By Vasiliki Carson, Partner (pictured above) – Sapphire Capital Partners LLP.
Over the past few months, the Enterprise Investment Schemes received a lot of attention as HM Treasury published their Patient Capital Review Consultation. It is fair to say that some negative feelings for the schemes surfaced as a result of the consultation’s conclusions. The private sector has responded, and the result is that significant changes to the schemes are to be announced during the Chancellor’s Autumn Statement scheduled for the 22nd of November, 2017.
What potential changes should we expect?
Mark Brownridge, the Director General of the EIS Association recently explained to EIS Association members that the upcoming changes are being made to sharpen the schemes’ focus on “high risk, innovative and growing companies that can scale up”. Making a case for increasing employment and tax revenue will no longer be enough for a company to avail of the schemes. Mark identified a pattern coming out of his discussions with government officials: “listen carefully … and the keywords you will hear are growth, innovation, and technology. This is [government’s] new definition of well targeted. Whether you agree or not, this is HM Treasury’s desired direction of travel.”
The sector that is to be most affected is film and television companies, as their structures are seen as providing a “capital preservation” strategy – with pre-sales and film tax credits/rebates also offered, the capital invested in these companies is not seen as “risky” enough to require further tax incentivisation. Furthermore, EIS for film was significant this past year – according to the EIS Association’s statistics, “of the £450 million raised in EIS in 2016/2017, £280 million was in TV and film.” (A while back, I wrote a blog about the UK film industry titled “SEIS and EIS for Film: Awakening the force of creativity” as I was impressed by the sector’s growth at the time, so it comes as no surprise to me that HM Treasury sees it as “overheating”.)
Other companies to be affected by the changes are those which appear to be “asset-backed” – i.e. employing SEIS and EIS funds to purchase assets such as their office building or machinery and equipment. For example, engineering companies that require heavy machinery and factory space could be affected.
When would the changes come into effect?
Unfortunately it is not known as at current what exactly is going to change and whether the upcoming changes will be effective immediately, at some point in the future, or retroactively. We will need to wait for the Chancellor’s statement on this.
Should we expect more changes to the EIS in the coming years?
In the late 90s US Economist Abby Cohen described the US economy as an oil tanker ship – it moves slowly and rarely changes its course, but when it does, it is difficult to realign back. Borrowing the nautical theme from the great Mrs Cohen, I liken the UK economy to a state-of-the-art speedboat – powerful, continually effecting (legislative) change quickly and thus altering its course, but also consuming a lot of fuel in the process. Such responsiveness and actionability enabled the city of London to become the world’s financial capital, and the country to become a global hub for innovation. However, too much change in legislation can be costly and confound, and there is a need now to stabilise the course, or maybe even slow down the speed of change, in light of the turbulent, (or at least) unknown waters of Brexit that lie ahead. Mr Brownridge doesn’t believe that HM Treasury has an appetite to keep revisiting the EIS rules year on year. “HM Treasury has changed the rules before, but they have seen little evidence of a change in behaviour. A cultural shift is now expected [with these changes].” Time can only tell what the outcome of these changes will actually be, but at this point in time we expect the effect to be material.
As a partner at Sapphire Capital Partners LLP, Vasiliki specialises in SEIS and EIS schemes, R&D tax credit claims, preparing investor documentation and financial models for clients. Prior to co-founding Sapphire Capital, Vasiliki was with PwC and Goldman Sachs in Tokyo and New York.