Are Enterprise Investment Schemes Unloved Outside London?

Tom Burroughes

14 February 2018

The weeks leading up to the new UK financial year on 6 April mean purveyors of tax-efficient investment structures are happily marketing their wares and supposed benefits, not least to journalists such as yours truly. This time, there’s a winter chill.

Enterprise Investment Schemes (EIS), created by the Conservative administration of John Major in the early 1990s, and which survived the Tony Blair and Gordon Brown Labour administrations, and also those of David Cameron and now Theresa May, arguably face trouble if a more socialist administration led by Jeremy Corbyn takes charge. While his party hasn’t yet put structures such as the EIS on its hit-list, the rise of political populism on the Right and Left, often sharing a common desire to promote “fairness” in tax, might put tax-advantaged structures in danger. (This is not just about the EIS structure; there are other structures with certain tax advantages, also focused on small firms and start-ups, such as venture capital trusts.)

Quite possibly the EIS sector isn’t yet large enough to draw political ire; even so, more than £14 billion ($19.4 billion) had been invested via the EIS structure in the 2014/15 financial year, based on the latest available data. This is a non-trivial sum, if not major-league stuff. With an EIS, subject to various conditions, individuals can invest up to £1 million per annum in the scheme and obtain income tax relief of up to 30 per cent of the amount invested. From 6 April 2018, the annual EIS limit will rise to £2 million, provided that the excess over £1 million is invested in qualifying “knowledge-intensive” companies.

There are also “seed EIS” structures: these are targeted at helping early-stage businesses attract seed funding, whereas EIS encourages investment in more established companies. SEIS investors will receive income tax relief of 50 per cent of the cost of the shares, whilst EIS investors receive income tax relief of 30 per cent. EIS and SEIS cannot be used in certain areas, such as coalmining, leasing, banking, forestry, and some others.

Such investments are typically relatively high-risk – definitely not a “core portfolio” holding for someone nearing retirement, perhaps. What is undoubtedly the case is that for some high-income savers, who have seen lifetime tax-free pension savings allowances squeezed by successive governments, the EIS structure has been an alternative destination of sorts, as some industry figures have told this publication. But that very fact might attract political frowns.

A divide
One source of potential controversy comes from recent research from accountancy firm took action in the budget to divert these funds into genuine investments by introducing a principles based test. Basically the test looks at investments and makes a subjective decision as to whether they are genuine Patient Capital Investments. If HMRC judges that they fail the principles based test they will not offer advanced assurance which means that investors have to take a chance over securing their tax relief,” Campbell added.

It may well be the case that a structure able to survive the political and market cycle for almost a quarter of a century will ride out whatever happens in the future. Also, the fact that such schemes are aligned with high-tech start-ups and SMEs in many cases – vital sources of future growth and jobs – gives them a degree of cover. That said, such structures must deliver across the UK, and any perception of imbalance and unfairness, whether justified or not, needs to be addressed. If recent years have taught wealth managers anything, it is that one can never be complacent in making the case for entrepreneurship and rewarding enterprise.