EIS has been part of an adviser’s tax efficient tool kit for the last 26 years and now, more than £2 billion is invested annually into EIS qualifying companies.
EIS is powerful medicine, armed with several appealing features to mitigate some of the risk in early-stage venturing – income tax relief, CGT deferral, loss relief, CGT exemption, business relief, and business investment relief for non-doms. From a government perspective, it makes sense. For every pound of tax relief waived via EIS, the treasury recoups more back in the form of NIC, employment tax corporation tax and of course the second order effects of stimulating SME spending on the wider economy. EIS is one of the biggest drivers of the UKs tech scene, propelling innovation and improving productivity across every sector it touches.
EIS Fund Managers have professionalised and developed in line with the maturation and growth of EIS. There is a new breed of manager today, compared with 10 years ago. Historically, VCs had been packed full of accountants, deal-doers, rather than having had their own experience in founding, growing and selling companies. That’s changed. Venture capital managers nowadays are wrapping experience and networks around their portfolio companies and it’s having a huge impact on returns for clients. Take Par Equity, for example, our returns to investors are sitting at 3.8x money and a 27% IRR across 125 realised investment rounds into tech companies, before any EIS tax relief.
Delivering positive change
2020 will be remembered as a year of hardship, a year of transition and also a year of opportunity. It has heralded a range of new words into common parlance – lockdown and furlough – and our kitchen tables have never seen so much of us, our laptops and never-ending debates about T-cells and government policy! Covid-19 has also hit industry hard, particularly hospitality, travel and entertainment.
But we have also seen positive change too. Consider the record-breaking speed at which we’ve delivered new vaccines and what that might hold for other diseases beyond Covid-19, or how the nation ‘walked with’ Captain Sir Tom Moore to raise more than £32m for the NHS. In a similar vein, Par’s EIS investment Current Health has empowered hospitals and supported multiple vaccination trials of tens of thousands of participants around the world with its remote patient monitoring devices, whilst Mallzee (another Par portfolio company) has sold over 120,000 boxes of clothes, each box supporting a factory worker’s family in Bangladesh for a week through Mallzee’s charity partner SAJIDA.
How EIS can help beyond Covid-19
There are two major challenges for the UK economy moving forward – unemployment and national debt. Unemployment in the UK is forecast to reach 2.6 million by the middle of 2021. National debt now sits at 101% of GDP, its highest level since the early 1960s. With Brexit now in full swing, it is hard to imagine where we go from here, but EIS is part of the solution.
Structural unemployment on this scale needs joined up government thinking – from education reform and widescale training programmes, to the adaptation of employment law and the much-needed investment stimulation. EIS is very much part of the scope to increase investment stimulation and, in turn job creation. Take Par’s own portfolio of 40 companies, for example, which currently employ 793 people in total. This has supported an additional 100 jobs since March, and we’re forecasting it to support a further 400 jobs during 2021.
EIS turbo charges the SME landscape, the backbone of the UK, and we’re not alone in using tax relief to stimulate early-stage venture capital and business angel activities – 9 of the EU-15 have one or more investor tax relief measures in place. As such, it’s common practice to promote innovation in this way. With a growing consensus to raise capital gains tax rates, and possibly income tax too, government can channel more money into SMEs, and the wider economy, through efficient investment tools like EIS.
Developing EIS further
Par Equity is working with the EIS Association on its campaign “Re-igniting the UK’s entrepreneurial ecosystem” – a piece of research supported by Beauhurst and analysing 18,000 companies. The campaign seeks to identify improvements to EIS, beyond the headline tax relief, to stimulate a post-Covid, post Brexit, economy.
One possible measure, lobbied by Par Equity, is to increase the carry back facility from 1 year to 2 years. We believe that his small tweak to the rules would improve the EIS funding ecosystem and, in turn, increase the use of EIS to support young companies. For financial intermediaries it would provide more time to advise their clients on tax efficient investment opportunities. For investors it would improve the diversification as their investments would be spread across more companies. Finally, for entrepreneurs it would remove the seasonality to the deployment of EIS funding and potentially also increase the amount of funding available.
Par Equity is undertaking an adviser survey in conjunction with GBI Magazine on this topic and will then be making a submission to the EIS Association. If you are reading this and would like to contribute, please contact Andrew Noble at Par at [email protected]
Our goal is to make sure we build a sustainable investment product for you and your clients, and we look forward to working with many of the readers of GBI Magazine in the years to come.