The Enterprise Investment Sham

Dom Hawes | May 29, 2018

The Enterprise Investment Scheme (EIS) and its little sister the Seed Enterprise Investment Scheme (SEIS) are Government-backed tax-relief schemes designed to encourage investment into small and medium-sized companies. Despite the title of the blog, EIS and SEIS are fabulous schemes and have done a great deal to back British businesses. When the banks stopped lending after the financial crisis of 2008, there was widespread concern about how entrepreneurs would fund their businesses. EIS and SEIS, through crowdfunding platforms, provided part of the answer.

As an aside, I remember the crisis well because I was a private banker at Coutts and Co when it hit. When I moved to Lombard Odier a year later to work with entrepreneurs, I saw the effect of the High Street Lender’s retreat first hand. For companies of a certain type, SEIS and EIS were and still are a godsend. Investors like the scheme too because they involve meaty amounts of tax relief. So, if I’m a fan of EIS, why write an article calling it a sham? Let me explain.

The Enterprise Investment Scheme and SEIS are not open schemes

Companies wishing to attract investment under SEIS and EIS have to fit quite stringent criteria in order to be eligible. No property companies, no investment companies, proceeds can’t be used to buy other companies, funds must be fully utilised within two years, no ratchets, no preference, isn’t a subsidiary of another company, is under seven years old…. And on it goes. It’s really complicated.

Because the schemes are not available to so many SMEs they are not ‘open’ schemes. They cannot help a company that’s eight years old grow. That not only skews the investment profile because only young companies are eligible, but it also excludes whole sectors that might provide more balance in a portfolio. The schemes are designed to do one thing which is to attract investment to high-risk, early-stage companies.

30% tax relief is a 70% loss if the company fails

Before crowdfunding, that wasn’t necessarily an issue. HNWs adept at investing and analysing risk could happily back eight to ten EIS start-ups and only need one to succeed to profit. In the crowdfunding age, that’s not how people invest. Smaller investors back businesses they like. And, despite the best efforts of the platform, my experience is that less experienced investors don’t understand or implement diversification strategies. 30% tax relief is not much use if you lose your investment. You still lose 70% of your value. But EIS and SEIS specifically prohibit investment in companies with longer trading records. In other investment cases, long track records of growing profits are rightly cherished.

EIS is Government-backed Roulette

Is a ten-year-old company less valuable to the UK economy than a three-year-old one? Are older companies less likely to grow with external investment? Do investors have a natural bias towards newness? No, no and no again. The bias, the rigging of the deck, the lengthening of the odds is a Government-led bias.

Generally, the older and more stable a company, the better its chances of longevity. EIS and SEIS are just part of our national psyche of short-termism when it comes to investing. It actively encourages money into more risky ventures without any evidence that they are better investment prospects. It’s a government-backed gambling programme.

EIS is a Sales Incentive

These days, the Enterprise Investment Scheme is used by IFAs and funds to attract money from clients. It has been changed into a product and it is very well remunerated selling for advisers. If the companies don’t deliver, the adviser still keeps the fee. They’re not so keen to share the client downside, apparently. Remember other tax relief schemes like the film schemes? They paid huge commissions and neither the commissions nor the promised tax returns will be coming back to the clients any time soon.

This is the problem with using tax relief to promote investment for a small class of company. It skews activity and makes the investment about the tax relief, not the returns, or the company, or the country or the economy. It’s why it starts to look like a sham – which something that pretends to be something it is not. It might not be the intention, but there’s trickery afoot here and it’s hurting the economy.

Why should we care?

Well…. We care because we generally invest in businesses that are 15, 20 or even 25 years old. Our companies’ management teams work with us to grow their businesses. We’re ambitious, aggressive and extremely confident in the future of our companies, the wider marketing sector and the UK’s creative economy as a whole. We care because neither the Seed Enterprise Investment Scheme nor its big sister, the Enterprise Investment Scheme, are available to our companies.

We care because we present investors with strong, stable and profitable investment opportunities in very high-quality British businesses. But without EIS, the crowdfunding platforms won’t play. All those crowdfund investors who earned their money the hard way – working for it pound by pound – can’t access these kinds of investments because the platforms want EIS. It pushes less sophisticated investors at higher risk investments. How mad is that?

We care because we’re about backing British business. There’s enough doom and gloom about Brexit and short-term concern about trade deals. Selbey Anderson works in one of the sexiest sectors Britain has to offer and we’re rolling our sleeves up to get on with the job.

We’re backing Britain. Are you?

At Selbey Anderson, we’re building a band of brothers and sisters that want to back Britain. It’s a call to arms, a mission, a positive and energetic campaign to enable Britain’s successful business people to back Britain’s successful businesses.enterprise investment

It’s shame we can’t use the platforms because the Enterprise Investment Sham pushes its investors towards younger, higher-risk opportunities. We’d love to help ordinary investors access older companies too. But that’s not the way EIS plays out.

A useful adage for investment is to buy good, solid and predictable businesses that produce steady returns throughout the economic cycle. Even then, beware of overpaying for them. Valuation matters. Compare this line of thought with EIS and SEIS promotions. It’s all about the tax. We know where we’d place our hard-earned capital. Companies.

As a parting thought and really to illustrate why EIS and SEIS have sham tendencies… do a Google search for EIS investment and see what you get. EIS incentivises investors to buy companies that they would not otherwise risk their money on. Beware of tax tails wagging dogs.