Can Brexit unlock the full potential of Enterprise Investment Schemes?

Green-Shoots-Emerging-Growth-700.jpgIt has been nine months since Britain announced its intention to leave the European Union. Last week Theresa May triggered Article 50 and formally initiated Brexit. It is difficult to know for sure whether Britain’s investment landscape will be radically revised over the ensuing 24 months. Nonetheless, in the negotiation period that is now underway investors will be offered greater clarity concerning the nature of Britain’s economic future, both in its relationship with Europe and as a forward-facing, independent entity.

While the Great Repeal Bill – the legislative framework revoking the European Communities Act 1972 and restating in UK law all enactments previously under the jurisdiction of EU law – will not come into force until after Brexit negotiations are concluded, the two-year negotiation window gives the Government the opportunity to review and repeal EU laws and regulations.

For investors, the imposition of EU state aid directives from 2015 onwards has had a noticeable impact on the UK’s leading tax-efficient investment schemes – VCT, EIS and SEIS. To comply with European regulation, the UK has been forced to limit the eligibility of companies able to raise growth capital through these initiatives, particularly EIS. For a scheme that traditionally catered to the growth finance demands of SMEs across all stages of the business cycle, state aid regulations have redirected the flow of capital into earlier stage businesses by forcing the UK to exclude companies over seven years old from qualifying for EIS investment. What’s more, only £12m can now be invested in an individual UK company through the scheme.

In principal, the basic premise of state aid directives makes sense – fostering a competitive market where no company or sector is unfairly advantaged through targeted government support. Yet, with the UK ranking 13th in the OECD for the number of scaling companies despite being ranked third for the number of start-up births, support clearly needs to be directed towards Britain’s mid-sized scaling businesses as opposed to start-ups – a community that regularly cites access to finance as a key barrier to growth. As the country prepares to leave the EU, it will now regain legislative control that will enable it to dictate the terms of vital investment schemes like EIS, thereby directing financial support into the categories of businesses that most require it.

Offering income tax relief of 30 per cent and a loss relief should a business fail, investor demand for EIS investment options has been rising, with a notable spike in interest following the Bank of England’s decision to set interest rates to a record low 0.25 per cent last year. A nationally representative survey recently conducted by IW Capital found that 30 per cent of investors would consider EIS opportunities in 2017. The Brexit announcement has also done little to hamper appetite for the scheme, with nearly half of UK investors anticipating that Brexit will have a positive impact on their investment strategy in 2017.

The coming 24 months are an ideal opportunity for the Government to repeal the state aid directives that have restricted the flow of capital into scaling, mid-sized businesses. Free from the regulation of Brussels, the UK can structure a flexible tax-efficient investment framework that caters to the specific demands of investors and enterprises. The Government has already taken positive steps in the right direction, with the recent decision to reform tax breaks for investors backing entrepreneurs and the launch of the Patient Capital Review in January 2017.

For now, investors will have to wait and see the extent to which the Government will reform EIS and other tax-efficient investment structures so that it is in a position to meet investor demand and propel the private sector forward.

Luke Davis is CEO of IW Capital