By Christian Elmes, Enterprise Investment Partners
The UK’s tax-efficient investment landscape is constantly evolving, and the past year has seen some significant changes: new rules in the EIS sector, more emphasis on investment-led strategies, and greater scrutiny of investment activity and dealflow.
Of course, some things never change: investors’ desire for capital growth driven by tax efficiencies, for one. But as the annual tax season rush draws ever closer, investors need to be sure that whatever the changes, the managers they back have a pipeline of enough quality investment opportunities that will qualify for tax efficient venture capital schemes.
What are the new rules?
In last November’s Budget, Chancellor Philip Hammond announced a number of initiatives designed to boost long-term growth for the UK’s startups and small businesses. The aim is to support young, innovative companies – in particular, knowledge-intensive companies (those that meet certain conditions relating to operating costs, innovation and skilled employees).
The rule changes relating to EIS schemes include:
- Investment activity to focus on companies that meet the risk-to-capital condition and with long-term growth and expansion objectives
- Doubling the EIS allowance to £2 million, provided the additional £1 million is invested in ‘knowledge-intensive’ companies
- Knowledge-intensive companies able to receive up to £10 million in EIS funding each year
In short, the government knows that business innovation doesn’t come cheap and that it comes with its own investment risks. To soften the blow, the government decided that investors can invest more, and companies can raise more money under the EIS.
What impact have the changes had so far?
Since the rule changes, the focus on knowledge-intensive companies has meant a reduction in the number of businesses qualifying for EIS. In turn, this means fewer businesses are available to have EIS money deployed into them.
However, while there may be fewer investment options in the EIS market, the demand for these tax-efficient products has not gone away. With EIS schemes plugging the pensions gap and the majority of opportunities now evergreen, quality of deals and ability to deploy capital have never been more important.
That’s not to say that attractive companies qualifying under the tax efficient venture capital schemes don’t exist, fund managers just need to look a little harder and investors understand it will potentially take longer to deploy their capital.
Where do investors go from here?
Investors and Advisors will have to re-calibrate their approach to tax efficient investing. Investors are going to be confronted with fewer products and choice than in the past, and the market will be focused on EIS growth funds, both existing and new entrants.
Investors and advisors should look to EIS fund managers that have been investing in the growth space for some time and scrutinise their planned level of fund raising, track record of deployment and successful exits. Also, focus on those new entrants that can differentiate themselves from the incumbents by way dealflow, rate of capital deployment, strategic partnerships with investment advisors or successful track record in other sectors.”