Deepbridge Capital, a company that provides investment access to small and medium sized UK growth businesses, has shared a wish list regarding the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) and measures it would like to see in Chancellor Philip Hammond’s forthcoming budget on November 22nd.
This wish list comes during a UK government review of “Patient Capital” and a consultation on “Financing Growth in Innovative Firms.” Both SEIS and EIS are designed to mitigate a portion of the risk investors shoulder when backing early stage firms. In brief, EIS and SEIS subsidize innovation, entrepreneurship and job creation. Yet there are some concerns that HM Treasury may scale back the important programs or perhaps “retarget”.
Deepbridge says it will support any measures that return EIS/SEIS investment back to how they were originally envisaged – as schemes set up to support innovative companies that would otherwise struggle to find funding, not as schemes to save tax.
Deepbridge wants the Government to deliver a tightening of qualification criteria for EIS/SEIS with a growing focus on money going to firms who are active in higher-risk and innovative companies who are focused on growth areas such as life sciences and innovative technology. Deepbridge hopes the Chancellor will signal such a move during the Budget as the Government.
“Clearly the industry has had a significant debate about the Patient Capital Review and subsequent consultation, and there are clearly a large number of vested interest views that would like to see the status quo preserved,” commented Ian Warwick, Managing Partner at Deepbridge. “From our own dealings with HM Treasury, and the work of the Enterprise Investment Scheme Association (EISA), it’s clear that this is not going to happen and we fully expect the Budget to be the start of the next stage in EIS/SEIS investment – one that returns the Scheme back to its original intention which was around supporting growing companies that would otherwise struggle to find the finance they require, rather than purely being used as a method to save tax in areas such as freehold property and film/TV.”
Warwick believes both EIS and SEIS are strategically important to the UK economy;
“With approximately £1.6 billion each year now being invested via EIS it is unsurprising that it has caught the eye of HMRC and HM Treasury who wish to ensure that this money is being used properly and those being rewarded for taking risk are taking an appropriate level of risk. EISA has provided the Patient Capital Review with examples to highlight how ‘EIS and SEIS are vital to our nation’s start and scale-up companies and to the overall prosperity of our future economy’. At Deepbridge, we regularly work with Government bodies to provide funding to young companies and understand that their direction of travel, and their money, is predominantly targeted at innovation.”
Mark Brownridge, Director General of the EISA, was quoted on the anticipated Budget announcement. In a recent letter to member firms, Brownridge stated;
“The key message to take away is this – every £1 of EIS/SEIS investment has to be a £1 that is equity at risk. If you are a fund and you can satisfy this rule you will be fine, if not you will likely have a problem. Over the years, EIS and SEIS have been incredibly resilient and had to adapt and change many times in the face of changing levels of tax relief, withdrawal of solar and renewable energy as investments and the 2015 State Aid rules and for me, there is absolutely no reason why EIS and SEIS can’t go from strength to strength. Britain continues to be the start-up capital of the world and EIS and SEIS have a proven track record in helping businesses to start, build and grow. It’s evident that small businesses still face significant funding challenges – that problem hasn’t gone away. This is the strength of EIS and SEIS and there are a myriad of small businesses across all sectors, not just technology, very worthy of investment and with the potential to grow for the benefit of both themselves and investors, and which are well within the Government’s new definition of ‘well targeted’. The portfolios of EIS and SEIS fund managers already include examples of this and I have no doubt their expertise will continue to find many more. EIS and SEIS are evolving, but surely entering the mainstream as an asset class, as switched on investors realise that small company investing can add both diversification and attractive potential returns to their investment portfolios.”
Warwick believes that both EIS and SEIS are great vehicles that the UK Government should be proud of.
“We fully understand the concern that too much money has gone to ‘asset-backed’ or ‘capital preservation’ targeted EIS propositions and agree a new focus needs to be taken to ensure this money goes to companies that need it and can make real returns to the UK economy,” stated Warwick. “We look forward to hearing how the UK Government will continue to encourage investment in to the sectors about which the Deepbridge team is so passionate, namely innovative technology and life sciences. We accept that changes have to be made and it is our view that the Chancellor should refocus the sector, returning it to its original purpose and retaining its ability to help those firms who can benefit the most from it.”