EIS is an extraordinarily generous tax relief, designed to incentivise high net worth individuals to invest in companies. There are many examples of companies that have used EIS effectively and catapulted their status from ‘struggling’ to ‘high-growth’, deploying funds on the development of intellectual property, sales & marketing and employing additional staff.
C+T has supported over 100 companies to seek advance assurance of EIS qualifying status in the last 2 years. We have also received at least as many queries from angel syndicates on the application of EIS rules through our LINC Scotland-sponsored EIS helpdesk. As such, we have extensive experience of the negative impact of European Union-imposed changes into UK legislation in late 2015. For example, it is now very difficult for companies more than 7 years old, that have not previously taken EIS, Seed EIS, Venture Capital Trust or Social Investment Tax Relief investment, to qualify for investment. Furthermore, companies must spend the funds raised within agreed parameters. For example, they cannot acquire other businesses or their assets using EIS money. Also, companies within certain creative industries, like film and video games, that have always successfully qualified for EIS in the past may find it much more difficult to qualify now. This is because HMRC considers the industry-standard structure an inhibition to a company’s ability to ‘develop and grow’.
EIS complexities extend to the shareholders also. As an example, existing EIS shareholders who may have a tiny additional shareholding attributable to buying a proportion of a departing employee’s shareholding cannot reinvest under EIS. Or EIS shareholders who have not claimed income tax relief attributable to their investments may get a nasty shock when they must pay Capital Gains Tax when they sell their shares, simply because they did not claim the initial relief in the correct manner. Even when an investor qualifies, not understanding the complexities of how to claim tax efficiently can be punishing. Over the last year, we saved new clients with an EIS portfolio an average of £10,000 through simply reclaiming their reliefs more efficiently than they did so previously.
In the last week, HMRC published results showing how the increasing complexities are adversely affecting the availability of funds to young, potentially high-growth companies across the UK. £230m less was invested in tax year 2015-16 than the year prior. Furthermore, having – for the first time ever – broken through 1,000 companies receiving funding in 2014/15, the number of companies that received funding in 2014-15 fell to just 787.
The EIS Association, of which Chiene + Tait is a member, commented in respect of these results:
“Our greatest concern from these figures is that there’s been a meaningful drop in the number of companies raising money via EIS for the first time…We believe this is a direct result of 2 measures, the 2015 rule changes imposed by the EU and the withdrawal of energy generation subsidies as a qualifying EIS investment.
“The EIS Association believes those changes have been harmful to the UK’s business and enterprise sector, and therefore to the economy as a whole, and the drop in the number of companies obtaining EIS funding for the first time reflects this.
“… Of more concern is the reduction in the numbers of applications obtaining approval from HMRC. Down from 80% to 70%…We continue to have major concerns about the current state of HMRC’s Advance Assurance system and the figures go to show that this is now having a negative impact on exactly those small and scale up businesses for whom EIS was originally intended to help start, build and grow their business.”
Irrespective of political sentiment toward an imminent hard Brexit, I believe that HM Treasury now have an opportunity to strengthen EIS. The 2015 changes were a disaster and need to be repealed as soon as possible. To work effectively, EIS needs to be more accessible. HMRC’s EIS Inspectors are not permitted to apply discretion; the implementation of these rules requires them to adopt an analytical approach in assessing companies that seek to raise EIS funds. They are not bank managers, so they should not be asked to determine whether EIS funding will enable a company to develop and grow. Additionally, whilst it is great that there is a scheme designed to enable young companies to obtain funding; more developed, older companies should not be prohibited simply because they are more mature. Investors do not seek opportunities to throw good money after bad; they seek to throw good after good and the legislation should seek to encourage this not block through a sentiment of corporate ageism.
More and more information is required to be appended to an EIS application and, despite this, further questions are being asked with increasing regularity by HMRC. These figures speak for themselves – companies receiving funding are down, whilst the level of enforced HMRC scrutiny into applications is up. Something must change.