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Why Brexit may be a boon for tax efficient products

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While the Brexit vote was greeted with much doom and gloom by most market commentators, leaving the European Union may actually be positive for the tax efficient funds industry.

The rules that govern the UK’s tax advantaged venture capital schemes – namely venture capital trusts (VCTs), enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) – were recently tightened to comply with EU State Aid rules.

It has been argued that some of these rules seemed to run counter to the objective of these schemes of supporting growth, which led three trade bodies – EISA, BCVA and UKBAA – to lobby both the UK government and the EU to reverse or amend some of them.

Daniel Kiernan, research director at Intelligent Partnership, argues that Brexit may well mean the amendments these trade bodies were lobbying for will come to pass, which he says could allow more capital to flow into small and medium sized businesses.

“This would be a boon for the tax-advantaged schemes, job creation and hopefully by extension the UK economy,” Kiernan says.

Kiernan says that three rules in particular stood out in terms of needing to be changed; a cap on total investment, an arbitrary rule that says a firm’s first commercial sale can be no more than seven years ago and the limiting of a company’s workforce.

“The seven year’s old age limit doesn’t seem to serve any logical purpose,” he says. “It penalises firms with long research and development periods, or firms that have traded on a small scale for a number of years but then identified the potential to grow.”

Meanwhile he says the cap on total investment penalises firms where there is a need to raise substantial amounts of working capital to finance a long term development programme before investors see a profit, or where expensive capital assets need to be acquired in order to commence business.

Lastly he argues the size of a company’s workforce will be a reflection of the type of trade carried out by the business, not an indication of its stage of development and how easy it can access finance.

“At the moment the rules are putting a break on economic growth and therefore they do not represent good value for money for taxpayers,” he says.

Jack Rose, head of tax products at LGBR Capital, agrees that the long term impact of a Brexit, could be good news for VCT, EIS and business property relief (BPR) products .

“We’re just over a week on from the UK’s referendum to leave the EU and in the immediate term it looks likely the status quo will continue for tax-efficient products,” he says.

“Looking forward into a post-EU landscape, perhaps some of the restrictive shackles of recently adopted EU state aid legislation will be removed – not only allowing investors access to a broader spread of companies but also increasing the number of companies accessing this great source of capital.

“Since the EIS legislation was launched in 1993 almost 23,000 businesses across the UK have benefited from EIS funding. As we navigate through the coming months and years, the UK’s tax-advantaged legislation such as VCT and EIS will continue to be a crucial provider of capital to the UK SME community, and in turn the UK’s economy as a whole.”

For more information see our What are VCTs and EISs guide.