Consultation on the Enterprise Investment Scheme
HM Treasury and HM Customs and Revenue – June 2008 Response from the British Business Angels Association
On behalf of the BBAA, I am writing to set out the views of the BBAA membership in response to the consultation on the Enterprise Investment Scheme launched by Government in March 2008.
The BBAA would like to state that the EIS scheme has been of great benefit in stimulating the early stage investment market and is an exemplary model both to the rest of Europe and internationally, as a means to support and promote angel investment. The overall scheme has been found to be generally satisfactory and should be continued. The following points are therefore made in this context:
1. Level of tax relief currently available to investors: Whilst the current level of 20% is satisfactory for investment in established businesses, the BBAA is keen to stimulate increased investment in Micro SMEs being businesses employing less than ten persons with turnover either below 2m euro or Balance Sheets below 2m euro. These start-up and very early stage often spin-out businesses represent a much higher level of risk to angel investors. Currently there is a reluctance among many Angels to invest in very early stage high risk businesses resulting in a severe equity gap for these businesses seeking investment. Whilst there have been a number of Government supported schemes to encourage investment and co-investment at this level which have attracted Angels including the Regional Venture Capital Funds and Early Growth Funds, these schemes are now becoming fully invested and are unlikely to be replaced so there is an overall loss of funding available to businesses at this level. We therefore recommend that a new initial income tax rate of 30% relief should be offered by Government to Angel and individual investors willing to invest in micro SMEs. This would serve as a stimulant to increase the number of investors willing to invest in these higher risk businesses and the overall level of investment in these companies. It would also enable businesses to gain from the expertise and business building support provided by private investors at this crucial stage of their development and growth.
2. EIS Share Structure: Currently the only type of shares that qualify for EIS relief are Ordinary Shares. Whilst BBAA recognises that the scheme is concerned to support risk and that such shares reflect equal risk with the business, there are impacts for angel investors in both structuring deals alongside VCs and continuing to support investee businesses through further stages of funding. VCs frequently invest via preference shares or convertible loans and this both creates an imbalance in the investment deal and frequently results in conflicts with Angels particularly in subsequent funding rounds. This affects the capacity of Angel investors to maximise their business building support for early stage businesses and prevents the overall development of improved relationships between Angels and VC funds which is essential to ensure a connected market place equity finance and to address the overall equity gap. BBAA suggests that Angels be entitled to claim EIS Relief when investing via Preference Shares as well as Ordinary Shares, thus enhancing the VC-Angel relationships and maximise the contribution and continuity of angel investment in early stage businesses: the profile of a qualifying EIS eligible Preference Share to be defined and agreed by Treasury/HMRC.
3. EIS Approved Funds- length of investment period: Despite the recent extension in the 2007-8 budget of an increase from 6 months to 12 months for EIS Approved funds, this period continues to be a constraint for Business Angel networks operating EIS Approved funding schemes, especially for those operating these schemes as angel co-investment vehicles and supporting novice angels and passive investors. The current requirement for investing the major part of the funds within 12 months means that investment are likely to be made in “low hanging fruit” often in low-risk businesses. This contrasts with the normal investment process and timescale for angel investing and angel syndicate investing which takes about 3-5 months per investment, also where many angels are investing in more challenging high risk sectors. BBAA would therefore like to recommend that the current period of investment available for tax relief for EIS Approved funds should be extended to 3 years to sit more closely with the angel investment process and maximise opportunities for angel networks and syndicates to make use of this instrument to stimulate the angel investment market.
4. Procedure and process for Applying for EIS relief: BBAA is concerned that Angel investors are often at risk of losing the tax relief from investing in companies who have been deemed EIS eligible but who subsequently have breached this criteria. Currently the system does not allow for any rectification for a company that loses compliance, resulting in the complete loss of the tax relief for the investor concerned. The BBAA would like to propose a period of 3 months for the rectification of any non-compliance by the entrepreneur, thus safeguarding the relevant tax relief for the investor. This could then be added to the 3-year qualifying period.
5. New Online tool: One practical measure that we should like to propose is that the Treasury/HMRC develop a new on-line tool that supports a more transparent EIS process and provides initial indication of advanced clearance. Whilst it is recognised that the final overall procedure for clearance could not be easily achieved on-line in view of the individuality of the business case, it should be possible to enable the entrepreneur to be better informed about likely eligibility and a clearer sense of next steps in the procedure to gain advanced clearance. This is likely to improve the overall efficiency of the scheme, lead to less breakdown and failure of compliance. This will also support confidence of the investor in moving forward the investment. This tool which could be used by entrepreneurs and investors will both enhance awareness and build the capacity of those seeking to use the EIS scheme.
6.Increased awareness: The BBAA is keen to support the Government to increase the awareness and usage of the EIS scheme by entrepreneurs and investors. Notably awareness should be built into the new regional framework for investment readiness being launched this autumn by BERR and to be implemented through the RDAs. Awareness Raising with relevant accessible information on the scheme should also be built into Entrepreneurship training at an earlier level both through Business development schemes operating across the RDAs (often supported by Structural funds) and through the advisory services to businesses promoted offered through the IDB of the new Business Link schemes. A further focus of awareness raising and capacity building should be through the TTOs developing University Spin-out schemes and Proof of concept schemes.
Raising awareness among investors: BBAA has been tasked by BERR in the new Enterprise Strategy to build the investor base and build the capacity of angel investors across the regions. Awareness of the EIS scheme will be directly integrated into any schemes developed by the BBAA and will be further highlighted through BBAA’s own information resources and the BBAA web-site. The BBAA would be pleased to co-operate with Treasury/HMRC to improve information resources and dissemination opportunities relevant to the EIS and angel investors. I should be pleased to discuss how the BBAA can support the Treasury and HMRC in further development or implementation of any of the above points.
Yours sincerely
Anthony Clarke
Chair, British Business Angels Association
June 2008
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