SEED ENTERPRISE INVESTMENT SCHEME
Industry Update - DECEMBER 2022
1. INTRODUCTION
The latest news, updates and statistics on SEIS
2. Market Update
3. Considerations for Investment
4. Industry Analysis
5. Managers in Focus
6. What's on the Horizon
7. Further Learning
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ENTERPRISE INVESTMENT SCHEME
Industry Update - Ocotber 2022
The latest news, updates and statistics on EIS
Opening statement Acknowledgements and thanks Key findings
1. Introduction
Opening Statement Acknowledgements and Thanks Key Findings
MICAP Stats Analysis MICAP Market Snapshot
3. Considerations For Investment
Boosting economic confidence: UK to revamp insolvency framework HMRC loses court battle over EIS funding for films —What are the larger implications?
Mini-Budget 2022: Sunset Clause extended beyond 2025 HMRC deals with growing pressures on advance assurance What the managers say
2. market update
Blackfinch OnePlanet Oxford Capital Praetura Comparison table
5. managers in focus
Splendid symbiosis: EIS & sustainable investment VC Inquiry: EISA urges Select Committee to abolish Sunset Clause “Are tax reliefs good value for money?” MPs want to know What the managers say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
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hat do we have to thank for helping more than 15,500 UK start-ups secure £1.6 billion of investment since 2012? – The Seed Enterprise Investment Scheme (SEIS). It has been absolutely vital for entrepreneurs and continues to provide the oxygen of investment that enables these very early-stage companies to grow and scale. Despite Covid, investment through the SEIS actually grew during the pandemic, enabling 2,065 companies to raise a total of £175m in 2020/21 alone. Whilst there is no doubt that the SEIS plays a fundamental role in ensuring that the UK is one of the best places in the world to start a business, there were certain aspects of the scheme that were making it more challenging for some founders to benefit from the SEIS. We were delighted to see these addressed in the September mini-budget when the Government announced some hugely important extensions to the SEIS. Against a backdrop of U-turns and cuts, it was fantastic to see the continuation of these changes confirmed by Jeremy Hunt in his Autumn Statement on 17th November.
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Given the number of U-turns in recent weeks relating to the mini-budget it is significant, and indicative of the importance the government places on entrepreneurs, that the commitments around the SEIS and the EIS have remained.
opening statement
SEIS expanded to support Government’s focus on innovation and entrepreneurs
020 8132 6199
MICAP Statistical Analysis MICAP Market Snapshot An analysis of the latest HMRC statistics
The patient capital gap: Early-stage startups & the struggle to get funding Do the government changes to SEIS investment limits go far enough?
What the ongoing budgetary changes could mean for UK startups SEIS & Co: How VC schemes bolster one another An opportunity to make a real change to the UK venture space SEIS 2.0: Time for change and the emergence of SEIS Funds What the managers say
Britbox Haatch Ventures Nova Capital SFC Capital Comparison table
The Autumn Statement 2022 What the managers say
Christiana Stewart-Lockhart
DIRECTOR GENERAL eiSA
These changes are incredibly welcome and will make a significant difference in ensuring that more start-ups, particularly those based outside of the South East, will be able to use the SEIS to raise crucial investment to help their businesses to grow. Currently, the two-year age limit restricts the businesses that are able to use the SEIS and the impact of this is most visible outside of London and the South East. In 2021, the government's Taskforce on Innovation, Growth and Regulatory Reform found that these age limits on the SEIS and the EIS
The increase in the SEIS age limit from 2 – 3 years from April 2023 is incredibly important and will likely play a significant role in supporting the Government’s levelling up agenda. Furthermore, companies are currently able to raise £150,000 through the SEIS, which has been the limit since its inception in 2012. Since then, there have been significant economic, social and technological changes that have shifted the context in which these limits must be viewed. The impact of inflation over the last 10 years, coupled with the changing needs of start-ups highlights why the increase to the limit to £250,000 from April 2023 is so important. Finally, and crucially, to further increase the investment available to start ups, the annual investor limit will be doubled to £200,000 from April 2023. This means that an individual could invest up to £200,000 into some of the most exciting and innovative new businesses every year and could benefit from the 50% income tax relief (amongst other reliefs) that the scheme offers. This should have a significant impact on the capital available to these high-risk, early-stage start-ups and will help to cement the UK’s reputation as one of the best places in the world to start a business. I have no doubt that many incredible start-ups using the SEIS will play a crucial role in the UK’s economic recovery through job creation, innovation and economic growth. The changes announced to the SEIS in September’s mini-budget will help to ensure that those entrepreneurs based outside of the South East are not at a disadvantage when it comes to securing investment into their start-ups. These changes are all set to take place from April 2023. Given the number of U-turns in recent weeks relating to the mini-budget it is significant, and indicative of the importance the government places on entrepreneurs, that the commitments around the SEIS and the EIS have remained.
