Article 50 and EIS
With Article 50 now triggered and the countdown to Britain leaving the European Union begun, what might we expect with regard to the Enterprise Investment Scheme?
Investing via EIS has never been more common place and never have financial advisers had so much demand from investors. The reason for this is partly a desire to find tax-efficient investment opportunities to replace increasingly limited pension savings. However, the other factors that are not always so commonly discussed include HMRC's increased enforcement and tighter control over 'tax avoidance' schemes and the media pressure therewith. One financial adviser once described to me that investing in life sciences and medical innovations, via EIS, allowed his high profile clients to manage their tax position whilst proofing them from the unwelcome headlines that accompanied so many 'names' who had fallen foul to challenged tax planning schemes.
So, with increased appetite for EIS, what does the crystal ball predict for the coming months as our nation leaves the EU? Firstly, the Government has already announced the Patient Capital Review, which is now planned to progress after the General Election. This is expected to review the role of EIS, Seed EIS and other tax incentive schemes. Initial thoughts suggest that, in all likelihood, this review will show the importance of such initiatives in encouraging inward investment in to UK businesses. However, it may well also highlight a requirement for such initiatives to be properly focused on those sectors that require substantive support and have the potential to generate real returns by way of exports, job creation or life/community enhancing innovation. This could mean sectors such as technology, life sciences, manufacturing and healthcare being considered as key areas for investment.
EIS and SEIS limits are currently constrained by EU State Aid rules. The maximum of £150,000 that a company can raise under SEIS, as an example, could well be increased as part of the Brexit proposals. Seed stage investments are, by their very nature, high risk and therefore the SEIS offers investors potential risk mitigation and the incentive to invest in companies which would otherwise struggle to receive investment. The Government understands that it is imperative to provide post-Brexit funding to seed stage innovations and has already pledged to support key sectors which currently rely heavily on EU funding and overseas funding linked to the UK's membership of the EU. Such funding is unlikely to come directly from Whitehall coffers so other means of encouraging such investment will need to be supported or even enhanced, such as SEIS and EIS.
A couple of other reasons for (S)EIS demand that we're hearing include the Brexit-linked notion of patriotism and a desire from investors to invest in the grassroots of UK PLC. Such investments aren't necessarily replacing global equities and such like, but where an investor has some spare cash or wants to 'dabble' there is a genuinely increasing appetite for doing this in UK companies. Crowdfunding, for all its faults and risks, has assisted with this awareness of the UK as a place for investing in innovation and exciting new ideas. How modern EIS providers support this is by investing in real innovation and articulating where investors' money is actually going. Investing alongside experienced investment specialists and business builders should offer investors access to exciting opportunities whilst also offering the reassurance that a trusted party has undertaken appropriate due diligence and will provide ongoing support to the investee company(ies).
All of these factors have created an EIS (and SEIS) market where the focus for investors and financial advisers is on understanding the underlying investments, wanting to be invested in real innovation and understanding that investors' risk is as much about the EIS qualification of an investee company as much as it is about the financial performance thereafter.
Over the coming months, I expect the tax-efficient investment space to continue to be tinkered with by Government, with a focus shifting even more towards investment in innovation and job creation. Anywhere an investment manager has described how they have cleverly 'got around' EIS qualification to provide a 'lower risk' EIS proposition will disappear from the market and we will be left with the propositions which focus on sectors that need investment incentives in line with a Government policy and potential holes in EU funding.
The EIS market is an exciting place to be with the quality investment managers sourcing and supporting some very interesting technological and medical innovations.
Of course, with a General Election imminent, all predictions could be off if the opinion polls are incorrect!
Andrew Aldridge is Head of Marketing at Deepbridge Capital LLP