The Enterprise Investment Scheme ("EIS") and Seed Enterprise Investment Scheme ("SEIS") have been in operation since 1994 and 2012 respectively, and they are part of the government's efforts to make the UK one of Europe's best places to start a new business. As mentioned in our numerous prior blogs on these topics, the schemes have been ever-growing in popularity, particularly within the past two years. There are a number of reasons for this rise to fame, being as follows:
(i) an increased awareness of the schemes in the marketplace and the government's ongoing support.
(ii) improved incentives provided by the schemes year on year such as the increase in tax relief for EIS investments to 30% (from 20%) and the launch of SEIS in 2012 which provides 50% tax relief, as well as allowing larger companies to qualify for EIS status.
(iii) the emergence of SEIS and EIS funds being offered by premier boutique and top tier financial institutions that allow investors to spread the risk of investing in small enterprises across portfolios of companies and various sectors.
(iv) the decline in popularity of Venture Capital Trust ("VCT") investments as a result of government tightening qualification requirements; apparently, VCTs were seen as "abusing the system" in relation to the share buy-back arrangements which inadvertently provided a fresh round of tax relief with no change in behaviour through the VCT repurchasing shares while the investor would re-invest in the VCT within a short period of time. As a result, the government proposed a time limit for re-investments, and upon this change, investment activity within VCTs started to decline.
As there are ever increasing numbers of EIS and SEIS company applications, seasonality trends are emerging. There appears to be a rush for companies to obtain their advance assurance and enter into the finance raising stage within the three months before the 5th of April. It appears that investors who avail of the schemes tend to make their placements very close to the end of the tax year. This seasonality appears to stem from last minute tax structuring / decision making and perhaps a misconception on how the schemes actually work.
In actuality, the schemes provide for tax rebate carry-backs, so effectively the rebate can be claimed and paid out immediately, even if last year's tax return has been submitted. As such, seasonality appears to be driven by a misconception of the schemes or just by sheer investor procrastination. Nevertheless, whatever the driving force of investor behaviour ultimately is, the effect is one of seasonality for small companies who are raising finance, with February and March experiencing the height of the schemes' application and financing activity, and a low point during the summer vacation months being July and August. In that respect, we can see similarities between the schemes and the Individual Savings Accounts ("ISAs") which also experience seasonality in their placements towards the end of the tax year. The question for investors might then become a choice between investing in ISAs or taking the higher risk option of investing in a small company. This choice that arises may potentially lure finance away from the schemes.
A second reason as to why small company investment seasonality may need to be addressed is that it may have non-beneficial effects to the companies availing of the schemes. It may delay their plans for launch or expansion unnecessarily as the money may be arriving at an inopportune time for the company's own trade seasonality. Lastly, HMRC will be feeling the increase in advance assurance application submissions from January to March and as a result may struggle to provide assurance within the typical four to six week window, thereby delaying the finance raising process for the companies or even risk missing the finance raising "high season".
The point of the matter is that seasonality experienced in small company finance raising may need to be addressed. This may just need to come through a better understanding of the schemes by the investors and the IFAs promoting the investment opportunities, or by companies making efforts to become investment-ready earlier in the tax year. Sure, there will always be investors making last minute placements, but for those that know how much they are wanting to invest in the year, the process can - and should - be starting earlier.
In the meanwhile, until this timing issue is addressed, we can but only put our heads down and burn the midnight oil up until the 5th of April.