Ian Battersby offers his thoughts on the EIS market in the run-up to the tax year-end, the potential impact of changes announced in the Budget and the proposals outlined in the much-anticipated Patient Capital Review

The waiting is over and, while the finer detail is still to emerge in some respects, we now know pretty much where we all stand. Realistically, I doubt there can be too many complaints about how ‘financing growth in innovative firms’ is being positioned for the future – especially in the sense of tax-advantaged investments.

Fears of sweeping changes, at least for now, appear unfounded and the consultation process seems to have largely taken on board the key issues raised by stakeholders from all parts of the tax-advantaged ecosystem.

As a consequence, plans were unveiled in the Budget to ‘unlock’ more than £20bn to help finance growth in innovative firms over the next 10 years, together with initiatives seeking to drive long-term investment.

Some of these announcements are likely to involve changes to pension fund rules and the establishment of national funds alongside British Business Bank intervention. It is likely the scope of such proposals and enhancements will widen in the Spring and in the run-up to the next Budget and beyond.

With or without Brexit, these firms are pivotal to any future growth in the economy and dealing with the issues they have faced for far too long is beyond essential. It will be interesting to see how things develop with Patient Capital Review objectives in mind and how that manifests itself at the retail investor level.

Still, as the Enterprise Investment Scheme (EIS) season gets underway, the here and now for most advisers and investors will be a sense-check of open offers and closer scrutiny of what lies under the bonnet. Growth capital investing has been an accepted state of affairs for many advisers for quite some time now and, in truth, the 2015 changes acted as a catalyst.

With only four months or so until the tax year end, however, sifting through what is available and of the requisite quality becomes a matter of high priority now. This is the time of year when panels are traditionally set and, for those advisers and investors seeking ‘carry back’ to 2016/17, capacity and deployment will surely be uppermost in their thinking.

Parking that thought for a moment; we already know the seven-year rule has put providers into different territory and generally this means investment ticket sizes have tended to reduce since its introduction, largely because investee companies are younger, less mature and not necessarily justifying higher investment at this point in their life cycles.

It fair to say this phase of funding is less of a concern to the government – rather, it is the subsequent scale-up phases where the issue lies and which the Patient Capital Review is currently seeking to address. If EIS capital bridges the funding gap typically from years three to seven, access to capital is generally less forthcoming in the 10 to 15-year period beyond.

Deal Flow And Timeframes

Back in the moment, however, providers who have deal flow and shorter deployment timeframes for sensibly valued businesses will be very much in demand in the coming weeks. In the meantime, advisers and their investors will be coming to terms with the fact they may now be taking on more investment risk in order to benefit from the tax reliefs available than might previously have been the case. Now more than ever, it is about being investment-led rather than tax-driven – and, quite frankly, that has to be right.

We now know approval for EIS qualification is all about ‘risk to capita’ via a ‘principles-based test’ and that ought not to result in a great deal of change for the longer established growth capital providers.

The benefit of the new proposals aims to simplify and accelerate the approval process and, hopefully, the production of tax relief certificates, which would be a welcome boost for everyone. A doubling of the limits for investment into knowledge-intensive businesses is noteworthy but probably beyond the range of most retail investors at the upper end of the cap. Time will tell in terms of how that plays out.

All things considered, we are happy to embrace the proposals which at least in spirit appear fair and reasonable. We are probably already further down the road of a growth capital culture within the wider EIS community than many may have imagined – particularly post-2015. And if the proposed enhancements can underpin the ability for our best businesses to access the capital they need to become the stars of the future, then we will all be much better for it.

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Source: Professional Adviser



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