Mark Fahy, Head of UK Small and Mid Cap Companies, London Stock Exchange
The London Stock Exchange Group understands the power of fast growing, ambitious businesses to the economic prosperity of the UK. These companies drive job creation, boost tax intake and create wealth across the country. What's more, the need for them to have access to appropriate growth funding is essential and we believe in the power of equity financing to support them.
In order for these businesses to expand and contribute to the economy, they need to rebalance their financing - away from debt, towards equity. But, the statistics remain troubling. According to data from the British Bankers’ Association, only three per cent of UK SMEs use equity finance, in stark contrast with the US, where over 70 percent of financing comes from various types of equity: angel investment, crowd-funding, venture capital, private equity or a stock market listing.
As promised in the 2016 Autumn Statement, today we were presented with the last Spring Budget, whose purpose was to provide a transition into an annual budget presentation that will give a longer term outlook for adopting new measures. As such, the content of today's presentation was focused on highlighting areas that may have changed since the Autumn Statement (such as the deficit), as well as re-iterating the main principles of this new government's vision on how to build a "stronger, better, fairer Britain".
The Chancellor furthermore made a point to reiterate the government's commitment to maintaining Britain as a top global business destination. There were measures that could be seen to limit incentives/support to entrepreneurs and small businesses, such as the increase in National Insurance Contributions for certain classes of self employed persons (LLPs), and targeting business rates increases for certain sectors - such as the "digital part" - of the small business economy, as most business rate cuts announced were for local "brick and mortar" businesses (like pubs). Furthermore, there was a cut in the dividend allowance for shareholders in companies, as the allowance was deemed "overly generous". Although these changes were done in the name of "fairness", such tweaks may indirectly impact early stage companies and the SME sector in general.
Topics: 2017 Spring Budget
We are often asked which companies qualify for SEIS. Below is a brief summary of the requirements.
Each Company must initially (i.e. at the time of issue of the shares) not be listed on a recognised stock exchange (as defined for the purposes of SEIS Relief) and there must be no “arrangements” in place for it to become so listed. In addition, throughout the three year SEIS period, it must not be a subsidiary of, or be controlled by, another company. It must either exist to carry on a qualifying trade or else be the parent company of a trading group and there must be no “arrangements” in existence for the Company to become a subsidiary of, or be controlled by, another company.
The world of pension and investment scams is dominated by some very slippery, dodgy, unregulated, unqualified, unscrupulous characters. For example, in Spain, these "shady" characters are aptly labelled as “Chiringuitos” (bar flies) by the Spanish Regulator. Herds of “introducers” masquerading as “wealth managers” stalk the unwary, flogging bogus occupational pension schemes and QROPS ("Qualifying Overseas Pensions Schemes") which they fill with toxic, high-risk, illiquid investments which pay the introducers handsome commissions – and ultimately ruin the victims.
So thank goodness for properly regulated and qualified UK-based accountants! Except those in the “Peak Performance” network who were flogging things they called “tax-efficient investment schemes”. Only they weren’t tax efficient. And they weren’t investments. As 46 investors have now discovered to their considerable cost, distress and humiliation.
The word “Entrepreneur” originates from French, and was first used by the economist Jean-Baptiste Say in the early 19th century. Its direct translation is “adventurer”, and that meaning conjures up attributes of bravery, resilience, and going beyond one’s comfort zone.
The current geo-political climate made me reluctant to write this blog as Brexit, with the potential triggering of Article 50, may indeed make this information null and void at some unknown point in time.
At Sapphire we are often asked to advise on the structure of a new SEIS Fund or EIS Fund ("Fund"). A SEIS or EIS Fund is normally used when a group of investors want to invest in a selection of companies (as opposed to only one company) that qualify for SEIS/EIS reliefs. It is a method of investing that is becoming increasingly popular due to the advantageous SEIS/EIS tax reliefs and the diversification of the investments.
Topics: EIS Funds
In order to ensure your company qualifies for the Enterprise Investment Scheme ("EIS") there are certain questions you need to ask firstly.
Below is a basic quiz to ascertain whether your company qualifies. If you answer no to any of the questions - then your company may not qualify for EIS. But as with everything, the devil is in detail, so check with your adviser (or us) before giving up.
1) Is your company a private unlisted company?
If you answer "no" you may not qualify for EIS.
Your company cannot be listed on a recognised stock exchange and there must be no arrangements in place for it to be become listed (there is an exception to this rule as certain exchanges are not "recognised" exchanges so quoted companies may still qualify for EIS, for example if they are on ISDX and AIM).
We were eagerly awaiting to hear the 2016 Autumn Statement in order gain some insight as to how the government proposes to deal with the resulting market uncertainty created by the Brexit referendum, and what the new prime minister and her cabinet are seeking to achieve.
