The recent Autumn Budget has confirmed that, once pensions and ISAs have been fully used, EIS and Seed EIS are now very much the third pillar of tax planning, writes Andrew Aldridge

If we were in any doubt about where the government and the Treasury see the future of the Enterprise Investment Scheme (EIS) and Seed EIS sector, then it would have been dispelled by the Budget and its response to the consultation on ‘Financing growth in innovative firms’, which was published at the same time.

As Chancellor Philip Hammond outlined, the focus has to be on investing for the future – and investing in companies that will deliver significant future growth, many of which will be technology-based. He talked about investment in ‘knowledge intensive’ firms – those who are working at the cutting-edge of their sectors, be that artificial intelligence or robotics or life sciences – and how the EIS/SEIS can no longer be just a home for those wishing for the lowest of risks from their investment.

We should now be in no doubt as an industry that this is about using EIS/SEIS to invest in the future, to help start-ups and entrepreneurs, to help fund research and analysis and to offer support to those who are looking at digital solutions and tech-based advantages. It is very much about setting our sector straight about what is permissible in the future and yet, somewhat ironically, it is a major nod to the past and a return to how these schemes were initially designed to function.

The introduction of the new principles-based test is a positive step forward to ensuring those firms who need this investment the most, gain access to it. There will be many in our industry who might feel they have somehow dodged a bullet in that the Treasury has not excluded any specific sector from EIS/SEIS investment. The test will, however, still mean many investments of the past will now not make the grade in the future.

As Hammond himself said, the priority is quality investment for ‘knowledge intensive firms’ and no longer the profusion of EIS vehicles which are “used as a shelter for low-risk capital preservation schemes”. A large number of managers within our peer group may well need to change their approach and get their heads around this very quickly.

After all, the ‘test’ will evidently sort the wheat from the chaff in terms of investee eligibility – this is a move away from a tax-motivated investment to one that can deliver genuine growth, has the potential to employ many people, can make a significant difference in the chosen sector, is truly entrepreneurial and (ideally) is developing new tech that provides productivity benefits and continues to highlight and sustain the UK’s position at the top of the digital economy table.

Again, looking at the range of investments that have been made through various EIS/SEIS schemes in recent years, how many of those would now meet such criteria?

For advisers, this change represents an interesting turn of events. Clearly it is a positive that investment limits have been improved, while the tax relief advantages that have always been there with EIS/SEIS remain. Yet the investment focus of many schemes may well need to change.

It has been interesting, even since the Budget, to see certain scheme managers attempting to reposition themselves as experts in the technology sector despite clearly having had little experience or investments in companies that are active within it.

Read the full article here.

Source: Professional Adviser



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