Brexit is done, so roll on amendments to EIS

This post is part of our Entrepreneurial team’s regular series of blogs.

Many within the investment industry have been frustrated at the restrictions placed on SEIS and EIS by virtue of compliance with EU legislation.

Whatever your political persuasion – this article is deliberately apolitical – it is clear that Brexit offers an opportunity for HM Treasury to make amendments to the SEIS and EIS schemes, without breaching EU law. It would appear that with this in mind, the EIS Association (EISA) has written to the Chancellor and laid out proposals to improve these schemes.

SEIS is de minimis state aid, meaning that there were limits around the quantum of investment that could be received and also that EIS is a Notified State Aid, providing the EU with influence over its rules and application.

Such influence was most notably exercised in 2015 when HM Treasury instigated changes to EIS because it needed EU reapproval of the scheme. These changes included a termination date for the EIS scheme; a maximum age of the company requirement and restrictions on which investors qualified, how money was to be spent, and which companies qualified; and the promotion of “Knowledge Intensive Companies”. With the exception of the last point, these changes were not welcomed by most and fundamentally changed the investment landscape. In my opinion, for the worse.

The EISA’s letter, timeously issued in advance of the March Budget, sets out its recommendations for changes to these schemes. I applaud their actions, having written several articles in the past stating my desire for positive and progressive post-Brexit changes to the EIS scheme. Their recommendations, together with my own thoughts, are listed below:

Immediate change – i.e. from 3 March 2020

1. Increase the maximum level of SEIS investment from £150,000 to £250,000.

The majority of start-up companies we see seeking investment look for around £250,000 in their first investment round. As the rules currently stand, investors need to seek the first £150,000 to be SEIS and the remaining £100,000 to be EIS. The effect of which, to be compliant with the SEIS rules, is that the investment must be tranched over two days. This added complexity requires more detailed and correspondingly expensive investment agreements to be drawn up, as a result of which I have seen investments falling through.

Autumn Budget changes – likely to be around mid-November

2. Replace the Age Restriction with a more appropriate threshold

5 years on, the maximum age restriction is still the EIS change that prompts the most questions to our @LINC Scotland EIS Helpdesk from investors. In a nutshell, older companies do not qualify unless

  • i) they have previously taken EIS investment and are seeking to further fund that activity; or
  • ii) are trying to do something very different and are raising a significant sum to finance it.

I see half a dozen good companies every year which need investment and cannot get through these rules. They are left out to dry. The EISA do not advocate simply throwing open the doors to all companies, but replacing this (unfair) test with a (fairer) test that reflects the size, not the age, of the business.

3. Ministerial assurances that EIS will continue beyond 2025

If we are to succeed as a country, investment in innovation is critically important. Banks simply will not lend to most early stage businesses, so these businesses need to turn to investors to get going, fund their growth and fund their expansion. The EIS scheme is a significant job creator, with 4 new jobs created for each £1m invested according to the EISA. When the 10-year scheme limit was enacted, much consternation was expressed. We are now over half way through that window and need to have assurances that the scheme will continue.

4. Reducing the admin burden

We live in a digital age in which all PAYE information is instantly known to HMRC; all VAT information is reported instantly to HMRC; and all accounts and tax returns will soon be instantly reported to HMRC.

By comparison, EIS is reported through a combination of a manually-completed document that prompts HMRC to issue a PDF certificate, authorising the company to prepare and issue forms to the investors who then can manually complete it and submit in the tax returns or directly to HMRC. This is archaic. It should be possible for the post-EIS investment form to be digitally uploaded and, once accepted by HMRC, each investor’s tax recorded updated to record the investment.

Final thoughts

In addition to the above, EISA also recommends HM Treasury investigates how money held in pension funds can be used to fund EIS and SEIS qualifying companies and how to raise the profiles of EIS and SEIS investments.

The EISA letter is first class. It is a well researched, well presented and well thought-through request for support. Support that the government can provide without massive cost to the exchequer, and that will enable the economy to grow.