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Is the EIS better off with Brexit?

By 20th May 2016 No Comments

The amount of column inches which has been written on Brexit in recent weeks and months is truly staggering – and there’s doubtless much more to come, since we’re still several weeks away from the big day

There have been articles about the economy, employment, the pound sterling, Scotland, Norway, Iceland, Canada, Gibraltar, Ireland, the financial services industry, the fishing industry, and so on. “If the UK leaves the EU, Scotland will vote to leave the UK” is a favourite one, which many people seem to regard as a given. That’s by no means clear to me, and they are quite likely to vote in much the same way as they did in 2014.

“Should the UK adopt the Norwegian, Swiss or Canadian model ?” is another favourite. Or maybe a unique new model of their own. “It will take many years for the UK to re-negotiate trade deals across the world?” Why many years? Surely the most important ones could be negotiated within a matter of months. “It’s a Stitch Up!  Do not underestimate the sophistication of the British electorate” is the latest mantra of the Brexiteers. And on it goes.

Large corporates versus SMEs

There is little doubt that staying in the EU favours large companies and is a disadvantage for small companies and the enterprise sector generally. Large corporates have the power and money to lobby, threaten and cajole. Small companies are powerless and are dragged kicking and screaming into an ever more complex web of red tape. How can entrepreneurs innovate and create new concepts if they have to spend a disproportionate amount of their time complying with the rules?

There are some industries which will definitely benefit from being outside the EU and the tax-efficient investment industry is one of them. Offering tax relief to investors via tax-advantaged schemes comes under the aegis of the Competition Commission in Brussels, whose wide remit includes blocking mega takeover deals which it deems not in the public interest, and also ensuring parity within member states with regard to the subsidising of certain industries. The steel industry is one such, which has come in for a lot of scrutiny in recent months.

Getting down to the EIS

All changes to VCTs, EISs and other “tax-advantaged” schemes must be ratified by Brussels. Endless Eurostar trips and hours sitting negotiating in meeting rooms and corridors by members of the UK Treasury team. The fact that the UK has by far the most sophisticated tax-efficient industry in Europe does not exactly help – commissioners are weary of making a special exception for the UK. Over the last decade, we have had a fair degree of difficulty with these negotiations. Reducing the annual maximum which could be raised by an EIS company down to £2 million is an example of a very unhelpful rule emanating from Brussels.

We survived those years (2008-2011) but it was a very tough restriction, and the result was a substantial drop in the level of funds raised and therefore a loss of investment for the enterprise economy. The EIS Association lobbied hard for this restriction to be reversed and asked for the annual limit to be put up to £10 million. The Treasury team returned from Brussels saying £5 million was the best they were able to negotiate, and best not to complain or lobby any more, as even that might be withdrawn.

Free from the excessive restrictions of the Competition Commission, the UK would be free to decide its own level of subsidy and where it should be directed. Record amounts of money are being invested in the EIS, which in turn is producing new businesses and creating employment and increasing the tax take through income tax, corporation tax and VAT. Yes, the EIS would be better off with Brexit.

Martin Sherwood

Martin Sherwood has been closely involved in both Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) since their inception and is a founding director of the EIS Association, the official trade association of the EIS industry.

Martin is now a Partner at Enterprise Investment Partners, a venture capital boutique specialising in fund-raising for smaller companies through tax-efficient structures, with a particular emphasis on the EIS and Seed EIS.

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