In the run-up to the last Budget it was a truth universally acknowledged that change was coming to the tax advantages for the UK's start-up businesses. Managers and investors alike were reconciled to the fact that things would need to change, perhaps radically, if the schemes themselves were going to survive.
While initial reaction to the proposed outcomes of the Patient Capital Review was one of relief for managers who operate in the tax-advantaged investment space, the finer details of the Treasury’s plans mean that the winds of change are indeed likely to blow through the sector after all.
Since the consultation document for the Patient Capital Review was released in August 2017, rumours had proliferated that the Treasury would significantly alter the nature of both the Enterprise Investment Scheme (EIS) and make substantial changes to Venture Capital Trusts (VCTs) in parallel to a new government-seeded investment fund. Lobbying plans had sprung into action for both EIS and VCT, and entreaties to the Treasury had been made by both managers and investors.
A consensus of opinion emerged. Film and TV products would be wiped out; investments in pubs, crematoria and nurseries – whether for plants or children – would either be eliminated or curtailed; and the tax benefits for VCTs could well be reduced even if VCTs themselves might survive as an investment vehicle.
The marketing of some products as “capital preservation” and the lower-risk nature of others meant that the Treasury had taken a dim view of many products as not being sufficiently “within the spirit” of tax-advantaged benefits designed to channel capital towards high-growth British companies. As an example, MJ Hudson Allenbridge's data on the film and TV sector showed that one in five products were designed to maximise tax benefits and not investor returns, for a given level of risk, rather than building businesses.
- Rumours have proliferated following the consultation document for the Patient Capital Review.
- The sighs of relief following the consultation response were almost audible.
- Each product will now be subject to the principles-based test.
In the hours after the consultation response made it onto the Treasury’s dedicated website, sighs of relief from all concerned were almost audible. There would be no exclusion of particular sectors, no sweeping rules to outlaw asset-backing altogether and more money for investments deemed as “knowledge-intensive” enterprises.
Far from reeling under new restrictions that necessitated immediate and radical changes in strategy for managers, a principles-based approach from the Treasury meant that what might have been black and white was now shades of grey. Many managers with products thought due to be excluded suddenly realised that perhaps they could walk them back down from the executioner’s scaffold.
Managers who specialise in early-stage tech, life sciences or advanced engineering investments were quick to claim vindication, based on the release of pre-prepared declarations of victory on LinkedIn. Yet most managers who had made a living from products thought to be under threat were definitely not accepting defeat; quietly issuing statements that their strategies had been spared.
Embedded in these tweaks in the Patient Capital Review is the potential for the Treasury to accomplish what it favoured all along, but with the new rules allowing each product to be judged on its merits rather than a blanket ban on particular sectors. The market expected a sledgehammer, but instead the Treasury came with a scalpel.