EIS Industry Report 2019/20

10 11 One metric from the May 2019 figures that is already showing the impact of the recent changes is the number of advance assurance applications. Provisional figures for 2018-19 show that the number of companies seeking advance assurance and the number of applications received by HMRC were both the lowest since 2014-15. This will, in part, be down to the impact of the risk to capital condition. However, HMRC is also clamping down on speculative applications and stopped considering such approaches from early 2018. This means applications need to have confirmation of who the likely investors are, and if this cannot be provided, HMRC will reject the application. Given these two factors, it is little surprise that in 2018-19 HMRC approved its lowest number of advance assurance request applications since 2011- 12. This will filter through into the amount raised through EIS in the 2018-19 figures when they are published in May 2020. In October 2019, HMRC sought to clarify the advance assurance process by publishing a 'checklist' to be completed and submitted alongside any advance assurance requests. It also said a company "must draw attention in its application to each point of doubt with a full technical explanation as to why it believes the requirement is met", which should help highlight to HMRC the relevant technical points in an application. We can perhaps infer from this that HMRC has received a number of applications that don't provide all the information necessary for it to make a proper judgement of EIS eligibility. It is also possible that it has received applications that don't properly consider all aspects of the new rules. Either could be connected to the drop in approvals. "It is not surprising that the number of applications fell following the tightened procedural requirements imposed by HMRC from early 2018, but the expectation would have been that the success rate would have risen as a result," says Sarah Lane, partner in Burges Salmon's corporate tax team, pointing to a proportionate drop in the success rate. "This reinforces the message that it is worth potential issuers checking best practice and technical guidance from industry bodies, from potential funders or from advisers before submitting applications." In 2017-18, the size of EIS investment per company was generally in line with or slightly ahead of the previous two years and the overall trend is also in line with this. A large proportion of companies received relatively small investments, with 43% (1,680) of companies receiving investments of £150,000 or less in 2017-18. However, there is one notable exception: in the £5 million upper limit, where the amount of funds raised lagged substantially behind the previous years. Again this is likely to be down to a mixture of factors. It could be in part due to the risk to capital requirement, as investors refocus their attention on smaller companies in the earlier stages of development that require smaller amounts of capital. But it may also be a response by the investee companies themselves to the uncertainty in the UK market, with a lack of any outcome on Brexit in 2017-18 potentially resulting in businesses choosing to raise smaller amounts of money rather than seeking investment for the long term. Another possibility is that there is money waiting to be deployed here into knowledge-intensive companies, where the upper limit is higher, and therefore this sector could see a rise as these companies become more established. Once again, London dominates when it comes to where EIS money is spent. It is the only region to surpass £1 billion of investment (reaching £1.02 billion), with the South East the next closest at £263 million. Beyond these two regions, the rest of the UK combined had less than £650 million of EIS investment in 2017-18, underlining just how important London is to the sector and the wider small business community. This dominance is also reflected in the number of companies in London that benefited from EIS in 2017- 18. While 1,860 companies in London and 605 in the South East raised investment through EIS during the year, just 1,435 companies in the rest of the UK raised investment through the scheme. This London-centric focus is probably down to a mixture of three factors. It may be that there are fewer companies setting up in the regions and wanting to expand; or less appetite from investors to venture outside London and the South East; or because companies outside this area have less opportunity and tools to showcase themselves to potential investors. However, it may be advisable for managers and investors to consider greater geographical diversification of their portfolios. While there is an expectation that London NUMBER OF COMPANIES BY AMOUNT OF FUNDS RAISED DISTRIBUTION OF EIS INVESTMENTS (2017-18) 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Companies seeking advance assurance 1,035 1,025 965 1,095 1,375 2,030 2,265 2,640 3,075 3,450 3,515 3,710 3,145 Tot. advance assurance request applications received 1,080 1,060 995 1,125 1,460 2,150 2,340 2,730 3,170 3,575 3,625 3,815 3,270 Tot. advance assurance request applications approved 930 920 870 960 1,275 1,900 2,075 2,425 2,775 2,880 2,955 2,860 2,040 ADVANCE ASSURANCE FOR EIS SOURCE: HMRC DISTRIBUTION OF FUNDS RAISED BY INDIVIDUAL INVESTMENT SIZE 10,000 200,000 25,000 250,000 500,000 1,500,000 50,000 300,000 750,000 1,750,000 4,000,000 100,000 350,000 1,000,000 2,000,000 5,000,000 150,000 400,000 450,000 1,250,000 3,000,000 £500m £400m £300m £200m £100m £0m 10,000 200,000 25,000 250,000 500,000 1,500,000 50,000 300,000 750,000 1,750,000 4,000,000 100,000 350,000 1,000,000 2,000,000 5,000,000 150,000 400,000 450,000 1,250,000 3,000,000 600 400 200 0 2015-16 2016-17 2017-18 2015-16 2016-17 2017-18 SOURCE: HMRC SOURCE: HMRC Market Update / Fundraising Update Market Update / Fundraising Update SOURCE: HMRC 20 6 132 109 57 51 38 1,020 263 29 69 YORKSHIRE & HUMBER EAST MIDLANDS WEST MIDLANDS NORTH WEST LONDON SOUTH EAST SOUTH WEST WALES NORTH EAST SCOTLAND NORTHERN IRELAND £0 £1,020m