At the back end of May, HMRC released the much anticipated first estimates on both the number of companies raising funds and the number of subscriptions and the amounts raised through EIS and SEIS for 2016-17.
It’s important to note that at this stage, the numbers are exactly that. Estimates. Releasing the data in May, only 2 months after the end of the tax year, means there are a lot of applications still in HMRC’s system and we expect to see upward revisions at next year’s data release (HMRC are moving away from releasing the data at two points in the year to an annual release).
So, what are the headlines?
Below are some key points with our commentary alongside:
- In 2016-17, 3,470 companies raised a total of £1.797 billion of funds under the EIS scheme. In 2015-16, 3,545 companies raised £1.954 billion of funds. 2,260 companies received investment through the Seed Enterprise Investment Scheme (SEIS) and £175 million of funds were raised, down from 2,405 and £182 million in 2015-16.
Firstly, the 2015-16 figure shows a significant increase on the original estimate given in October 2017 of £1.88 billion. We can therefore expect a similar increase on the 2016-17 when the figures are updated next year. Given this, the figure are only very marginally down on the previous year and this is perhaps no surprise given the uncertainties that surrounded EIS last year as various rumours gathered pace ahead of the industry receiving a very positive Budget outcome
- In 2016-17, companies from the Information and Communication sector accounted for £669 million of investment (37% of all EIS investment). It’s a similar story for SEIS (39%)
This figure is up from 30% in the previous year and still represents by far the biggest sector. HMRC has this year formally moved its breakdown of industry classification from TCNs to SIC 2007 as they believe this to be more detailed and commonly used. Unfortunately, this classification is still extremely wide ranging and doesn’t give us the detailed breakdown we need to see what exactly which sectors are receiving investment via EIS. If you have trouble sleeping, it’s well worth looking at the SIC 2007 classifications, Information and Communication for example, includes sectors such as Motion picture, video and television programme production, sound recording and music publishing activities, Data processing, hosting and related activities and Computer programming activities. Its clear then TV/Film and technology orientated companies continue to be the most popular sectors for EIS investment and with the introduction of the new Risk to Capital in the 2017-18 tax year, this is clearly set to continue. This also raises the point that we therefore need a far deeper dive into the breakdown of industry sectors to understand which sectors are benefitting from EIS investment
- London and the South East accounted for the largest proportion of investment with companies registered in these regions receiving 67% of the investment in 2016-17 (63% for SEIS).
Interestingly this is the exact same figure as the previous year. Once again, these figures are likely to be skewed by the fact the figures are based on the registered address of the company raising funds not the physical location of that company
- 43% (1,500) of companies receiving investments of £150,000 or less in 2016-17.
Could some of these companies raise under SEIS rather than EIS. If so, why aren’t they?
- 43% (£774m) of the amount of funds is concentrated in investments above £2m, with 24% (£426m) going to investments over £4m
This is where perhaps EIS can make the biggest impact for SMEs seeking high growth. It is hoped that with the new rules in place we will see more, higher level investment into EIS funded companies to help them scale up quicker. This feeds in to the Patient Capital effect and the Government’s stated intention to find funding at 2nd/3rd funding round stage
- The number of investors claiming Income Tax relief on Self Assessment forms under EIS decreased from 35,360 in 2015-16 to 29,860 in 2016-17
On first glance, this looks like a significant fall in numbers. But once again, the figures are misleading as many EIS investors from last year still won’t have processed their EIS claims so this is another area where we expect to see a significant uplift in numbers when they are updated next year
- 81% of EIS investors made a claim for tax relief in respect of an investment of £50,000 or less.
This number continues to rise. Is this the crowdfunding effect?
Overall, figures are largely holding firm year on year. 2017-18 however should see a seismic shift. The new rules introduced at the Budget 2017 close some EIS investment opportunities and open up others. How will fund managers react to this? And more importantly, how will investors react to this? Traditional financial planner clients have been weaned over he past 4 or 5 years on capital preservation type EIS deals. We have now entered a “Growth only” stage so will investors immediately feel comfortable trading perceived lower risk, capital preservation deals for perceived higher risk, growth deals? Time will tell but certainly there is a lot of work for all in the industry to do to educate financial planners as to what is happening, why and how EIS can still be a very important part of their client’s diversified portfolio. Certainly at EISA, we are not complacent and our strong belief is that if we want EIS and SEIS to grow and see greater inflows of investments from a broader base of investor then we need to work together to engage with the financial planning community to make this happen.
To see the full HMRC EIS and SEIS statistics report click here