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CONCLUSION TO EIS IN FOCUS
There are some fantastic reasons to invest
in EIS qualifying companies and investment
can be a rare win-win-win- win-win scenario.
Win 1
: Small and medium sized
enterprises can access the capital they need
to grow
Win 2
: The government knows an
important part of the UK economy is being
supported
Win 3
: HMRC may gain more from the
taxes these companies pay than it loses
from giving investors tax reliefs
Win 4
: Those tax reliefs tilt the risk/
reward profile of smaller company investing
back in favour of the investor
Win 5
: The same tax reliefs can be very
important tax mitigation tools for advisers
These drivers, along with the reduction in
annual and lifetime pension allowances,
are going to be behind the growth in the
EIS market for several years to come.
Based on this, we cautiously predict a
£2bn market by the end of the 2014/15.
We may see some further regulatory
changes as well: the EISA is lobbying HMRC
to remove ‘anti-dilution’ prohibitions. At
present, any specific provisions to protect
early stage investors from being diluted in
the future are outlawed under EIS as they
greatly reduce the investment risk. However,
the EISA and the rest of the industry would
like to see these prohibitions removed.
It’s also possible that we’ll see a wider
variety of investments qualifying for the
EIS. Currently only shares (and a narrow
category of preference shares) qualify,
but we may well see that widened to
include loan stock and full preference
shares – investments that are commonly
used in early stage fundraising.
Some other changes that HMRC
might consider bringing in:
A lifetime company fundraising
allowance of £10m
A maximum age of qualifying company
Allowing funds raised via the EIS to be
used for secondary company purchases
(currently prohibited, forcing companies to
use other sources of capital to fund
acquisitions)
All of these proposed changes would
require a consultation period, clearance
from the EU and a finance act to bring
them into legislation, so the soonest
they could be implemented would be
on a two to three year time-scale.
No doubt there will also be
some growing pains.
The first one has been flagged up by
the government in the 2014 budget.
Schemes set to exploit the EIS and serve
as tax shelters rather than putting
money at risk to grow businesses,
will come under the microscope.
We are surely going to see some under-
performance at some point as well. Not all
the fund managers are going to get it right,
and while there is more than enough deal
flow, the pressure to deploy cash could
lead managers into poor investments.
The issue will be compounded by the
illiquid, hard to value, long term nature
of the investments – problems may not
come to light for a number of years.
The low interest rate environment also
means there are a lot of ‘zombie’ companies
out there – companies who are only just
servicing their debts, but not growing – it
must be hoped that EIS fund managers
will be skilled enough to avoid these.
The growth in the sector could attract
unscrupulous elements that will set up
‘me-too’ opportunistic funds that verge on
fraud – with the potential to cause great
reputational damage to the sector. Greater
levels of disclosure and transparency
should help to mitigate this risk.
Overall though, in our opinion, it is hard not
to feel positive and optimistic about a sector
with so many good points that is enjoying
government support.
“The EIS allows investment
in a wide range of sectors, but
qualifying companies should all
have strong management teams,
scalable business models, the
potential to grow and create jobs
and build value for investors”
David Mott, Oxford Capital
