30 May 2017, 3:28pm
Kin Capital in Professional Adviser.
Having actually read the Tory manifesto, Tom Hopkins sees potentially great things for the tax-efficient market in the wake of next month’s general election.
I will be bold and make a prediction. The Conservatives will win the 8 June general election.
When I say ‘bold’, of course the world and its dog thinks the Tories will walk it but, given the electoral anomalies seen last year on both sides of the Atlantic, we are operating on the premise the Prime Minister will end up with a ‘workable’ majority. So what does that mean for the UK’s tax-efficient market?
As we saw last tax year, the amount of capital raised on the government’s venture capital schemes was mixed, with venture capital trust (VCT) numbers up and Enterprise Investment Scheme (EIS) amounts down. Nevertheless, more money was raised to invest into growth businesses following the qualifying rule changes.
This is of course good news for both the government and UK PLC – but there are storm clouds forming in terms of available funding for growth businesses.
For one thing, the European Investment Fund (EIF) could be starting to turn off the taps. The EIF is a European Union agency – effectively funded by member states – that provides finance to SMEs, for instance via venture capital funds.
The EIF has been an important backer of British venture capital and accounted for more than a third of investment in UK-based institutional venture capital funds between 2011 and 2015. More than that, it is an ‘anchor’ investor, which is vital for a successful fund-raise as it allows fund managers to build a book around the EIF commitment to the fund.
The Conservative party manifesto, which came out last week, pledges the UK’s British Business Bank will make up for any EIF shortfall. As you would expect, the manifesto is light on the detail but it states: “When we leave the European Union, we will fund the British Business Bank with the repatriated funds from the European Investment Fund.”
Getting funds out of the EIF might be easier said than done, however, so can the tax-efficient market help?
The Conservatives clearly think so – the manifesto also states: “We will help innovators and start-ups, by encouraging early-stage investment and considering further incentives under our world-leading Enterprise Investment Scheme and Seed Enterprise Investment Scheme.”
Stirring stuff indeed – the government has already done a lot to encourage capital to flow into growth businesses by changing the qualifying rules and it is difficult to see what other rules changes could be made.
Still, a further incentive – for instance, increasing the rate of tax – would undoubtedly increase demand and help people get over the recent shift in risk profile for these types of investments.
In fact, there is a great opportunity to increase the early-stage capital pool, given the large amount of EIS capital exiting renewable energy investments over the next couple of years – any encouragement to get that reinvested into early-stage EIS investments would be welcome.
In terms of the Seed Enterprise Investment Scheme (SEIS), an increase in investment amount, which was set at £150,000 to fall outside EU state aid rules, would be welcome – that amount of capital does not last long in a fast-growing business.
Some VCTs have had a tough time since the rules changes but they play an important part in funding UK businesses across all sectors. If the government was still concerned, then some minor tweaks would ensure the capital is invested on the same terms as EIS.
And it is important to note that, for many investors, VCTs are seen as the preferred route to invest in growth businesses, thanks to the comfort of a listed vehicle, the simpler administration and the risk mitigation via portfolio diversification.
Hence VCTs must surely be seen as part of the patient capital solution. Any changes – for example, reducing the initial tax rate – to dampen demand would be a mistake and a lost source of capital for growth businesses.
We are expecting the Patient Capital Review consultation post-election and both EIS and VCTs will be included so we might find out more about the government’s current thinking. Mind you, I do find it odd that no representative of either venture capital scheme is on the panel …
There is also a lot in the manifesto about digital Britain and rightly striving to be the world’s leading digital economies. But actually tech firms do not necessarily create huge jobs numbers. Granted, they would en masse – but, by its nature, tech enables scale without the bodies.
So don’t forget non-digital entrepreneurs as they create jobs too and, in some sectors, a lot more than digital businesses. Retail is a classic example – one Pembroke VCT’s portfolio company, the burger chain Five Guys, has created well over 1,000 jobs nationwide since it started in the UK three years ago.
The power of UK universities is also increasingly recognised. According to the Conservatives: “Our world-beating universities will lead the expansion of our R&D capacity. We must help them make a success of their discoveries – while they have a number of growing investment funds specialising in spin-outs, we have more to do.”
The government has already created ‘knowledge-intensive’ qualifying businesses, allowing more EIS/VCT funds to be deployed in the university spin-out sector. The government could look to increase the tax relief for these types of businesses as well if it believed certain sectors needed to be supported further to obtain their objective of innovation in Britain.
Any changes would certainly help the specialists funds such as Parkwalk EIS, which was the largest growth EIS fund of 2016/17 raising £50m, proving even now that investors are willing to take a higher risk with potential higher returns.
Dare I make one more prediction? It is great news for UK PLC that the government recognise the importance of EIS and SEIS. And it is right – these schemes are world-leading, and have done more than people realise to build the current UK entrepreneurial culture.
And the relatively new rule changes are starting to have their desired impact with more funds from these venture capital schemes getting invested in growth businesses, further enhancing their importance.
The venture capital schemes, the approved tax-efficient vehicles such as SEIS, EIS and VCTs, will play their part post-Brexit but the industry needs to prove its case. And the government should recognise that, while VCTs have historically had their issues, they are an important part of the patient capital solution.
A boost to overall SEIS and EIS tax relief is unlikely but the rules around investment might become more flexible for sectors where the government strategically wants the UK to be a world leader.
With six months before the first Autumn Budget, we should know more over the next few months but one thing is for sure – the current government sees venture capital schemes as part of the solution for ‘a Strong and Stable Britain’.
The original article can be found in Professional Adviser here.
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