EIS Industry Report 2019/20

12 13 will continue to outperform the rest of the country post-Brexit, that remains to be seen and therefore a more diversified portfolio may shield investors from any nasty shocks to the economy in the capital. Cost versus benefit: a twin positive Figures published by HMRC show that, in the 2018- 19 tax year, the cost of EIS in lost income tax to the Treasury was £600 million. It also revealed that the cost of capital gains tax as a result of CGT deferral under EIS was £120 million, thus making an overall loss of tax income to the Treasury of £720 million. Loss relief for these purposes is not captured by HMRC data. While almost three-quarters of a billion pounds might seem like a large sum of money for the Treasury to be willing to lose every year (and in the 2017-18 tax year the combined figure was even higher, at £795 million), it can be assumed that the government gets more than this figure back as a result of the tax reliefs. In response to a Freedom of Information request in September 2019, HMRC told us that these figures are simply the bare costs of EIS, without any other benefits to government taken into account. Benefits will include things such as corporation tax, income tax paid by employees, and even less tangible benefits such as VAT paid on personal goods by employees who may otherwise be unemployed and therefore unable to afford such items. Figures from the Department for Business, Energy & Industrial Strategy published in October 2018 show that small businesses accounted for 99.3% of all private sector businesses at the start of 2018 and 99.9% were small or medium-sized (SMEs). There were 5.66 million SMEs (companies with 0-249 employees) at the start of 2018, with a combined turnover of £1.99 billion 1 . Although only a small proportion of these companies will have received EIS investment, the inflows to government from those that have, are likely to be well in excess of the £720 million that it lost through EIS in 2018-19, suggesting that EIS provides a positive net benefit to government coffers. Figures from high-growth company tracker Beauhurst, compiled in September 2019, show that 2,420 companies raised an ‘EIS likely’ round of investment in the first half of 2019. When compared with HMRC data over a full year, about 80% of those investments are likely to be EIS fundraisings. Overall, 30,000 companies have had EIS funding in the past 25 years. Figures show that half of all start-ups fail within the first five years, although not all EIS investments are start-ups. On a conservative assumption that 30% of the companies that have received EIS funding are still active, that equates to around 9,000 remaining companies. Using this as a basis, and extrapolating an average of 15 employees per company (based on Beauhurst's figures) earning £20,000 per year, this would result in income tax and National Insurance Contributions of £387 million from those 9,000 companies. If those employees were instead unemployed and claiming jobseekers allowance at the lower rate for those up to the age of 24 of £57.90 per week, this would have cost the Treasury £406 million. This is without taking into account the other potential benefits to the Treasury like VAT, corporation tax, or any of these taxes from all the companies funded in previous years that continue to contribute to UK Plc. Furthermore, just as EIS is seen as a long-term investment for investors, it should also be viewed as a long-term investment for the government. Providing tax reliefs to support small businesses today can see significant benefits returned over the life of that business. For example, Ten Lifestyle Group was founded in 1998 as the “original lifestyle management service”. It had two rounds of EIS funding of around £1 million each, in 2000 and 2001, and investors have seen returns of up to 15 times their initial investment. The company has gone from an initial 25 employees to 20 offices and more than 700 employees worldwide, including more than 40 corporate partners. The company has no doubt repaid its EIS investment several times over in terms of Treasury receipts, and while not every EIS investee company will be as successful as Ten, it is an example of the success that EIS investment can help to deliver. “We probably would not have a business today without EIS,” Ten CEO and co-founder Alex Cheatle told the EISA 2 . Underlining this, one manager told us that one of his EIS investee companies had provided at least £20 million in PAYE back to government since it was created. Such positives may well shield the scheme from any new government planning a radical overhaul of EIS, on the basis that it has the twin benefits of supporting small, growing British businesses while at the same time almost certainly increasing the amount of money coming into the Treasury. SEIS SMALL BUT PERFECTLY FORMED? The Seed Enterprise Investment Scheme (SEIS) was introduced in then-Chancellor George Osborne’s 2011 Autumn Statement and launched the following April. Since then, 12,900 companies have received investment and over £1 billion of funds have been raised. A company can raise no more than £150,000 in total through SEIS. Investors can invest up to £100,000 per tax year into SEIS-qualifying shares. For investors, income tax relief is available on up to 50% of SEIS investments, rather than 30% under EIS, but only £100,000 per year can qualify for the SEIS reliefs. Furthermore, reinvestment relief of 50% is available under SEIS. This is not deferral relief (as it is under EIS), but will see 50% of the investment become exempt from tax. However, given the investment amount is capped at £100,000, the maximum relief available is £50,000. SEIS also offers the other reliefs that are available under EIS: 100% Capital Gains Tax relief on disposal (capped at £50,000 of gains); 100% IHT relief (via Business Relief after a two-year minimum holding period, applicable to most SEIS-qualifying companies); and Loss Relief. Since 2014-15, the number of companies raising funds has remained steady at around 2,400, and while this dropped to 2,320 in the provisional figures for 2017-18, that is likely to be revised upwards as HMRC processes all the year’s returns. There may be a number of reasons for this lack of upward trajectory, but perhaps the main one is simply the size of investments required under SEIS. As one adviser put it, markets tend to grow quickly when fund managers get involved. By its nature, the scheme’s focus on investments only up to £150,000 in a company’s lifetime means that it is difficult for fund managers to set up a fund that is cost-effective for them. The costs to establish and run a fund, including due diligence on investees would likely outweigh the potential returns on such low funding rounds, making it an unprofitable venture. Mark Brownridge, director-general of the EIS Association, agrees with this analysis. He also points out that, when it first launched, there was a lot of interest and it saw a lot of money going in at that stage, rather than an incremental growth, which may account for the subsequent plateau. The future of SEIS will be considered later in this report. AMOUNT RAISED THROUGH SEIS & COMPANIES RAISING FUNDS 2012-13 200 150 100 50 0 2013-14 2014-15 2015-16 2016-17 2017-18 2,500 2,000 1,500 1,000 500 0 Amount (£million) AMOUNT OF FUNDS RAISED NO. OF COMPANIES RAISING FUNDS Market Update / Fundraising Update SOURCE: HMRC