The latest Budget shows the government continues to throw its weight behind EIS, says Andrew Aldridge, Head of Marketing at Deepbridge Capital, and advisers should get investing
I was recently in conversation with a foreign national who found it intriguing that, in the UK, the general public take an interest in the Budget and that it is widely covered and scrutinised by the media. Apparently, this is not the case in other European countries where this individual had previously lived, worked and studied.
Of course, I naturally explained that for most people, and tabloids, the key points of interest are the price of beer, cigarettes and petrol. However, the ceremony around the red briefcase is a British tradition and we naturally pore over it in great detail to assess what it means for businesses, regions and individuals – all with a natural focus on those areas which affect our own personal or business interests.
There is no doubting that the current Chancellor himself is hugely supportive of EIS in particular
The Budget 2018 naturally didn’t reference EIS as much as in 2017, but that was to be expected as 2017 was a largely unprecedented refocus of venture capital reliefs. Rather, the 2018 statement followed on from 2017 with updates on both the digitalisation of EIS administrative processes and the response to the EIS knowledge-intensive fund consultation.
Once again, this budget was hugely supportive of EIS and VCTs, as tools to provide funding for earlystage businesses, and reinforced this government’s support for managers and investors seeking to assist growth-focused companies.
There is no doubting that the current Chancellor himself is hugely supportive of EIS in particular, and given this government’s work to re-establish the original aims of the scheme, it will continue to play an important role in developing funding and backing for the next generation of UK firms.
EIS Well Placed
This support is of course all tied up with the Chancellor’s vision for the future of the UK economy, and the Budget speech was peppered with references to technology, digital futures, and creating an environment in which businesses can thrive.
That clearly plays into the hands of those EIS investment managers who specialise in such sectors and provide funding to these types of investee companies, and the Budget also placed some more meat on the bone of the new EIS ‘knowledge intensive’ (KI) approved fund, which was initially announced last year.
Following its own consultation, the government has announced a number of measures, and we now know that the EIS Approved Fund structure is due to be introduced from April 2020 and it will be part of the Finance Bill 2019-20. Some highlights of this new structure include:
- A requirement that at least 80% of funds must be in invested in KI companies.
- Funds can now make their investments over two years not one.
- Funds must invest at least 50% of each raise within the first year, and any monies not invested must be kept as cash.
- The introduction of a ‘carry back rule’ which means investments will be able to set their relief against income tax liabilities in the year before the fund closes.
- Those funds which are approved must submit annual statements to HM Revenue & Customs (HMRC) to demonstrate they are continuing to meet the relevant conditions.
Interestingly, and given the current state of Brexit negotiations with the EU, something to consider is the fact that the fund would be subject to the EU State Aid requirement, and therefore it will be dependent on what comes out in the wash regarding an EU exit deal (or otherwise). As in so many areas of life and business at present, we will be watching those negotiations with great interest.
It is however hugely positive to see the continued government interest and support for the EIS sector and it clearly sees it as a major provider of funding for UK companies for many years to come. Tellingly, the government ‘believes the introduction of the risk to capital condition has been successful in preventing abuse and re-directing capital towards higher growth areas’ which is essentially confirming it was right to move EIS back to its original, stated aims, and that it has seen some positive movement away from those funds which were purely focused on capital preservation.
As an investment manager, we are very pleased by this refocus and, even though we have always deployed our funds in growth-focused sectors, specifically early-stage technology and life sciences innovations, it is reassuring to see that the rest of the EIS sector – even if it is due to government intervention and direction – is also starting to ensure funding is going to support innovative companies seeking to grow.
One might say such a refocus was well overdue but the fact the changes are having the desired effect is a considerable step forward for the EIS sector, for advisers, and for those clients invested in such funds.
Focus On Admin
One further area to be covered by the government’s Budget response to its own consultation is around the EIS administrative process and how it might be approved. The new, online forms now mean that digital EIS1 certificate submissions from applicant companies can now be accepted by HMRC, and it will also issue digital EIS2 and EIS3 compliance certificates to businesses and their investors.
Moving away from paper certificates will speed up the process considerably, will provide an environmental benefit and dial-down the administrative burden on all EIS stakeholders. Again, this is long overdue but is perhaps a sign of how serious the government/HMRC takes the EIS sector now, and the support it is willing to give those of us involved in it.
Don’t Wait And See
Overall, the news regarding the KI-approved EIS fund is clearly a positive for the industry however, in our view, advisers shouldn’t be adopting a ‘wait and see’ approach to EIS between now and the launch of those funds in April 2020.
From our perspective – as we do every year – we will review our product offerings and will consider whether a KI-approved fund structure might be beneficial to both our adviser partners and their clients. However, our EIS funds already deploy on a monthly basis anyway and it might therefore have little impact on our propositions.
Perhaps instead, between now and April 2020, the key question advisers and investors should be asking is just how quickly managers can deploy their funds into quality investee opportunities, as this ultimately dictates how quickly investors will be able to claim their tax reliefs and it will also provide an idea of potential exit timescales from those investee companies.
The further good news is that there are undoubtedly great investment opportunities out there for appropriate investors and with the Budget demonstrating the government’s continued (and growing) backing for EIS, we believe they should not be overlooked.
This is a positive time for the EIS market and – even with uncertainty about what the future might hold – the need for such funds and the funding requirements of UK companies in KI sectors, means this is now the time to get on board and use the best EIS investment managers for those clients for whom EIS investment makes perfect sense.