Investors in Enterprise Investment Schemes (EIS) were expecting some changes to be announced by chancellor Philip Hammond in the Autumn Budget.
A year earlier, in November 2016, the government launched its Patient Capital Review with the aim to consider “how to support innovative firms to access the finance that they need to scale up”, according to gov.uk.
The outcome of this consultation was due on the same day as the Budget, so expectations were high as to the extent of the reforms Mr Hammond might unveil.
Among the changes as detailed in the consultation response paper were:
- Establishing a new £2.5bn Investment Fund incubated in the British Business Bank with the intention to float or sell once it has established a sufficient track record. By co-investing with the private sector, a total of £7.5bn of investment will be supported.
- Significantly expanding the support that innovative knowledge-intensive companies can receive through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) while introducing a test to reduce the scope for and redirect low-risk investment, together unlocking over £7bn of new investment in high-growth firms through EIS and VCTs.
- Investing in a series of private sector fund of funds of scale. The British Business Bank will seed the first wave of investment with up to £500m, unlocking double its investment in private capital. Up to three waves will be launched, attracting a total of up to a total of £4bn of investment.
The chancellor was also rather pleased to announce in his Budget speech a doubling of the EIS annual investment allowance, from £1m to £2m, although he confirmed any amount above £1m should be invested in “knowledge intensive” companies.
Further details on companies which fall into the definition of being knowledge intensive can be found here.
Tackling the challenge
Dr Ilian Iliev, chief executive at EcoMachines Ventures, explains: “As expected, HM Treasury is starting a pushback against the use of EIS scheme for capital-preservation/asset backed investment.
“Instead, the focus is firmly on using the EIS scheme to support/encourage investments into knowledge-intensive companies.”
He goes on: “That looks like a direct response to the UK’s 'scale-up' challenge - the finding that there are simply not enough funds for Series A and B investments into knowledge intensive companies going from first revenues to scale-up/growth. So this is very welcome indeed.”
He predicts this may lead to increased use of EIS funding for Series A or early B funding for growth companies, which he notes is much less risky than seed investment, but where the capital needs are greater.
John Glencross, chief executive of EIS and VCT manager Calculus Capital, insists: “The increase to EIS investment limits – for end investors and for certain companies receiving funding – demonstrate the government is investing in the UK’s enterprise sector and is backing EIS as an important vehicle for making that investment.
“This is great news for investors and the growing businesses that will benefit from their investment.”
The scope of the changes was a relief for many in the industry, who had predicted the Patient Capital Review might publish more stringent conclusions.
Mark Brownridge, director general of the EIS Association, acknowledges: “The EIS Association and its members put a great deal of work into making detailed representations to HM Treasury in the run-up to this budget.
“We did so because there had been suggestions that wide-ranging changes to EIS were under serious consideration. We are therefore extremely pleased to see that no changes to EIS tax reliefs or holding periods will be introduced, nor will there be any new exclusions for certain sectors.”