Could EIS changes affect angel funded turnarounds?

Changes to tax relief on angel investments

As the end of the tax year looms, a number of changes to the tax relief available to angel investors under the EIS (Enterprise Investment Scheme) and VCT (Venture Capital Trusts) which were EC approved back in April 2009 will now be coming to the forefront of angel investors minds. The main changes were that:

(1) to qualify for relief under EIS or VCT, invested companies must not be in difficulty;
(2) invested companies need to have “a permanent establishment in the UK” – previously they needed to “carry on its qualifying trade wholly or mainly in the UK”.
(3) A VCT’s shares must be on an EU regulated market as opposed to being included in the official UK List and the rules governing the amount of a VCT’s investment that must be held as equity have also changed.

Struggling businesses put at a disadvantage?

Back in January when I attended and spoke at the BBAA (British Business Angel Association) Winter Workshop, a number of delegates commented on how angels had stepped in to provide turnaround finance for businesses and how it was leaving a shortfall for start up companies. The BBAA are running an excellent national “Raising Awareness” campaign to combat this problem, but these changes may help to reverse the trend back from turnaround to startups.

Note – “start up” in this context generally refers to a venture that has proven it’s ability to generate revenues with a pilot and which has an experienced team in place.

Essentially, it means that companies who are looking for angel investment to enable them to finance turnaround activity will no longer will no longer be able to include EIS tax relief as an incentive to effectively reduce the cost of investment into their business.

In one way, it does mean that tax payers money is put into businesses that are more likely to generate new jobs and tax revenue as opposed to those that may fail and then just have their assets sold off. On the other hand, it does mean that a business that has taken hears to build and needs just a little bit of help to realign itself to the market may fail as it’s ability to fit into the 2 to 3% propositions that do win funding is decreased.

A better long term turnaround funding solution

An alternative to pre-pack administration that has become the norm for implementing many turnarounds with many creditors left out in the cold, old fashioned voluntary arrangements complimented by getting additional resource obtained on a payment-out-of-future-revenue-shares. Rather than damaging supplier relationships which could affect growth prospects, when structured right, the latter can maximise growth prospects which are essential in today’s competitive market.

Priorities – quality .v.tax relief

Some business angel networks including those with which we work rightly believe that prioritising the tax relief offered by EIS over is much less important than picking up the right opportunities as they appear. Towards the end of the financial year, as high nett worth individuals finalise their income statements and resulting tax bills, there is a rush for opportunities, but picking the wrong ones doesn’t do any favours to either the angel or the industry as a whole.

Have you been affected by a turnaround or business failure?

I would be most interested in hearing the views of any business owners seeking turnaround or start up funding, investors thoughts on EIS and whether it is a make/break factor in their decision making. In addition, for all of you who have been involved with pre-pack administrations, voluntary arrangements and other form of turnaround from a creditors, administrators or business owners standpoint.