EIS Industry Report 2018/19

14 15 The decrease in applications being approved from 81% to 69% in the most recent tax year, indicates some level of confusion as to how the new rules from the Autumn 2017 Budget are to be applied. After the 2017 Autumn Budget, HMRC committed to a 15-working day turnaround on Advance Assurance applications. With the changes to the rules on which types of company could qualify for EIS tax relief, HMRC certainly has had its work cut out as all new applications have to meet the new risk-to-capital condition. With this being a principles based approach, there will no doubt be grey areas. HMRC claims its current response rate is 55% within three working days, 85% within 15 working days and 98% within 40 working days. 4 However, there have been reports suggesting as much as a 16-week turnaround on Advance Assurance applications. 5 HMRC’s Small Company Enterprise Centre (which is changing its name to the Venture Capital Reliefs Team), deals with the applications. It is no longer operating a telephone service, and its automated email response states that it will take 30 days to respond to emails. Cathy Wilson, a member of the HMRC policy team, commented on why HMRC has changed its policy regarding telephone enquiries: “Lots of the calls we were getting were just queries about the guidance. Calls have now gone down by 80%. That’s released people to process applications. ”The calls that really needed an answer were going to be ones that couldn’t be answered straight off the top of their head. The query can now go to the appropriate person.” 6 What future stats could show When the statistics for 2017/18 are published by HMRC next year, we expect there to be a further dip in EIS fundraising when compared to historical figures. There were very bleak rumours circulating regarding the future of EIS in the run-up to the 2017 Autumn Budget, which is likely to have prompted some hesitation among companies planning to raise investment, as well as investors. On the other hand, there was also a hike in subscriptions to EIS funds that displayed an element of capital preservation, with investors taking advantage before the new rules from the 2017 Budget kicked in. Director general of the EISA, Mark Brownridge, said: “EIS created a ‘buy now while stocks last’ opportunity in the weeks up until tax year end, so it’s likely the amount raised by EIS in the 2017/2018 tax year will still be around the £1.8bn mark. “It won’t be until the 2018/2019 tax year that we get a clearer idea of investor sentiment and whether appetite remains at existing levels or falls in line with the demise of capital preservation.” 7 The move away from capital preservation to growth is likely to affect both adviser and investor sentiment (at least in the short term). The new rules implemented from the 2017 Autumn Budget close down some investment opportunities, whilst opening up others. However, it will take time for traditional EIS investors to shift to a growth mindset. In the long run, however, the outcome of last year’s Budget should be seen as a positive for the EIS industry, as it re-focused the scheme on its original purpose, thus giving it legitimacy and increasing investor confidence. TAX AND REGULATORY UPDATES FORMALISING THE NEW RULES As mentioned earlier in this report, the Autumn 2017 Budget made a raft of significant changes to EIS via the implementation of the new risk-to-capital condition. Intelligent Partnership’s previous EIS publication, EIS Industry Report 2018 , went through the new rule changes in detail, so it’s worth looking at last year’s report to familiarise yourself with the new regulatory landscape. The 2018 Finance Act received Royal Assent on 15 March 2018 8 , ratifying the new rules and confirming that low-risk investments would no longer benefit from EIS tax relief from that date. EU State Aid Approval Some of the changes to EIS from the 2017 Budget, such as the increased amount that could be invested into knowledge-intensive companies (KICs), were pending approval from the EU commission at the time of the announcement. On July 5 2018, the EU commission approved the relevant changes to EIS that had been set out in the 2017 Budget, with the relevant provisions ratified with effect from 6 April 2018. 11 Commencement regulations for the Finance Act 2018 changes to EIS, SEIS, and VCTs have now been made. 12 Navigating a principles-based approach With the new risk-to-capital condition being a principles-based approach, this clearly introduces some grey areas as to which companies would qualify for EIS tax relief. The Venture Capital Schemes Manual 13 outlines a more detailed scope of how HMRC interprets the condition and how they view it should be implemented. Following the 2017 Budget, HMRC published draft guidance on the risk-to-capital condition. Somewhat unusually, this was published directly in HMRC’s manuals rather than being listed as a consultation on the relevant section of GOV.UK . 14 RECAP ON THE RISK-TO-CAPITAL CONDITION The risk-to-capital condition is a principles- based condition that depends on taking a ‘reasonable’ view as to whether an investment has been structured to provide a low-risk return for investors. The condition is designed to deter tax planning, and there are no hard rules or boundaries that would enable such planning. 9 The risk-to-capital condition is met if: (a) the issuing company has objectives to grow and develop its trade in the long-term, and (b) there is a significant risk that there will be a loss of capital of an amount greater than the net investment return. 10 HMRC goes on to explain how it looks at these two parts: “When considering whether both parts of the condition are met, we will look, in the round, at the company and any normal commercial practices within genuinely entrepreneurial companies, the prospective investment and any associated arrangements. We will take into account all factors and context relevant to the company at the time the investment is made.” NUMBER OF EIS ADVANCE ASSURANCE APPLICATIONS RECEIVED, APPROVED AND REJECTED 1,500 2,000 2,500 3,000 3,500 4,000 4,500 0 500 1,000 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 APPROVED REJECTED Market Update / Fundraising Update