Brexit: what now for the EIS?
The country has spoken and we’re out. But what effect will this have on the Enterprise Investment Scheme (EIS), current offers and the immediate tax investment climate? Once past the initial shock of the surprise result, it seems probable that it will be status quo for the immediate future, until a new Conservative leader is in place. At the time of writing, we are expecting a reshuffle fairly soon, with the leadership contest starting in July and being completed in time for the Party Conference in October. A new chancellor could be appointed any time soon but we think it unlikely the EIS is likely to be on the radar of that person for the time being.
Under current rules, any changes to EIS rules have to be ratified by Brussels. It is unclear what will be the position going forward during the two year Article 50 inter-regnum, but the thinking is that Brussels will no longer be interested in meeting with UK officials and approving any proposed changes to the scheme. So, there are unlikely to be any changes to the current EIS rules for at least two years. At last there will be an end to the regular Eurostar trips to Brussels and the hours spent sitting negotiating in meeting rooms. Assuming notice to quit will be given in the next few weeks, the UK will not finally exit the EU until the second half of 2018, so any changes to the EIS are therefore unlikely to be introduced until the spring of 2019.
So, with regard to the EIS rules, we have the prospect of a level playing field for at least two and half years. The outlook for tax rates is nothing like as clear. Osborne was quoted as saying that if the UK voted Brexit, there would need to be an emergency budget to increase tax rates. This could happen any time soon.
So, the likelihood is a combination of higher tax rates and status quo with regard to the EIS rules
People will if anything have higher tax liabilities and the means of mitigating those liabilities are likely to remain unchanged.
But that ignores the question of investor confidence. We think that the uncertainty thrown up by Brexit is likely to have a dampening effect on investor sentiment in the short term. A Morgan Stanley statement put out on Friday morning was hinting that the immediate trend would be towards a “less open and more volatile economy”. Certainly, market indices and currency conversion rates are likely to fluctuate more than usual and this in itself could be unsettling.
Sterling denominated assets are likely to attract extra interest due to a lower pound. This does not include UK residential property, which has been dealt a further blow by market uncertainty, to add to the wounds recently inflicted by higher stamp duty rates. But assets like fine wine, which are traded in sterling and whose prices appear to be on the rise, could well attract extra attention.
Our house view is that the need to apply stimulus to the enterprise economy will be greater than ever. Young entrepreneurs and start-up businesses do not have the time to wait for all the uncertainty of Brexit to clear the system. They need funding now. So will the demand for funding be met with sufficient investor appetite? We think investors will be cautious and opt wherever possible for lower risk, asset-backed options. Having said that, there should still be plenty of brilliant new product concepts which will emerge and grow relentlessly, unconstrained by tariffs and border controls. “Out of chaos comes opportunity” said Karl Marx in one of his more intelligent statements.
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.