Calling all advisers! Tell HM Treasury what you want for ‘Knowledge Intensive’ investment
Do we want a new EIS fund structure which will encourage more patient capital into Knowledge Intensive businesses?
If so, and we think most advisers will like the idea as we do, the government’s consultation paper on said has been launched and closes on May 11.
So the time is now for action.
Knowledge Intensive businesses focus on the commercialisation of technology, where revenues often show a significant time lag over investment. Typically, the relevant technology has spun out of a university.
The funding available for these businesses has historically been in short supply, but the firms are an important part of the government’s plans to ensure the UK remains a global leader of innovation and R&D.
Recent, well documented, changes to the rules surrounding EIS and VCTs have increased the potential risk profile for these schemes, so the government wants to further encourage advisers and clients to invest in growth EIS funds.
Interestingly, Cambridge Enterprise, the university’s commercialisation arm, recently announced that the five-year survival rate its portfolio companies is 97.5 per cent.
Food for thought for many advisers who have clients who have previously shunned growth EIS and VCT as being too risky.
So what is being proposed?
HM Treasury has just launched the consultation which floats some ideas for a new KI EIS approved fund.
These include possible new tax incentives, including a dividend tax exemption, CGT Reinvestment Relief and extended carry back.
Kin Capital says…
We believe the overriding objective is to ensure there isn’t a flight of capital out of EIS and VCTs given the change in the investment rules and early-stage nature of the companies which now qualify.
Investing in growth-focused EIS funds (mostly all unapproved) has historically been an administrative burden for investors and fund managers alike – unknown investment / tax relief timing, multiple EIS certificates, difficult allocation process etc.
By making the investment process easier for all stakeholders, more capital is likely to be retained in the EIS market, and by definition more invested into growth and KI EIS qualifying businesses. Especially given the amount of capital due to exit ‘capital preservation’ strategies over the next few years.
Therefore, we are suggesting that no further tax relief is required (EIS is a good scheme – let’s not complicate it) but make it easier for financial advisers and investors.
So our recommendations focus on areas such as fund-level tax relief, carry back and speedy issue of the fund EIS certificate to ensure more certainty over timing and amount of EIS relief.
Your ideas are more important
As financial advisers you will understand the risk / return profile of these schemes, which may or may not be appropriate for your clients. You are controllers of the capital and so your voice is vital.
You will also understand that there are issues beyond the risk / return nature of these funds which stop clients investing. For instance uncertainty over timing of tax relief and the paperwork involved post investment (ie multiple tax certificates).
Tax planning is an important part for these schemes and the burden of administration hinders the advice process. What should government do to make that process easier?
You also probably have clients that have some capital exiting the old ‘capital preservation’ EIS fund over the next couple of years so it would be useful for you to have an easy EIS option for clients to reinvest.
Therefore, you are in a good position to advise the government on timing – is there a window of opportunity to ensure this money remains invested in EIS and hence more into KI businesses?
In summary it is an interesting and exciting time for EIS – let’s make it easier for advisers and clients to back higher risk and earlier stage companies, and generate growth for UK Plc. And you have the chance to influence and design the perfect EIS vehicle to enhance the advice process.
The consultation closes on 11th May 2018