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100% vote to enhance EIS Carry Back relief

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At GBI magazine we are always keen to support initiatives that are designed to support and enhance the EIS industry. That is why we were delighted to embrace a campaign from Par Equity, designed to improve the rules and benefits of Carry Back. A small increase in the time period for carry back, from 1 to 2 years, could have a big impact on the EIS industry, improving the effectiveness of this tool for financial advisers, investors, fund managers and the underlying companies that the scheme was designed to support.

Why there is an issue

In practical terms, the investor (and their adviser) may not have a good feel for the tax liability for the 19/20 tax year until November or December 2020. This means that to advise their clients effectively, an adviser will only be able to recommend EIS investments to mitigate this liability where the investment is fully deployed into EIS qualifying companies over the following 4 or 5 months.

This immediately puts deployment pressure on all parties concerned, to act quickly. As a result, it may limit choice of companies to invest in, and could lead to poorer investment outcomes.

The proposed solution

If Carry Back is increased from 1 to 2 years, it gives advisers, investors and fund managers a much more realistic time frame to deploy money into EIS companies, improving trust in the system and stimulating private money into early-stage companies. Something that this country needs now more than ever! It would remove some of the seasonality in the availability of EIS capital for young companies.

The survey

The starting point was for Par Equity to find out the attractiveness (or otherwise!) of this idea to advisers. They put together a survey, and we were pleased to help promote this to the adviser market, ensuring Par had a representative sample size to draw some conclusions from. We were pleased with a strong uptake from our readership, reaching 63 survey participants. Thank you to those of you who took part to help improve EIS as a tax efficient planning tool.

The findings

The survey identified that carry back is an important consideration for advisers using EIS with their clients. 61% of advisers that responded use EIS, and their clients need to utilise carry back 42% of the time, incurring several additional administrative headaches associated with this feature of EIS. It was also very good to see that a number of advisers who do not currently use EIS completed the survey, because they are interested in finding out more about EIS and are considering using it in their financial planning in the future.

Of those advisers who use carry back, 25% have experienced issues with deployment by fund managers, citing it as highly problematic for them and their clients.

When presented with the option to increase carry back to 2 years, 100% of advisers thought this was a good idea, with 84% stating it would give them greater confidence in EIS as an investment tool, leading to a potential 60% more EIS clients per annum.  This could generate significant additional capital to be deployed in growth companies as the country emerges from the COVID pandemic. We see this as a ringing endorsement for the idea.

Further ideas

Within the survey advisers were also asked what other ideas they had for enhancing EIS. Ideas put forward included:

  • Greater transparency and clearer charges (which is being addressed in the new EISA principles on fees)
  • Understanding of the underlying investments
  • Less jargon
  • More approved funds with a confirmed deadline (we are sure these are coming, but the change to carry back as proposed, if taken up, would also help here)
  • Greater tax relief for riskier investments

We know that Par Equity are looking to address some of these, in response to the survey.

Next steps

We think that the arguments for an extension to Carry Back are conclusive. We will support Par Equity in submitting them to the Treasury, on the basis that this simple step will improve EIS for all stakeholders and potentially increase the level of investment available for early-stage companies.  With the recent announcement that more start-up companies are being created than ever before, it is a very timely way of providing further support for their growth.

If you would like a copy of the findings from this survey, please contact Andrew Noble at Par Equity at andrew.noble@parequity.com or call on 0131 556 0044.

 

 

 

 

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