“From April 2023, companies will be able to raise up to £250,000 of SEIS investment, a two-thirds increase [currently £150,000]. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from 2 to 3 years. To support these increases, the annual investor limit will be doubled to £200,000. These changes will help over 2,000 companies a year that use the scheme to grow.”
“are exaggerating regional disparities in access to capital for early stage and growth firms in the rest of the UK compared to London and the south east. It's also worth noting that there is a wide disparity between regions with some regions of the UK such as east of England, south west and Scotland where just 27% to 58% of businesses that received investment qualified under the age limits.”
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
This report and the research behind it would not have been possible without the help and support of a number of third parties who enthusiastically shared their time and expertise. These busy professionals went to great lengths to provide us with data, their insights on the market, and useful comments and suggestions while peer reviewing initial drafts. We thank Christiana Stewart-Lockhart, director general of the EIS Association (EISA), for graciously providing the opening statement for our first industry update of the Seed Enterprise Investment Scheme (SEIS). We’re also grateful to Tom Wilde of Shoosmiths and Henry Whorwood of Beauhurst who provided valuable insights via thought leadership articles. We thank them all for taking the time out of their busy schedule. We’d also like to express our gratitude to Dominic Keen and Dominic King of Britbots; Fred Soneya of Haatch; Alistair Marsden of Nova; and Ed Prior of SFC Capital. The expertise of one and all have improved this study in innumerable ways and their support as sponsors has made this update possible. Any errors and omission are our own. We have relied upon MICAP for most of the data that we have based the update upon. MICAP is part of the same group of companies as Intelligent Partnership. We also carried out our own extensive desk research and interviews to verify their data. The update is made possible by our sponsors, who have contributed copy to the update and supported us by helping to meet production costs. So, a big thanks to Britbots, Haatch, Nova Growth Capital and SFC Capital.
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Acknowledgements and thanks
Identify the main developments and news in the SEIS market Outline budgetary developments that could be impactful to SEIS Benchmark products and providers in the market against one another Evaluate the key fees and charges applied by SEIS managers Outline the statistical trends in SEIS investment and tax relief in recent years Define some of the key events likely to impact SEIS in the near future
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EDITORIAL Mohamed Dabo CREATIVE Gillian Livingstone SUB-EDITING Lisa Best & Mohamed Dabo RESEARCH Mohamed Dabo
MARKETING Chloe Fry Carlo Nassetti DISTRIBUTION Michelle Powell SALES Chris White
MICAP Statistical Analysis MICAP Market Snapshot
Mini-Budget 2022: Sunset Clause extended beyond 2025 HMRC deals with growing pressures on advance assurance Pivoting with passion: how resilient founders are the key to growth Why climate change is such an interesting investment space over the next 5 years Inflation Drain - tackling the inflation problem What EIS managers are going through and the realities of the current situation for their inflows and deal flows What the managers say
Blackfinch OnePlanet Capital Oxford Capital Praetura Comparison table
Splendid symbiosis: EIS & sustainable investment EISA continues advocacy amid mini-budget uncertainty “Are tax reliefs good value for money?” MPs want to know What the managers say
What could the budget changes mean for UK startups? SEIS & Co: How VC schemes bolster one another SEIS Manager - Intelligent Partnership thought piece SEIS 2.0: Time for change and the emergence of SEIS Funds What the managers say
Small innovative companies are still great bets for the future The Autumn Statement 2022 What the managers say
This report and the research behind it would not have been possible without the help and support of a number of third parties who enthusiastically shared their time and expertise. These busy professionals went to great lengths to provide us with data, their insights on the market, and useful comments and suggestions while peer reviewing initial drafts. We thank The Lord Flight, member of the House of Lords and chairman of the Enterprise Investment Scheme Association (EISA), who graciously provided the opening statement. We’re also grateful to Christiana Stewart-Lockhart, director general of the EIS Association (EISA), for her pre-budget piece on abolishing the Sunset Clause. We thank them both for taking the time out of their busy schedule. We’d also like to express our gratitude to Nic Pillow and Dr Reuben Wilcock of Blackfinch Investments; Matt Jellicoe of OnePlanet Capital; David Mott, Richard Roberts, and Sarah Wakefield of Oxford Capital; and Jonathan Prescott of Praetura. Our thanks also go to Dave Morrison, partner at Nyman Libson Paul, for his insightful thought leadership about EIS funding for films. The expertise of one and all have improved this study in innumerable ways and their support as sponsors has made this update possible. Any errors and omission are our own. We have relied upon MICAP for most of the data that we have based the update upon. MICAP is part of the same group of companies as Intelligent Partnership. We also carried out our own extensive desk research and interviews to verify their data. The update is made possible by our sponsors, who have contributed copy to the update and supported us by helping to meet production costs. So, a big thanks to Blackfinch, OnePlanetCapital, Oxford, and Praetura.
