EIS 2018 report (web)

16 17 CROWDFUNDING PLATFORMS FUELING GROWTH HMRC data suggests that both EIS and SEIS investments are becoming more popular with retail investors. The number of investors claiming relief for EIS investments of up to £5000 increased by 18% from 8,490 in 2014-15, to 10,040 in 2015-16. 11 In terms of SEIS, the number of people who invested £500 or less increased by 26% from 780 in 2014-15 to 985 in 2015-16. We think it’s safe to assume that investors who are committing amounts in these lower value categories are more likely to be retail investors, or investors who are looking to dip their toes in the water. HMRC believes that this is, in part, due to the increasing popularity of crowdfunding platforms - which have made the schemes more accessible. Andrew Hubbard, a tax consultant at RSM, said that crowdfunding had made the tax-advantaged investment schemes a practical way for companies to raise money from small investors. He said: “We see that ADVANCE ASSURANCE TIGHTENS After the budget in November 2017, the government published its response to the consultation on Advance Assurance (AA), removing any concerns that the service would be withdrawn. In 2016-17, HMRC received 3,530 Advance Assurance applications for EIS, a small decrease of 1.12% from 2015-16. 13 Although this can somewhat be attributed to the more stringent rules coming into play from the 2015 budget, it appears there is a greater backlog of applications. The proportion of approvals and rejections is lower than the previous year - which suggests that a higher number of applications will be rolled over to the next year. It will be interesting to see how many applications will be made over the next few years. HMRC hopes that the introduction of its risk to capital condition will deter many companies which are capital preservation- focused from applying for Advance Assurance, and as a result, speed up waiting times for eligible companies. The question is, will this deficit be made up by higher risk propositions? In reality, there will no doubt be a myriad of grey areas, and the government’s promise of a 15 day turnaround on Advance Assurance applications may be unlikely to come to fruition - at least not in the short term; When the government implemented a new requirement in the 2015 budget for companies to provide evidence that funds would be used in order to grow or develop their business - it added an extra burden to the Advance Assurance process, in terms of judging which companies qualified. This had a detrimental knock-on effect on AA processing times. So the question is, how immediately obvious will a non-qualifying capital appreciation focus be? If it is very obvious in a large number of products applying for AA, then we can expect a lower turnaround time and higher level of quick rejections. But, if this is not the case and areas of the new rules need clarification, the turnaround times may not drop to the 15 day promise as fast as the government and the companies that need funding would like. “The government is trying to put a principle into place that says that if you’re investing purely for tax reasons, it’s not an investment that should get relief.” — DAVID SCRIVENS, CLUB FINANCE ADVANCE ASSURANCE APPLICATIONS as a positive sign — previously start- up companies have struggled to find a way of encouraging small investors to make investments which, by their very nature, carry some risk.” 12 SMALL GAINS FOR SEIS The SEIS scheme saw modest increases in investment during 2015-16 - with a £0.5m total increase from the previous year. SEIS is still a relatively nascent area, and HMRC data indicates that 2,360 companies received investment through the scheme. Over 1,800 of these companies were raising funds under SEIS for the first time, raising a total of £154m in investment. The average investment per company under SEIS in 2015-16 was around £76,000 - a slight decrease from £77,000 in the previous year. This suggests that the increased total investment is attributed to more companies becoming involved with the scheme, as opposed to a greater commitment to each company. In December 2017 HMRC, in response to its consultation 14 ‘Tax-advantaged venture capital schemes – streamlining the Advance Assurance service’, confirmed that the Advance Assurance service will continue. HMRC is also commiting to a 15 day turn around on applications, and believes it will be able to curb current wait times by introducing the following measures: Digitisation - which should help to reduce errors in applications and mitigate the administrative burden for all companies using VC schemes. (Trials are underway) As a discretionary, non-statutory service, HMRC may decline to give an opinion to a company seeking Advance Assurance. Where a company is relying on a particular interpretation, it should provide a full technical analysis of how it meets that law. HMRC will not provide an opinion where it believes the application is testing the limits. From 2 January 2018, HMRC will not provide Advance Assurance on speculative applications. The company should have approached potential investors, and name the individual(s), fund manager(s) and other promoter(s) who are expected to invest. From 4 December 2017, HMRC will not provide an opinion where it is reasonable to conclude that the investment is part of a capital preservation scheme. CHANGES TO ADVANCE ASSURANCE SOURCE: HMRC 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 2006-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-2017 NUMBER OF APPLICATIONS AARs APPLICATIONS RECEIVED OF WHICH, NUMBER OF APPLICATIONS APPROVED OF WHICH, NUMBER OF APPLICATIONS REJECTED “Delays to Advance Assurance means we can’t commit to investments – meaning we could potentially lose out. It would make a huge difference if Advance Assurance worked to a 15- day timetable.” — LAURENCE CALLCUT, DOWNING SEIS FIRST TIME VS. SUBSEQUENT FUNDRAISERS SOURCE: HMRC SEIS1 FORMS COMPANIES RAISING FUNDS FOR THE FIRST TIME COMPANIES RAISING FUNDS THROUGH SUBSEQUENT ROUNDS 2012-13 2013-14 2014-15 2015-16 100 120 140 160 180 80 60 40 20 0 AMOUNT OF INVESTMENT (£M) “A different type of client will be buying EIS. At the moment, when you can have asset-backed capital preservation mandated, you actually have an older demographic. It’s is not going to be nearly as appealing now with the real high-growth innovation EISs, but who it will appeal to is the younger company director types and high net worths.” — DOMINIQUE BUTTERS, BLACKFINCH