EIS Industry Report 2019/20

32 33 SEIS: The seed that’s worth growing Since the Seed Enterprise Investment Scheme (SEIS) was launched in 2012-13, over £1 billion of funds have been invested in more than 12,900 early-stage companies. And whilst the figures for EIS investments show a downturn in 2017/18, the amounts being raised under SEIS do not. So it’s well worth reminding ourselves why SEIS remains good for investors and for early-stage businesses. Let’s start with the tax reliefs. Under SEIS, an investor who invests £1,000 can claim back £500 in income tax relief and up to £140 in capital gains tax relief. Making the true cost of the investment £360. Not bad for starters. But early-stage companies are very high risk, you might say. Which is absolutely true. However, don’t forget that if our £1,000 SEIS investment becomes worthless, our investor can then claim loss relief, against income tax, of up to a further £225. Bringing the actual loss down to £135. Not great (a loss is a loss), but a lot better than losing the whole £1,000. And bear in mind that a similar investment under EIS would result in an actual loss (after tax reliefs) of at least £385 – almost three times the “real” loss under SEIS. Notwithstanding the tax reliefs, investors might still be put off by the risk profile of SEIS, and prefer to stick to the “safer” option of investing in more mature businesses under EIS. But is that such an obvious decision? The recent risk to capital changes mean EIS investors are now taking greater risks than would have been the case previously. The risk profile of SEIS remains pretty much unchanged, given that SEIS has always been limited to businesses less than two years old and which, in most cases, would lack any kind of asset backing. We’re seeing more and more SEIS, or hybrid SEIS/EIS funds, springing up. The attractions for investors in such funds are obvious. Risk can be spread across a number of companies and sectors. Fund managers bring a rigour and professionalism to the selection of businesses for investment, and will then lend support, business acumen, and useful contacts, to help those businesses survive and grow. Hybrid SEIS/EIS funds may offer particular benefits. Almost all early stage businesses will wither, and ultimately fail, without access to further rounds of funding to boost growth and development. A hybrid fund provides a ready-made source of follow-on funding, and gives investors the ability to follow their money under EIS. And by “incubating” their own pipeline of EIS investments by investing smaller amounts of early stage capital under SEIS, these funds offer investors the chance to follow on into businesses that are already familiar to both fund manager and fund investors. So in the context of greater tax reliefs, better loss protection, increased risk profile for other tax-relieved investment schemes, and increasing numbers of hybrid SEIS/EIS funds, we see an environment in which SEIS should, like the businesses it helps support, be well placed to grow and prosper. Neil Pearson Partner, Mills & Reeve Considerations for Investment / Thought Leadership SEIS AND THE FUTURE CONTINUITY RATHER THAN REVOLUTION As discussed earlier in this report, the Seed Enterprise Investment Scheme (SEIS) has not seen a great increase in popularity since its inception in 2012, with investment remaining largely stable since 2013-14. We have already looked at some of the reasons why this may be the case, so in this section we will consider what may happen to the scheme from here. The future of SEIS remains somewhat unclear following the rule changes to EIS, with the higher risk requirements potentially resulting in investors searching out the types of companies that SEIS was originally designed to target. Alternatively, it may be that investors are encouraged into the SEIS market: the benefit of 50% income tax relief, as opposed to 30% for EIS investments, could prove more attractive because the risks are now more closely aligned. Given the increased reliefs available under SEIS, it makes sense for investors to use this tool where it is available, rather than abandoning it for EIS. The increased amounts for knowledge-intensive companies do not apply for SEIS, but nonetheless experts suggest this area of research and development will continue to see the technology and life sciences sectors dominating SEIS usage. As one adviser explained, in these companies SEIS is often used to get something off the ground, with a “family and friends type of play” - and so SEIS remains more appropriate for these types of investments than EIS. Indeed, in these scenarios, it may make sense to use SEIS funding until the business has reached its £150,000 funding limit, before then moving on to use EIS to continue its growth. This suggests that those who invested in the 1,680 of companies receiving investments of £150,000 or less in 2017-18 may have missed a trick and would have been better served in respect of income tax relief to search out SEIS investments. If this were the case, perhaps the increased demand would push up the number of SEIS offerings. “EIS funding, together with strong, active business support, can fuel economic growth in start-ups.” — REUBEN WILCOCK, VENTURES DIRECTOR, BLACKFINCH “EIS provides investors with exposure to some of the most innovative trailblazers across multiple sectors in the UK economy.” — JOHN DAVIES, INVESTMENT DIRECTOR, SENECA PARTNERS