EIS Industry Report 2019/20

18 19 CURRENT CONDITIONS BREXIT CONTINUES TO PLAY ITS PART Research from HMRC shows the continued support for EIS among investee companies. A study undertaken by Ipsos MORI between January and April 2016 on behalf of HMRC, and published by the government in July 2019, found that UK digital tech businesses credited both EIS and SEIS with helping them to “manage the length of their development phases, attract investment and, ultimately, to grow”. Based on qualitative interviews with 50 UK digital tech businesses, the study reported that those operating in entirely new markets felt that without these reliefs, “they would not have gained the investment they needed to develop their product or service” 5 . Nonetheless, sentiment among UK small businesses has been affected by the ongoing Brexit quagmire of recent years, with the lack of a deal (or even a firm no-deal exit date) leaving uncertainty hanging over businesses that are unable to plan more than a few months in advance. It is no surprise that the Federation of Small Businesses reported small business confidence measuring -8.8 on its index in the second quarter of 2019 - the fourth straight month in which the index had recorded a negative result. And that sentiment has been mirrored by investors, too. In July 2019, Nikki Howes, an investment associate at Heartwood Investment Management, suggested that UK shares “remain markedly unloved by investors”. This could provide an opportunity for the type of investors who are likely to be attracted to EIS investments. Writing in FT Adviser, Howes concluded: “[UK shares] are also relatively cheap, appearing good value by virtually all measures.” 6 While she was mainly referring to listed companies, the statement still stands for unlisted stocks that may be ripe for EIS investment. One future impact of Brexit could be the way in which government legislation affects EIS. For example, changes made in 2015 adding further restrictions on the types of companies that qualify for relief under EIS were brought in to comply with EU State Aid rules. Brexit may free the UK government’s hand to extend the tax relief if it is looking to stimulate greater investment in small businesses. Government figures show just how much legislation is passed in the UK every year. Since 2010, the UK parliament has passed an average of 30 Acts per year, while in the period 2000-09 it averaged 37 new Acts per year. How this will change after Brexit remains to be seen, not least because it is difficult to clearly show where different legislation originates. While a Parliamentary Note from 2005 quotes an average figure of just 9% of national law being based on EU law, this does not take into account all the different ways in which UK legislation is influenced by EU legislation. In June 2005, then-Europe Minister Douglas Alexander explained this difficulty: “There is no central register of UK legislation wholly or partly implementing EU legislation. EU legislation may be directly applicable, implemented by administrative means, or introduced when domestic legislation is amended for other purposes.” In 2006, then-Foreign Office Minister Lord Triesman estimated that “around half of all UK legislation with an impact on business, charities and the voluntary sector stems from legislation agreed by ministers in Brussels” 7 . Whatever the true figure, it may be that, once the initial aftermath of leaving the EU has receded, parliament may have more time and space to consider whether rules brought in by European legislation - such as the level of State Aid allowed and the types of companies that cannot currently qualify under existing EIS rules - are still appropriate to the UK. That said, consideration will need to be given to the possibility of a backlash from the EU in terms of trading conditions should the UK decide to move away from the ‘level playing field’ for companies that EU State Aid rules are intended to create. “EIS remains central to the government’s plans to grow innovative companies in the UK. However, it is quite clear as to where the government wants this funding to go. Investors have never had it made quite so clear that they need to be taking genuine risk in order to benefit from the generous tax reliefs potentially available.” — ANDREW ALDRIDGE, PARTNER, DEEPBRIDGE CAPITAL NUMBER OF ACTS PASSED BY UK PARLIAMENT PER YEAR SOURCE: LEGISLATION.GOV.UK 45 2000 2007 2001 2008 2002 2009 2014 2003 2010 2015 2004 2011 2016 2018 2005 2012 2017 2019 2006 2013 25 44 45 38 24 55 31 33 27 41 25 23 33 30 37 25 35 34 27 Market Update / Current Conditions