As Chancellor Sunak prepares for his March Budget and the tax year-end looms, should advisers and paraplanners be bracing themselves for change to the EIS and SEIS landscape? EISA’s Mark Brownridge is in optimistic mood as he outlines why he believes you should keep talking to your clients with confidence about EIS and SEIS.
We are approaching the long slog that is the march to the tax yearend in April, a supremely busy time for everyone involved in our sector. Just as well there is nothing else going on in the world right now!!
To add to the usual tax year-end madness, with the November 2020 Budget having been postponed until 3 March 2021, potentially there are also a number of tax and other economic rule and legislation changes to contend with. And just at that pivotal moment you are making your client recommendations!
Stick or twist?
Such uncertainty is unwelcome and financial planners are left with having to guess whether to stick or twist. Do you ‘twist’ and make recommendations based solely on rumours and heresay as to possible changes? Or do you ‘stick’ and risk a ‘keep calm and carry on’ approach? You could be damned if you do and damned if you don’t. Who’d be a financial planner?
And of course, this next Budget could be a humdinger. It’s clear that the Government needs to raise large amounts of money after a tumultuous 2020, economically speaking. It seems all bets are off as to where they will focus on trying to raise that money from. We have already seen CGT recommendations from the Office of Tax Simplification as well as IHT recommendations, threats of pension tax relief being cut and that old chestnut, a wealth tax. Desperate times call for desperate measures.
What about EIS and SEIS?
Of course, EIS and SEIS offer investors exceptionally generous tax relief schemes themselves. So could they be in the firing line? We think not, for a number of reasons. This article sets out why.
Firstly, we have spent the last few months researching the UK early-stage business funding ecosystem. Our campaign, entitled “Reigniting the UK’s entrepreneurial ecosystem” highlights the funding gaps that currently exist and makes recommendations to address these in order to boost the UK economy post-pandemic. You can read the report here – Reigniting the UK’s entrepreneurial ecosystem – EISA. In short, what we found was that pre-pandemic, early-stage businesses often struggled to raise equity finance due to market failure and ‘funding gaps,’ where credit markets failed to supply sufficient finance to fulfil demand. Covid19 has widened these gaps. The pandemic has adversely affected the supply of debt and equity finance for all firms. However young, small and innovative companies face a disproportionate burden and many were not eligible for any of the Government’s Covid-related funding schemes. The total equity gap by investment stage in 2019 suggests £768m is required at seed stage; £1.45bn at venture stage and £4.45bn for growth finance. The northern regions, East Midlands, Yorkshire and Humberside, West Midlands, and the North West, have the largest shortfalls.
We advocate that public and private sector partnerships will be increasingly important going forward. Addressing the issues which are identified in our report will need to be done by a collaboration which the Government has the ability to kick start. It must include the private sector – particularly as we seek to address regional imbalances that existed pre-Covid19 but have now been exacerbated by it. Clearly jobs are also a priority. This reports highlights that EIS and SEIS investment in an early-stage business help it to employ more people. Our survey discovered that:
- Average employment growth for EIS funded companies is 86%.
- On average, companies employed 6 additional people as a direct result of their EIS investment.
- Within a year of investment, each £1M invested in EIS creates 4 jobs
Just short of 4,000 companies received EIS funding in 2018/19 meaning the schemes can justifiably claim to have created 24,000 jobs in that one year alone. Expanding the schemes can multiply that figure even further and keep our young, entrepreneurial companies on the path to growth. In addition, for every £1 invested into EIS qualifying companies, those companies deliver back £2 in additional revenue.
Our overriding aim is to preserve and maintain EIS and SEIS. These are schemes not only with a long and distinguished track record of delivering targeted equity funding to companies who otherwise struggle to access much needed finance but also provide extremely valuable and increasingly rare tax reliefs to individuals who are an important but often overlooked source of equity funding. As the Government considers new measures and funding programmes, EIS and SEIS must play a part alongside these and not in replacement of them.
If it ain’t broke…
Secondly, Chancellor Sunak has been a long-time supporter and admirer of EIS and SEIS. As recently as December 2020, he was quoted as saying “the world leading EIS and SEIS schemes offer significant support to small businesses”. The schemes are recognised as being effective and delivering funding to companies at the appropriate and relevant stage of their development. In other words, if it ain’t broke, don’t fix it.