How a new broom can tidy tax-efficiency

11 July 2017, 5:39pm

An imperfect new government may not have the tax-efficient market at the top of its agenda but there is no reason why it cannot succeed in spite of political uncertainty. Tom Hopkins explains.

We have a new government. Of sorts. It’s not the one we or anyone else wanted and the outlook is whether we like it or not, and we don’t – uncertain. All markets hate uncertainty and the tax-efficiency marketplace is no different. I, like many people before the election, made a prediction of a substantial, or at least workable, Tory majority. I had not at that time considered it to be all that bold a prediction. As it turned out of course, bold it was.

Now there can be little doubt that there is a large spectre of uncertainty lurking over the British political landscape. Many pundits are not ruling out the possibility of another general election in the not-too-distant future. For better or for worse, that means more uncertainty.With Brexit dominating almost all the political agenda, where does that leave the world-leading Enterprise Investment Scheme and Seed Enterprise Investment Schemes?

EIS and SEIS were nicely positioned for improvement in a Tory list of promises that has now been consigned to history as ‘Worst Manifesto Ever’. So much for a stable and strong government as we enter the Brexit debate.

Are the venture capital schemes at risk?

Labour leader Jeremy Corbyn, who has gone from political write-off to potential Prime Minister overnight, would probably argue these are nothing but tax schemes for the rich. In some ways he is correct – given their risk profile you have to be of a certain level of worth to invest in the schemes. But that misses the point – these schemes have done more than people realise to stimulate entrepreneurship, and hence growth and job creation and ultimately tax receipts.

For instance, Parkwalk EIS fund did an analysis of its portfolio companies – the amount paid in PAYE and NI was double the amount of EIS tax relief in one year only. Actually, the payback period for UK Plc was just six months which is a great investment in anyone’s books.

And Pembroke VCT’s portfolio companies have created thousands of jobs, with the likes of Five Guys going from 0 to 60 sites nationwide in 3 years.

You might have had sympathy with Mr Corbyn’s view a few years back but now that the rules have changed for EIS and VCTs the flow of capital is going into growth companies and sectors of strategic importance to UK Plc, prominently in media and technology. So these schemes are as important now as they ever have been. Some might argue, like us, that given the new restraints on spending cuts, as a result of a weak and wobbly government, the need for growth is even more important.

So what can the government do to help promote growth via the venture capital schemes?

I have said before that EIS should be made more investor-friendly given it is a major headache. Other than that – not a great deal needs to be done and I’m not sure the industry needs or wants further changes especially if it means a wider review by those in parliament who don’t share the capitalist / entrepreneurial vision for Britain and would rather follow the Venezuelan economic model…

Yes it would be nice for the schemes to invest in businesses more than over seven years old and increase the investment cap, especially when following on capital. But there needs to be clear rationale and the planned (or was anyway!) patient capital review, which will include VCTs and EIS, gives the industry an opportunity to set out its case for any changes.

However, regardless until post Brexit the venture capital schemes fall under EU state aid rules and hence the government (strong or otherwise) can’t make any changes for two years even if it wanted.

So, business as usual?

I think so – yes. The schemes are delivering what was originally intended which is to fill the equity gap for early stage companies. And it was good to see included in Theresa May’s 12-point plan for Brexit was this:

‘10. Ensure that the UK remains the best place for science and innovation

We will remain at the vanguard of science and innovation and will seek continued close collaboration with our European partners’

I know this related mainly to the university collaborations but innovation and growth across the economy is the way, as the Conservative states, ‘Theresa May can guarantee Britain’s economic security and future prosperity for you and your family’…

And the venture capital schemes are there to help support innovation and growth regardless of Brexit negotiation position…and support UK plc’s place as a great place to set up and run businesses.

So, for the meantime while we wait and see at least, it is for us, business as usual.

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