Fund Management

Strength In Diversity: Thoughts On Enterprise Investment Schemes

Dan Perkins, 16 September 2019

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The author of this article trumpets the appeal of UK Enterprise Investment Schemes, a structure created a quarter of a century ago.

The following article is by Dan Perkins, director at Great Point, the UK media and investment firm. He writes here about Enterprise Investment Schemes, which carry a range of tax benefits and which have been around for a quarter of a century. The EIS model is a way that investors can tap into the kind of private equity styles often associated as a sole preserve of large institutions and high net worth clients. As with all investments, there are costs, risks and details to consider. It is quite remarkable in some ways that the EIS model has survived a succession of Conservative, Labour and coalition governments. 

The editors of this publication are pleased to share these views with readers and invite responses. They do not necessarily endorse all views of guest writers. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Enterprise Investment Schemes celebrate their 25th anniversary this year. Created in 1994, the tax reliefs of then Chancellor Ken Clarke were designed to encourage investments in small unquoted, early-stage, high-growth, entrepreneurial companies.

Some £18 billion ($22 billion) worth of investment later, EIS continues to be an enormous success story for the UK economy, investee companies and investors alike. One of the biggest beneficiaries over that time frame has been the UK’s media sector.

However, investment into media-based opportunities has been tarnished in the eyes of many in the wealth advice community with historic, unapproved ‘film partnership’ arrangements marketed in the late 1990s and early 2000s subsequently being viewed as tax avoidance schemes for wealthy investors, making front page headlines and causing more than a few problems for the advisor community.

Yet the current EIS landscape is a world away from those arrangements. HMRC’s advance assurance process acts a pre-qualification test where companies must meet specific criteria to qualify for EIS investment. Under these measures – as refined by the Patient Capital Review and subsequently implemented through the ‘risk to capital’ requirements – the emphasis has been placed firmly on the use of EIS for growth-oriented businesses only. 

While some saw this amendment as a potential hammer blow for media-based EIS investing, we are finding the opposite to be true because the sector’s fundamentals are so compelling.

Between 2010 and 2017, the UK’s creative industries saw its Gross Value Added (GVA) to the UK economy increase by 53.1 per cent - outstripping the 29.7 per cent increase in the economy as a whole over the same period. Elsewhere provisional numbers from the Department for Digital, Culture, Media and Sport suggests that the UK’s creative industries contributed £101.5 billion of value to the domestic economy in 2017 alone.

Factor in that the sector employs over 2 million people in the UK and a voracious, growing consumer appetite for creative and entertainment media content globally (Netflix and Amazon spent a combined $13 billion on content in 2018 alone) and you can start to see why we believe the sector represents a major investment opportunity.

The tax benefits of EIS investment
While the choice of underlying assets into which you can invest may have shifted over the past year, many aspects of the EIS remain the same. The tax benefits of EIS remain the same, with the structure becoming ever more appealing to those individuals who find themselves limited as to what they can place into pension either as a result of reaching their lifetime allowance or the recently introduced £10,000 cap for the highest earners. As a result, EIS is losing its niche label and is now being used as part of both longer term wealth accumulation and retirement planning strategies. 

Income tax relief of 30 per cent can continue to be offset against income tax already paid or payable in the current or previous tax year on investments of up to £1 million (or £2 million if the previous year’s allowance has not been used). 

EIS also allows investors to defer historic or future gains made elsewhere in a portfolio (subject to time restrictions), with any gains crystallised on the underlying investments being free from capital gains tax. For example, an EIS investment could benefit an individual facing a capital gains bill after selling an investment property where rates currently stand at 28 per cent for a higher or additional rate tax payer. 

Most importantly, given the high-risk nature of EIS investments, investors can claim share loss relief against taxable income should one or more of the companies in an EIS portfolio fail, resulting in an additional rate taxpayer effectively only ever putting 38.5p of their £1 investment at risk. This is an incredibly valuable relief offered by the EIS and is a real differentiator to other popular tax efficient wrappers such as Venture Capital Trusts (VCTs).

Diversifying investment portfolios
Of course, the UK’s creative industries are about more than just content creation. The UK leads the way in businesses focused on media distribution and marketing, post-production and visual effects, tech-enabled media and gaming. This makes for not just a diverse commercial ecosystem but also a broad pool of investment opportunities to target. 

By picking the best companies from each of these sub-sectors, creative industries focused EIS funds are able to create a balanced portfolio for investors, spreading risk and offering significant upside.

Expertise, experience and track record is key
As with any fund or investment manager, investors and wealth managers should look for expertise, experience and a solid track record. This is particularly true of the creative industries where a proprietary network of contacts and commercial acumen is key to identifying, investing, managing and exiting companies that have the highest growth potential.  

The wealth sector has been understandably cautious about investing in the creative industries given its past association with certain high-profile film partnership arrangements. However, with the HMRC pre-approval mechanism and the recent rule change to ensure capital is focused towards high growth companies only, EIS is a different proposition. The opportunity to support the UK’s creative industries is vast. 

By taking a sector agnostic approach and ensuring investment is focused on high growth, entrepreneurial businesses, HMRC has not only safeguarded vital funding for the UK’s media and creative sectors, it has hopefully secured the future of EIS for the next 25 years and beyond.

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