Identify main developments and news in the EIS market Outline regulatory developments that could impact the EIS in the near future Benchmark products and providers in the market against one another Evaluate the key fees and charges applied by EIS managers Outline the statistical trends in EIS investment and tax relief in recent years Define some of the key events likely to impact EIS in the near future
Key findings
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percentage of people in the UK who have started a side hustle
46%
number of private debt deals in 2021 (89% increase from 2020)
785
total of SMEs currently active in the UK
5.58 million
number of new businesses launched in 2021
810,316
number of equity finance deals completed in 2021 (worth £46.8bn)
803
share of SMEs that sought external finance in 2021 (versus 36% in 2018)
56%
390,00
increase of business population in 2020 – 2021
%
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This update has thrown up some interesting, sometimes alarming, sometimes revealing facts and figures. So we've selected a few to give you a flavour of the current context, some food for thought and some indicators of the fundamentals you should be aware of.
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percentage of the UK’s business population accounted for by SMEs
99.9%
What could the budget changes mean for UK startups? SEIS & Co: How VC schemes bolster one another An opportunity to make a real change to the UK venture space SEIS 2.0: Time for change and the emergence of SEIS Funds What the managers say
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- fred wilson, vc entrepreneur
The VC market remains largely out of reach of many ‘main street’ investors as the SEC limits these fund investments to qualified and accredited investors. That has never made sense to me and is yet another example of the ‘well meaning’ rules resulting in the wealthy getting wealthier and everyone else missing out.
What the ongoing budgetary changes could mean for UK startups
o say the past few months have been uncertain is an understatement to even the most politics-averse of readers. Recent months have been not just politically uncertain, but economically too. That uncertainty continues to abound, especially on the macro-economic front. Inflation continues unchecked (at least in the UK), and a technical recession threatens to become very literal too. With the Chancellor’s Autumn statement out of the way, might we at least see some fiscal stability to counter the macro picture? Yes and no is the answer, for all segments of the economy. But it is a particularly mixed bag for startups and the entrepreneurs who run them. Just about the only thing to have survived from Kwasi Kwarteng’s brief tenure, are the increases that will be made to SEIS. Next year, companies will be able to raise up to £250k under SEIS (increased from £150k). Companies will be eligible if up to three years old at the time of the investment (increased from two years). And the gross asset limit on the balance sheet will be increased from £200k to £350k. Investors will also be able to put in more each year, as the annual limit that an investor can invest under SEIS will increase from £100k to £200k. That is undeniably good news for startups (and investors too); entrepreneurs looking to raise their first round of funding can now make plans based on the changes that will come into effect in April next year. Jeremy Hunt’s Autumn Statement also repeated the Mini-Budget’s commitment to reviewing and extending (or removing) the EIS and VCT sunset clauses. The actual wording from the Autumn Statement was “The government remains supportive of the Enterprise Investment Scheme and Venture Capital Trusts and sees the value of extending them in the future.” This is also good news for startups, but it could be clearer and more concrete. Each month that passes the sunset clause looms ever nearer – this time next year 2025 will not feel far away. Businesses need to be able to make long-term plans. So much for the good news. There was plenty of bad news in the budget too. Never mind for now the increases to personal and corporation tax which will be a drag on growth in every part of the economy. Jeremy Hunt announced changes that directly impact startups. In particular, changes to the R&D Tax Incentive scheme will adversely impact the UK’s startups. The changes specifically are that “For expenditure on or after 1 April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%, the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. These rate changes will be legislated for in the Autumn Finance Bill 2022.” These changes will harm the finances of innovative startups and scaleups. As Toby Austin, CEO of Beauhurst, put it when speaking to the Financial Times, “[It’s] baffling to hear the chancellor say that he wants ‘to turn Britain into the world’s next Silicon Valley’ whilst he simultaneously slashes the only meaningful tax incentive for tech start-ups.” “It’s baked into their budgets and hiring plans. This cut will have a severe negative impact on both tech job creation and the progress of innovation.” Steve Bates, chief executive of the BioIndustry Association, commented that a “heap of instability” had been injected into “one of the most stable policies the UK had for supporting innovation.” Other experts, such as Kate Bingham (of vaccine taskforce fame) and Dom Halls of Coadec, have also condemned the changes. With all the headwinds facing UK businesses, in particular innovative and loss-making ones, it feels like the oddest time to be making these changes. Indeed, the effects of increasing SEIS while paring back R&D tax credits could be that they cancel each other out – all of which begs the question of the Chancellor, why bother? It’s lucky that entrepreneurs are a resilient bunch, who will do what they can to innovate, and grow the economy, and improve lives, irrespective of the occupants of Nos 10 & 11.
