The market is still in the process of digesting the major changes to the EIS in last November’s budget, including the new risk-to-capital condition, but it is clear that HMRC are determined to disqualify low risk or no risk schemes and replace them with genuine businesses established for the purpose of growing and developing over the long term.
In other words, Go for growth!
From now on, HMRC will be adopting a principles-based approach in assessing whether companies fulfil the risk-to-capital condition. Instead of disqualifying certain trades, as they have done in the past, or certain types of asset (viz. freehold property based businesses) they will look at EIS Advance Assurance applications “in the round” to assess whether they qualify.
The following are the key points HMRC will consider:
- The company should be proposing to trade on an ongoing basis, not just to carry out one project.
- The company should have the objective of growing and developing over the long term.
- An investment in the company must carry the risk that an investor will lose an amount greater than the net return.
- The company should not have assured or highly predictable income streams.
- The company should not own an asset held mainly with a view to its disposal.
- The company should not sub-contract all or most of its activities to others.
- The company should not effectively be controlled by the promoter.
- The company should not be one of a number of identical companies all carrying out the same activity – this is referred to as “fragmentation”.
Start-up companies, businesses founded by entrepreneurs with a vision to grow, “Knowledge Intensive Companies” (already abbreviated to KICs), i.e. companies established off the back of research and development or intellectual property – these are all the types of businesses which will qualify going forward.
It is clear to us there will be increased demand going forward for offers focused on growth and with that in mind, we are launching a new fund in partnership with the award-winning Startup Funding Club called the SFC EIS Growth Fund. The Startup Funding Club have been specialising in start-ups for over five years and now need a vehicle to provide the follow-on or scale up investment for the businesses they have seed-funded in recent years. The Fund will also invest in “new” businesses which the team have not previously backed.
The Fund will focus on fast growth businesses which have come through the start-up phase and are demonstrating significant commercial traction, with potential for significant further capital appreciation. The Fund will target scalable companies operating across various sectors, including digital technology, life sciences and consumer goods, in order to achieve a high level of portfolio diversification. Businesses which solve a real need and challenge the status quo will particularly be favoured. The investment team will be looking for a number of key characteristics, but the principal consideration will be the credibility of the management team, who need to display the right level of skills and experience and have a clear vision for how to drive the business forward towards a successful exit.
The Startup Funding Club team have huge experience in selecting and supporting growing businesses and have an evolved support “ecosystem”. Since inception over five years ago, they have been involved in over 100 businesses through their angel networks and funds. A number of these investments are already showing strong signs of progress and value creation. The team has won a number of awards in recent years, including the Lead Syndicate of the Year Award at the UK Business Angels Association in 2016, and the 2017 Best Angel Syndicate Award at last November’s Growth Investor Awards. Plus at the prestigious EIS Association Awards on 6 February they won the “Best Innovation, Newcomer or Rising Star in the EIS/SEIS” Award!
At EIP we welcome the recent changes as the new rules will now fall squarely into the spirit of the law, which is to support the UK’s outstanding early stage investment industry. Long Live Growth!
Enterprise Investment Partners LLP (FRN: 604439) is authorised and regulated by the Financial Conduct Authority.
Our investment products may place your capital at risk and the value of them may go down as well as up and an investor may not get back the amount they invest. The tax treatment of the investments depends on the individual circumstances of each investor and may be subject to change in future. The availability of tax reliefs depends on the company invested in maintaining its qualifying status.
Neither past performance or forecasts are reliable indicators of future results and should not be relied upon.