On Monday, I discussed the UK Productivity Puzzle that has bedevilled the UK for a decade (Beyond The Usual Headlines), but did not quite expect it to be prominently featured in yesterday's media coverage of the Autumn Budget. After yesterday's expected coverage (housing, students, NHS, etc.) it was frequently mentioned by the media but with apparent disregard as to why the ONS has moved their productivity trend estimates downwards. Moreover, the Chancellor seemed to get little credit for his emphasis on technology and the future rewards for Britain.
Symvan deems his tightrope act to be excellent and wants access to his favourite Excel files! With seemingly nowhere to move - either within his party, the opposition parties, or the media - he seemed to pass with flying colours.
From a venture capital perspective, four points stand out.
First, and seemingly oblivious to some of his critics, the apparently stiff Mr. Hammond became as evangelical about technology investing as some of his colleagues are about past British glories:
"For the first time in decades, Britain is genuinely at the forefront of this technological revolution... but we must invest to secure that bright future for Britain. And in this budget, that is what we choose to do."
Secondly, the economics of "crowding out" matter to the Treasury. The intent of the government is crystal clear:
"Tax-motivated investments, where the tax relief provides all or most of the return for an investor with limited risk to the original investment (i.e. preserving an investor's capital), will no longer be eligible...
"… the risk-to-capital condition is a principled approach which enables the government to avoid excluding further specific types of activity, which would risk excluding genuine entrepreneurial businesses, whilst reducing opportunity to use the schemes for tax motivated investment."
As we recall from the debates of the 1970s and 1980s, "crowding out" was an economic theory that rested on the supposition that rises in government spending replaced or ‘pushed out’ private sector innovation, the presumption being that overall productivity suffered as a result. The 2017 version of this seems to be that ‘non-economic’ or ‘sub-optimal’ EIS & VCT investing crowds out more socially and economically desirable tax-efficient investing. Growth companies typically finance the early years with EIS & VCT investments, and the ‘capital preservation’ or ‘asset backed’ vehicles ultimately deny financing to those firms more closely aligned with Treasury objectives.
Third, released in conjunction with the Budget is a document entitled, "Financing growth in innovative firms: consultation response", and one of the more interesting sections refers to a new “principles-based test” which will be introduced into the EIS/SEIS/VCT universe.
It will apply from Royal Assent to the Finance Bill 2017-18, which one would assume would take place before Christmas, although this is a rather tight deadline. The stated aim appears to be that if a company has not received advance assurance by that time, then any such EIS or VCT investment will not qualify. Given the tight timeline, this effectively means that the market for non-growth EIS and VCT investments is over. At the very least, such companies run considerable ‘HMRC risk.’
This is a bit of a game changer, and slightly reminds me of the FCA’s “fit and proper” test. Moreover, the move towards a “principle-based” litmus test emphasises that public policy objectives will not be overridden by clever tax and legal advisors.
Finally, August's consultation paper indicated that HM Treasury saw a funding gap in the post-seed ‘scaling’ of successful British start-up companies.
Hence the very generous three announcements:
- The annual investment limit for Enterprise Investment Scheme (EIS) investors will be doubled from £1 million to £2 million, provided that any amount above £1 million is invested in knowledge-intensive companies.
- The annual investment limit for knowledge-intensive firms will be doubled from £5 million to £10 million through the EIS and by Venture Capital Trusts (VCTs).
- And knowledge-intensive companies will be able to choose whether to use the current test of the date of first commercial sale or the point at which turnover reached £200,000 to determine when the 10-year period has begun.
In conclusion it is the "spirit of EIS" that will inform HM Treasury on the shape of tax-efficient investing for the future.