Mark Brownridge, Director General of the EIS Association (EISA), sets out the positive news for EIS from the Budget
The Budget, and the changes brought with it, contained plenty to be positive about for small businesses and the investment schemes that they benefit from.
Entrepreneurs in the UK needed to be assured pre-Brexit that they would continue to receive support encouraging investment and growth in the SME arena and it seems that that is what we’ve got in this final Budget before Brexit.
SMEs make up 99% of UK private sector businesses and contribute £1.9 trillion to the UK economy, so ensuring continual growth is key to securing the future of a sector which provides the foundation of communities and employment nationwide.
The stand out announcement from the government was the new EIS fund structure; this will focus on knowledge-intensive small businesses and is to be introduced in 2020. The new fund structure will require 80% of funds raised by the scheme to be invested into knowledge-intensive businesses.
To qualify as knowledge-intensive, companies ought to have spent at least 15% of its operating costs on innovation and research and development in at least one of the last three years.
Further to this, the company should have allocated at least 10% of operating costs in each of the last three years to research and development (R&D). This new fund structure will serve as a huge boost to innovative businesses nationwide, and will help to strengthen a sector that is already setting the global standard for creativity and new ideas, of which many may have an effect on the future of the global economy.
There is a new limit on how quickly the investments must be made, increasing from one year to two with half of the funds to be invested within 12 months. This means that there will be slightly more flexibility for businesses looking to grow and expand at the right moment. The time period to make investments has been an issue for fund managers, so it’s also good to see the government has listened and reacted on that.
Protecting high-growth companies during the transition period of Brexit and post-Brexit is going to be vital as we navigate one of the most transformative periods in our political and economic landscapes. With our private sector advancing rapidly, it was of crucial importance that advancements to EIS reflected this evolution, especially in an era where standing still in the global economy is more like being left behind. The extra tax incentives that this fund provides aims to boost investment to keep the pace of growth during this period of change.
This is a positive step for the small businesses that do qualify for knowledge-intensive status. However, we have got to be careful that we do not let the vital community of businesses propelling more traditional sectors, such as industry and manufacturing, fall into their wake.
One possible way of addressing this danger was also announced by Chancellor Philip Hammond in the form of a feasibility study for defined contribution (DC) pension funds to be used to invest in highgrowth SMEs. This plan has the potential to act as a double-edged sword in tackling the problem of not only finding funding for businesses looking to expand but also to help bolster the returns of pension savers.
It is, however, still subject to the results of the study that will have a number of technically challenging, pension-specific, challenges to navigate to make this kind of investment work. However, we have long been recommending that the government opens up earlystage investment to pension schemes. We believe what investors would directly benefit if the Treasury moves forward with the changes, so we are pleased to see this feasibility plan in place.
Whilst the Budget certainly offered some good news for small businesses, it’s important to remember that this Budget could be largely defunct in a matter of weeks depending on what happens in the Brexit negotiations.
This could potentially leave SMEs and business investors in the dark in the short term. This is especially relevant to SMEs that are looking to grow in the near future, as picking the wrong moment to expand can cause otherwise strong plans and models to falter in light of unexpected changes to legislation and business infrastructure. Brexit resilience can only be secured once the full array of outcomes is known and SMEs are supported, whatever the business climate is like post-March 2019.
The stand out announcement from the government was the new EIS fund structure
Women In The Workplace
One thing that was notable by its absence was the lack of initiatives or extra support for women in business or looking to become entrepreneurs, after the work done in the Women in Finance Charter to promote the advancement of equality in the finance sector. In this sense, the Budget missed an opportunity to do more on this subject.
We, as an investment community, need to take a leading role in supporting female investors, entrepreneurs, and business people to come forward to support the entrepreneurial economy. EISA takes an active role in supporting small and mediumsized companies, hundreds of which are founded by women.
Clearly making the most out of the UK’s pool of talent, ideas, and creativity to found and grow new businesses is of paramount importance to ensure that we have a resilient, Brexit-proof and globally facing economy in the coming years.
This Budget, overall, was a step in the right direction for small business in the UK with the new EIS fund leading the way and the DC feasibility study offering the possibility of even more good news for SMEs looking to grow and expand in the next few years.
It’s quite clear that EIS and SEIS are going to be part of the government’s plans in the lead up to and after Brexit. That is really good news, especially as in 2019, we celebrate the 25th anniversary of EISA.
We work to support small businesses and the government whose legislation applies to the scheme. That all being said, there is still work to be done to cement the position of these SMEs, their ability to grow and to innovate freely, as well as giving women the best possible opportunity to create and expand their businesses.