The Patient Capital Review sets out the road map. We are told that the focus of EIS and SEIS must now be on higher risk, growing and innovative companies. Whilst government accepts that many existing EIS and SEIS companies are “good” they do not hit the sweet spot for continued support. The key company attributes repeated ad nauseum are risk, growth, innovation and technology so investors and their advisers will have to get used to real changes to the qualifying requirements to access the available tax reliefs.
Increasingly, the government – HMRC in particular – is taking exception to to what it considers to be asset backed or risk mitigated strategies (long favoured by promoters and advisers wanting to protect investors) notwithstanding to date many such companies have qualified for EIS and SEIS tax breaks with HMRC blessing. A Patient Capital definition sees the way forward as long term investment in innovative firms led by ambitious entrepreneurs who want to build large scale businesses. It’s not hard to see why this is likely to become a divisive change that will also mark a fundamental shift in investors’ thinking when considering ongoing support for the regime. After all, they would not consider capital preservation to be an abuse which appears to be part of the government’s reasoning for change.
So what is driving the change? The answer is probably in the published statistics. In 2016 / 2017 of £746m raised by EIS in excess of £450m was classified as capital preservation. So a collision with the EIS industry is almost inevitable as risk mitigation is diametrically opposed to the risk level the government wants.
The Treasury / HMRC view is broadly:
- Every EIS / SEIS £1 invested must be at risk.
- There is no appetite to revisit the rules each year. HMRC has got little change from the industry for this approach to the reliefs in past years.
- Tax relief levels will be sustained for risk focussed investment – this is not a cost cutting exercise.
- There must be a cultural change of approach.
HMRC has highlighted certain asset backing as unacceptable. Freehold property is clearly a bone of contention. Another is TV and film where the suggestion is that bank or collaterlised lending is more appropriate than an EIS structure. The latter market is huge, of the £450m referred to above as capital preservation funds £280m was TV and film i.e. 62% or 37% of the overall EIS raise. The indications are that whilst TV and film may not become an excluded activity for EIS there will be an imposition of restrictions aimed at excluding tax relief on asset backed budgets using tax credits (from the UK and elsewhere) and pre-sales contracts. Time will tell.
It is to be hoped that there will be no retroactive measures allowing HMRC to attack asset backed EIS schemes already in existence but recent experience in similar matters does not bode well. Let us hope that the proposed measures for change will not be a hurricane of devastating proportions which destroys a relatively benign and carefully nurtured EIS and SEIS industry built over many years.