Asset-backed EISs in Treasury’s sights
Dermot Campbell: “For some time now, HM Treasury has been restricting the type of company tat qualifies for relief under the Venture Capital Scheme, which includes EIS, SEIS and venture capital trusts.
Before the June election, changes to schemes to encourage investment in new and growing companies looked set to be a mix of good and bad news but now, says Dermott Campbell, more of the latter seems probable
The inconclusive result of the 2017 General Election unsurprisingly led to a drastically slimmed down legislative programme for the new minority administration. This confirmed our initial verdict that the non-appearance of the expected Conservative Party triumph would likely result in a considerable degree of political impasse.
Among the items and measures caught up in the subsequent legislative log-jam will possibly be those that had been expected to update and – we had hoped – improve the UK’s regime governing tax-efficient investments.
Central to the likely changes were to have been the extension or adaptation of existing schemes to encourage investment in new and growing companies. For those of us with an interest in the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), there were always likely to be aspects of the proposed changes that we would embrace and those that would be rather less welcome.
In the wake of the election result, there is a danger only the less welcome aspects will survive. For some time now, HM Treasury has been restricting the type of company that qualifies for relief under the Venture Capital Scheme, which includes EIS, SEIS and venture capital trusts. Currently they have asset-backed companies in their sights – and, if you are interested in these, you should invest sooner rather than later.
It is worth remembering what the state of play was ahead of that fateful first exit poll on the evening of 8 June. Earlier this year, the Department for Business and the Treasury jointly launched the Patient Capital Review in order to examine the barriers faced by growing companies in gaining access to supportive finance. Among other things, the review would look at what happens, or ought to happen, when companies that may have started life in the EIS or SEIS try to move on to the next stage and scale up.
The review had the potential to produce very good recommendations. There are, in fact, two reviews – one comprising Whitehall officials and a parallel “industry panel” whose role “will be to provide input, advice and challenge” to the official review.
Both halves of the review were charged with identifying any “root causes affecting the availability of long-term finance for growing innovative firms, including any barriers that investors may face in providing long-term finance”.
Any changes thought needed in government policy were to be identified and the review was to report to the Chancellor, Philip Hammond, in time for his Autumn Budget.
Given the role of the Treasury in establishing the review, it was always the case that any extension of tax incentives for the provision of ‘patient capital’ was likely to prove a case of giving with one hand and taking away with the other. Since the days of the Business Expansion Scheme in the 1980s, officials have been understandably averse to producing tax incentives for the creation of firms that would have been started anyway.
They are equally averse to seeing incentives that were designed to encourage risk taking being used to subsidise investments that, in their view, involve little or no risk.
Asset-Backed EISs In Treasury’s Sights
It has thus been thought for a while that the Treasury has asset-backed EIS investments in its sights, including shipping companies, nursing homes and even crematoria. We would dispute the idea that asset backing removes all risk, however – especially since all three of these businesses can be extremely challenging to operate profitably.
A second area of Treasury EIS interest is thought to involve film and media businesses. Here, the objection is that some of these businesses are benefitting simultaneously from the EIS and from incentives elsewhere in the tax system, such as those aimed at stimulating the British film industry.
It therefore seemed likely prior to the election the outcome of the review would see an exchange of some existing incentives – with those for asset-backed businesses and media companies being the most likely casualties – in return for genuine progress in unlocking capital for companies seeking to move up to the next stage of growth.
Now, the worry is that the review’s position within Whitehall has been weakened in relation to the Treasury, with the unwelcome result that tax-efficient business investment could lose the incentives relating to asset-backed and media businesses without gaining new reasons to provide capital for next-stage firms.
What is more, the Treasury seems to have developed a narrow focus regarding the Patient Capital Review, seeing its purpose as relating entirely to technology companies. This is an ill-thought out view that would put too much focus on one sector.
We still hope the review sees the light of day with its better ideas intact. But it now seems likely that asset-backed businesses will become ineligible for EIS incentives, so anyone interested in such an investment ought to act now.
Dermot Campbell is CEO of Kuber Ventures