Matthew Cushen (pictured above), Co-founder of Worth Capital, argues that we need more noise and education about SEIS:
Imagine two businesses…
Business 1: a soft drinks manufacturer experimenting in a domestic kitchen, occasionally renting a commercial kitchen, sampling and selling in person to a handful of bars in Shoreditch, East London.
Business 2: a brand stocked in around 400 outlets, including Selfridges and Ocado. This month hitting the shelves in 300 Waitrose. Exported to 130 stores in Austria and the Netherlands. Directly employing 8 people with a manufacturer in Wales and many others in their supply chain.
You’ll probably have worked out where this is going. They are the same business. They are called ‘Nix & Kix’ and are a producer of healthy, all natural soft drinks, with no refined sugar (the Nix) and a touch of cayenne pepper to give a little chilli pick me up (the Kix). It’s a positioning exactly where the big drinks manufacturers would like to develop drinks – sophisticated adult alternatives to alcohol and low in sugar.
Business 1 was when I invested at the seed stage, benefiting from the Seed Enterprise Investment Scheme (SEIS) tax reliefs and volunteering to become Investor Director. With only a handful of outlets and the slimmest of proof points, they were an outside bet. Even with the highly credible pair of co-founders, a strong positioning, sound brand and a great tasting product, I couldn’t have justified the investment without tax reliefs. But 2 years later Nix & Kix are business 2 and have raised a much larger funding round at 3 times the valuation and have a strong pipeline of new distribution.
Nix & Kix are a perfect example of how SEIS encourages investment in early stage businesses and gives them time to create innovation, proof points, employment and exports. But unfortunately, SEIS is insufficiently well known by investors and their advisors and there is not the understanding of how well SEIS tax reliefs mitigate the risks of investing in start-up businesses – clearly a high-risk asset class.
The Enterprise Investment Scheme (EIS) was set up in 1994 and continued to be supported through Labour governments. It has since been made more attractive by the Conservative government, and has established itself as a part of tax legislation that neither of the main parties would be likely to compromise. The Seed Enterprise Investment Scheme (SEIS), established in 2012, is an extension of EIS and offers even more generous reliefs.
SEIS tax reliefs are available on the first £150,000 that a business raises in equity funding, if it has been trading for less than two years, has less than £200,000 in gross assets, less than 25 full time employees (or equivalent) and is of a ‘qualifying trade’. Most trades are qualifying, but some, such as some financial services and dealing in land & property development (including property intensive activities such as hotels or nursing homes) are excluded.
If a business satisfies these criteria – with ‘advanced assurance’ being granted by HMRC – a UK based tax payer will access 5 reliefs. The most significant is income tax relief of 50% of the investment. Effectively the government is paying for half of the investment. Investors can also benefit from capital gains tax reinvestment relief, capital gains disposal relief, inheritance tax exemption and loss relief. The loss relief means that if the investment fails, the net exposure (after reliefs already claimed) can further offset tax. Dependent on an investor’s tax rate and tax liabilities, the actual investment risk can be as little as 16% of the investment. Broadly speaking, in this situation, if they can pick more than 1 in 7 winners then they are going to make a return.
No wonder investors that know about the reliefs are enthusiastic about them. In the 2015/16 tax year, 2,225 companies raised £170 million through SEIS (according to HMRC). However, that was slightly less than the 2,340 companies and £178 million invested in 2014/15. My belief is that this is all about lack of awareness and, amongst advisors, an entrenched attitude to risk that doesn’t take account of the impact of the reliefs available.
In their much maligned 2017 manifesto, the Tories described SEIS as ‘world leading’. It is going to be reviewed, and possibly strengthened, as part of the ‘Patient Capital Review’ announced by the Prime Minister in Autumn 2016 and mentioned in Philip Hammond’s Spring 2017 budget. Let’s all keep our fingers crossed this review doesn’t get go the same way as much of the rest of the Government’s programme – subsumed by Brexit and the inefficiencies of a fragile ‘coalition’. If on track, the results of the review will form part of the Autumn 2017 budget. We would like the Patient Capital Review to recommend increasing the noise and education around SEIS – so that more investors benefit, more entrepreneurs are able to build their businesses and our UK economy is fed the innovation that we need to continue to be competitive and grow.
The Start-Up Series SEIS Fund One, created by Worth Capital and managed by Amersham Investment Management, is a £2.1 million fund investing in 12 monthly winners of the Start-Ups Series, along with two other discretionary investments.