To support growth right across the country, we need to go further, with targeted action in local areas
Kwasi Kwarteng - Former Chancellor of the Exchequer
Henry Whorwood
head of research & consultancy Beauhurst
- Name Surname
With the Chancellor’s Autumn statement out of the way, might we at least see some fiscal stability to counter the macro picture?
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NOTABLE: the government’s vote of confidence in SEIS
Jeremy Hunt shredded Liz Truss’s economic plans in one of the most astonishing U-turns in modern political history. Interestingly, one of the few commitments set to remain, defying various U-turns, is the increase in the investment caps of EIS. As announced in the Growth Plan: From April 2023, companies will be able to raise up to £250,000 of SEIS investment, a two-thirds increase. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from two to three years. To support these increases, the annual investor limit will be doubled to £200,000. These changes will help over 2,000 companies a year that use the scheme to grow. Now confirmed by the new chancellor, the decision to widen the scheme means that sourcing finance can become more accessible, subsequently enabling impact-driven, transformative startups to more easily realise their potential and generate wider positive impacts. A broader and more accessible SEIS scheme could help to accelerate growth for early-stage UK businesses, further encouraging job creation and the delivery of notable positive impacts on both a regional and national scale. The endorsement of the former chancellor’s extensions to SEIS in the Autumn Statement 2022 is a notable vote of confidence in this flagship growth business investment scheme.
SEIS & Co: How VC schemes bolster one another
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In response to markets’ failure to provide adequate equity finance to small and medium sized enterprises (SMEs), the UK government set up a range of venture capital schemes to encourage investment in young businesses. These tax-advantaged venture capital schemes are an important part of the government’s growth strategy, facilitating access to finance and providing support for smaller companies which would otherwise have difficulty finding the necessary finance to develop and grow. The government-backed schemes—among them the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS), and the Venture Capital Trust (VCT)—give investors access to significant tax reliefs in return for investing in small, higher-risk companies. Over the years, these schemes have been hugely successful and are now a cornerstone for the funding of the UK’s startup ecosystem. Year in year out, they continue to provide irreplaceable support to small and growing businesses seeking finance to develop and grow. Often envied and emulated all over the world, the schemes provide disproportionate support to British innovation and the economy. And over the years, governments of both parties, recognising the need for continued support for small and growing businesses that are key to the UK economy, have reaffirmed their commitment to the tax-advantaged schemes. “The government is committed to ensuring that the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS) and the Venture Capital Trust scheme (VCT) continue to provide appropriate support for small and growing businesses across the UK,” HM Treasury noted in a recent report about the schemes.
One of the keys to the outstanding success of the VC schemes is their complementary nature, which makes the UK such a successful place to start and scale a business. As noted by the Venture Capital Trust Association (VCTA) in its response to the recent Treasury Select Committee inquiry into the UK’s Venture Capital “ “SEIS allows for very early stage, EIS provides for further advance in maturity, and VCTs for further scale up before moving on to venture capital. Many VCT-backed businesses have received prior EIS or SEIS investments and are ‘handed on’ through the effective ecosystem developed in the UK.” Instead of competing with each other, the schemes are mutually supportive, ultimately forming a complete unit that helps to bankroll promising businesses from seed stage through maturity. Under regular review to ensure they continue to be targeted at firms that need funding to grow and develop, the schemes have established themselves as a permanent fixture of the fundraising and investment landscape—and a lifeline to some of the UK's fastest growing companies. However, the VCTA, which represents the largest VCT managers in the UK, maintains that the scheme can do a lot more. In its written evidence to the select committee, the trade body notes: “We believe that more can be done to increase the pool of high growth and scalable companies to the benefit of the UK economy."
Complementarity or reciprocal rounding off
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Instead of competing with each other, the schemes are mutually supportive, ultimately forming a complete unit that helps to bankroll promising businesses from seed stage through maturity.