The main take-away points were:
There has never been a better time to set up a company in the UK. The government support offered by both the Seed Enterprise Investment Scheme ("SEIS") and the Enterprise Investment scheme ("EIS") provides start-ups with an excellent method to attract much needed capital in order to get a company started.
SEIS and EIS facilitate private investment into companies by providing investors generous taxincentives, such as income tax relief, capital gains tax deferral, inheritance tax relief and loss relief. A great summary of investor incentives can be found on the infographic that we created for a prior blog: SEIS versus EIS - a visual comparison.
One of the requirements for companies to qualify for SEIS and/or EIS, is that they must continue trading for at least three years from the time the SEIS/EIS shares are issued. This requirement reinforces government’s commitment to support entrepreneurship and permanent job creation within the UK. Government wishes to support medium to long term company trade, and we have seen a tightening of the rules around the schemes to ensure that they serve this purpose.
“Myth: (1) A traditional story, especially one covering the early history of a people or explaining a natural/social phenomenon [like the ancient Greek myth of Ikaros, pictured here, who attempted to fly...]. (2) widely held but false belief.”
R&D Tax Credits have been around for quite some time, yet many early stage / start-up entrepreneurs seem to be only vaguely familiar with them, shying away from taking the time to consider the scheme.This lack of enthusiasm appears to stem from “widely held but false beliefs”, such as:
a) that the credits are only for larger, established companies with their own separate R&D departments;
b) that start-ups experience losses in their first years of trading, and as such, there is no need to apply for Tax Credits;
c) that the claiming process will be too much of a hassle for what it would be worth;
As these myths are preventing companies from optimising governmental incentives (and essentially losing out on money), I am going to try to dispel them.
Over the summer months, I caught up with some long overdue television viewing time, and came across the American TV series “Billions”. For those that haven’t heard of it, the story is about a successful hedge fund manager, Bobby Axelrod, who is being investigated by the U.S Attorney for the Southern District of New York, for suspected insider trading. The complexity in the plot occurs due to a “conflict of interest”, as the U.S. Attorney’s wife works for Bobby’s firm, as a key person employee and investor.
Short answer: yes it is. At Sapphire we are increasingly being asked to obtain SEIS and or EIS advance assurance for foreign-based companies. Contrary to popular belief, this is a popular structure. We recently obtained SEIS and EIS advance assurance for a company based in Malta (link to example), EIS advance assurance for a company in the United States (link to example) as well as one based in the Netherlands (link to example).
The old curse: “may you live in interesting times” seems to have been bestowed upon us lately. In the ever so global village that we live in, it is amazing to notice how quickly and profoundly financial markets have been reacting to significant political uncertainties such as the “Pax Populi” movements and the rising isolationist sentiment across both America and Europe.
London , 29th June, 2016
Since before the global financial crisis, a new breed of financial services has been taking hold in markets as far afield as the US and China. Today, the UK itself is a world leader in equity crowdfunding and online lending platforms.
It is estimated that close to half of all investment in UK fintech relates to platform based financial services.
This month we are spotlighting the topic of EIS, SEIS and SITR funds (abbreviated as EIS funds). An area of recent focus within the investment community is due diligence, arising mainly from the FCA’s recent publication of TR16/1: Assessing Suitability: Research and due diligence of products and services. The publication is a thematic review of the topic to ensure that advisors take appropriate measures and care when advising retail clients (ie. The general public) of what to invest in.
Topics: EIS Funds
The selection of an EIS Custodian for your fund(s) can be a very confusing and time consuming business. This article will, hopefully, make this selection clearer and quicker to ensure you have the best EIS custodian for your requirements.
At its simplest an EIS custodian & administrator is a financial institution that holds customers assets on behalf of the Fund Manager for the beneficial owner; the investor. Thus, the main responsibility of the Custodian is to physically hold the assets, whether in paper or nominee form, account for them, report these holdings to the fund manager & investor and to execute the required transactions.
As the latest wave of EIS and SEIS offers subsides, and we enter the new tax year, we look back at some of the issues we have come across while advising our clients on setting up investment structures in this space:Stand-alone or fund?
Economies of scale will often mean that a fund is a cost-effective approach where a stand-alone offer for a single corporate would not be, particularly in the SEIS space. However, given that the maximum raise under EIS is now £5,000,000, there can be times when a single company EIS offering makes sense – particularly given AIFMD issues.
At Sapphire Capital Partners we meet many entrepreneurs who have great business vision and are keen to pursue their ideas through one of the business tax incentive schemes; Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS), or Social Investment Tax Relief (SITR).
One of the areas where we are frequently asked for advice and guidance is in the area of founder shares, and more precisely, can the entrepreneur or owner of the company benefit from the above mentioned tax schemes?
And the answer to this is that it all depends on your relationship with the company, with the key question being, “Are you connected with the company?”