Despite the best of intentions, change for the sake of change often leaves us yearning for the past - so, please Mr Chancellor, says Tom Hopkins, make one more change before the EIS sector chokes on red tape
The rules governing Enterprise Investment Schemes (EIS) have been changed only relatively recently and so there would have been a collective sigh of relief that EIS - and venture capital trusts - were not mentioned in the Budget.
Those recent changes mean, mostly, that capital has now gone back to what is was designed to do and support genuine growth businesses - as opposed to simply providing tax relief for the lowest possible investment risk. Undoubtedly this is a good thing. Lots of advisers and, by extension, their clients like the fact investing in EIS helps both the economy and the growth of their portfolios. And for both taxpayers and the government this situation is a ‘win-win'.
Most of the companies supported by EIS will continue to grow and employ people every year - with such a swift payback, this is probably the best investment UK could be making.
In addition, the Budget contained confirmation of the upcoming ‘patient capital review', which aims to ensure high-growth businesses can access the long-term capital they need - and EIS will be part of that review.
That said, advisers and their clients are struggling with the administration involved in the EIS process. Channelling investors into genuine growth businesses has increased the general risk profile of EIS - at least compared with investing in government-backed renewable energy schemes, which were all the rage four or five years ago.
While this might rule out some investors altogether from EIS, many are comfortable with the risk/return profile - providing of course they are sufficiently diversified.
Given the current administration burden of EIS funds, more diversification means more paperwork … which means a major headache for investors and their advisers, which in turn, results in fewer people using EIS as an investment tool.
This is a shame, especially as there is a wall of money coming out of EISs that no longer qualify - notably solar energy. Unless the EIS process is made easier for investors, the capital will not get reinvested into an EIS. And you only have to see what has happened this tax year to understand there are not enough VCTs to take up the slack.
HMRC and HM Treasury understand there are red-tape issues and recently issued a consultation on the advanced assurance process for EIS, exploring how this process can be changed to speed up the investment process. The EIS Association understand HMRC will be giving an initial response to the advance assurance consultation at the end of this month.
One of Kin Capital's suggestions was that the government should allow greater flexibility on the current ‘approved EIS funds' rules. An ‘approved' fund allows the investor to get more diversification without resulting in increased administrative burden - in other words, lots of EIS3 certificates.
Fund managers do not currently use approved funds, however, given the tight timeline to invest the capital - unfortunately deals get delayed for a number of reasons outside the fund manager's control (especially growth investments) and, as currently structured, all tax relief is lost if 90% of the funds are not invested within12 months. So all-in-all this is proving very punitive.
Minor changes, major benefits
Whether it is linked to the ‘patient capital' review or the advanced assurance consultation, we suggest giving more flexibility to approved funds, especially the timeline to invest - extending it to, say, 18 months. And allowing the fund to carry back tax relief. This, coupled with the use of approved investment documents, would give fund managers the confidence to invest without the red tape. Minor technical changes to the EIS approved fund rules could result in major benefits for the UK economy.
In a similar vein, Oxford Capital has suggested more investors would back EIS if tax relief were automatically granted to approved schemes in the way ISA reliefs are granted. Oxford Capital managing partner David Mott said: "If investing in EIS was as easy as choosing an ISA, we believe more people would be encouraged to invest in exciting growth businesses."
EIS funds done correctly grow the UK economy, investors' portfolios and government tax receipts. So, now that the government has fixed the rules to ensure the capital is invested in the right areas, let's not lose this big growth opportunity and make it easy for investors to back these funds by tweaking some of the administrative rules.
Time for a change.
Tom Hopkins is a co-founder and partner of Kin Capital, which provides fund-raising and fund management services to funds operating in government tax-efficient schemes
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