EIS 2018 report (web)

14 15 FUNDRAISING UPDATE WHAT DOES A DROP IN FUNDRAISING REALLY MEAN? HMRC’s latest EIS statistics reveal that the amount of money raised through the scheme in 2015/16 dipped for the first time in five years. 9 It's the first fundraising fall since 2012, and much of this can be attributed to the restrictions placed on the EIS scheme by the 2015 budget. Accountancy firm Moore Evans has suggested that one of the contributing factors was former chancellor George Osborne's decision to exclude businesses that had been trading for more than seven years. 10 However, the findings are not a substantial cause for alarm. Although there was a dip of 2% from 2014/15 to 2015/16, the £1.89bn raised in 2015/16 was still the second highest amount invested into the scheme since it was launched 24 years ago. It is also worth bearing in mind that the statistics, published in October 2017, do not tell the whole story. Companies who are involved in the EIS and SEIS schemes have several years after shares are issued to complete a compliance statement - namely the EIS1 / SEIS1 form. This means that the 2015/16 figures provided in the HMRC 2017 statistics are merely provisional, and the figures are likely to be revised as HMRC receives more forms. That being said, since EIS1 and SEIS 1 forms are required for investors to be in a position to claim their tax relief, the reality is likely to be that most firms request their EIS1 Forms as quickly as possible, so the extent of the revision of the figures will be limited. “When considering a client recommendation of an EIS qualifying investment, in-depth sector expertise should be of the utmost importance.” — MATTHEW BUGDEN, INGENIOUS HMRC ILLUSTRATIONS OF HOW THE RISK TO CAPITAL CONDITION WILL BE APPLIED An investment in a restaurant business that is independently run and has ambitions to grow its trade by setting up a new outlet would qualify. The fact that it has substantial assets (premises, kitchen equipment) does not mean that it loses eligibility because HMRC will look at the investment in the round, including the intention to engage employees. In this case, investors would be taking a risk that the restaurant can grow its business. An investment in a life sciences firm that wants to build its own research facility to enable it to expand its existing operations would qualify. The fact that it is using investment to create a substantial asset does not cause it to lose eligibility because the company already has employees who will be working in the new facility – and the company may engage new employees – and the asset is not being used to give investors a protected low risk return. An investment in an animation production company to develop, market and exploit a series of new characters would qualify, even if the company outsources the animation to freelance animators. The government recognises that many sectors use outsourcing as part of normal commercial practice. In this case, outsourcing is not an indicator of a capital preservation investment. An investment in a company set up to acquire and operate a wedding venue, targeting low returns to be achieved by an early exit, with returns in excess of the target capped by the fund manager, would be unlikely to qualify. The low targeted returns and plans for an early exit indicate an absence of any intention to grow and develop the company’s trade in the long term, whilst the capping of returns above the target suggests a low risk profile and is also an indicator of capital preservation. HMRC would nevertheless take account of all of the facts before reaching a decision. By contrast, a genuine entrepreneurial company owning and operating a wedding venue, seeking investment for long-term growth, would qualify. An investment in an independent film production company , which is seeking investment to fund a production via a SPV as part of its plans to develop and grow its film making trade over the long-term, would qualify, provided that the investor remains at significant risk. The presence of a SPV would not itself preclude eligibility, as this is in line with normal commercial practice in the media sector. An investment in a company set up to construct and then operate, through sub-contractors, a crematorium, where the company is closely affiliated to the EIS fund manager marketing the investment, is unlikely to qualify. The control and influence of a fund manager, as nominee for the individual investors, along with substantial assets (land, equipment), suggest a capital preservation strategy. HMRC would nevertheless take account of all of the facts before reaching a decision. AMOUNTS OF FUNDS RAISED THROUGH EIS (1993-94, 2015-16) NO. OF COMPANIES RAISING FUNDS UNDER EIS (1993-94, 2015-16) The amount of companies raising funds was more promising, with the number increasing to 3,470. However, the proportion of companies using EIS for the first time was 53%, a dip from 58% in the two previous years. This suggests that there have been more companies engaging in secondary EIS funding rounds, albeit at more modest amounts. This, in part, may be attributed to some of the larger funds being dissuaded by the 2015 budget changes. SOURCE: EIS1 FORMS 1993-94 15-2016 94-95 04-05 13-14 02-03 11-12 00-01 09-10 98-99 07-08 96-97 05-06 14-15 03-04 12-13 01-02 10-11 1999-2000 08-09 97-98 06-07 95-96 AMOUNT OF INVESTMENT (£M) 2,500,000 1,500,000 2,000,000 1,000,000 50,000 0,0 SOURCE: HMRC EIS1 FORMS 1993-94 15-2016 94-95 04-05 13-14 02-03 11-12 00-01 09-10 98-99 07-08 96-97 05-06 14-15 03-04 12-13 01-02 10-11 1999-2000 08-09 97-98 06-07 95-96 NUMBRE OF CCOMPANIES 4,000 3,500 1,000 2,500 3,000 1,500 2,000 500 0