Securing funding is one of the most challenging aspects of starting and scaling a business. In early 2022, the Coalition for a Digital Economy (Coadec), ‘the policy voice of tech startups and scaleups’ carried out a survey of over 100 founders in its ecosystem to get an understanding of the challenge of raising capital in the UK at an early stage. “The results of our survey show that the experience of raising funds for the earliest stage startups in the UK is tough. Of those that were raising funds for the first time 95% perceived the process to be difficult, while for those that had raised before this the proportion was still a very high 84%,” the non-profit organisation reported in June 2022. But the funding given by SEIS provides early-stage startups with the monetary support that can help transform them into successful businesses. The majority of SEIS funds aim to target exciting, innovative and disruptive businesses. That’s how the tax-advantaged scheme contributes towards a thriving economy, creating jobs, facilitating innovative ideas to flourish, and ensuring that the UK is on the cutting edge of technological progress.
Driving investment in innovative firms
SEIS was introduced in chancellor George Osborne’s 2011 Autumn Statement which heralded a big shake up of tax incentives for investors, with EIS and VCT also being revamped. Beginning from 6 April 2012, the new scheme was to help raise money for companies that are starting to trade. Since then, SEIS has enabled over 15,500 companies to receive investment of a total £1.6 billion. The SEIS was designed to encourage direct investment in the early development of fledgling companies. As such, it provides capital to very early-stage companies so that they are able to grow, and provides equity to investors in return. An early-stage fund investor represents an important vote of confidence in a business. It tells other potential investors that the early-stage startup has been successfully vetted and qualified by a specialised fund. This encourages both existing and potential equity holders to invest more because they perceive less risk. At the same time, SEIS portfolios are typically designed to help mitigate the risks of early-stage investment by diversifying across sectors and business risk profiles. The other significant risk mitigator is the tax relief SEIS can offer. The scheme takes into account the higher risk level of SEIS vs EIS and VCT, for example, by offering upfront income tax relief of 50% of the amount invested, 100% disposal relief on any capital gains achieved, the opportunity to permanently extinguish up to 50% of a reinvested capital gain and inheritance tax reliefs. In addition, the combination of loss relief and income tax relief can ensure that well over half of the gross investment is fully safeguarded against loss. Often both EIS and SEIS are involved in the funding lifecycle of early-stage businesses. Generally, the earlier the investment stage, the lower the equity costs, but the higher the risks. As SEIS offers more tax relief, it is logical that SEIS tax reliefs would be applicable first. In fact, where an investment qualifies for both SEIS and EIS, the rules require that SEIS be claimed first and it is not possible to claim SEIS tax reliefs if EIS tax reliefs have already been claimed on an investee company’s shares. Outside of tax and investment gains, some of those investing in very early-stage companies, especially those who are founders themselves, are keen to support others on the same journey. For the investee, SEIS investment raises the likelihood of larger and ongoing funding rounds. The likelihood of EIS as well as SEIS qualification raises the strong possibility of follow-on EIS funding should the company progress well. This kind of certainty can be like gold-dust for an early stage, entrepreneur CEO, as well as reassuring for an early stage investor whose exit is unlikely to have taken place by the end of the SEIS funding runway. SEIS investment may also help to limit the dilution of the founder’s equity share when onboarding new investors: In exchange for losing a degree of control over their business, founders receive the gift of growth.
SEIS: giving the gift of growth
SEIS is a fantastic way for investors to access high-growth potential companies at low valuations, with very significant downside risk protections in the form of tax reliefs. The recent extension of the scheme will add further momentum to the SEIS market.
Dominic Keen - Managing Partner, Britbots
The government-backed venture capital schemes, which encourage investment in certain newer, smaller unquoted trading companies, seamlessly complement one another, combining to finance businesses from seed to IPO.
SEIS and the government’s levelling up agenda
The government levelling-up plan aims to improve standards of living across the country and help every place to reach its productivity potential. The Seed Enterprise Investment Scheme (SEIS) can be one of the most effective tools to accomplish this goal. SEIS came about in 2012, in the afteryears of the global financial crisis of 2008, which had a devastating impact on startup financing and survival. Lenders and investors had incurred large losses and businesses desperate for new financing could not obtain it. It was a particularly difficult time for startups needing to raise money. Bank debt, the single most important source of funding, even for startups, was not forthcoming. Angel investors were just as reluctant to invest even years on. Brooks Newmark is a former MP and Angel Investor who, as a member of the Treasury Select Committee, helped establish SEIS. “We identified that despite angel investors having ample funds to invest, they still weren’t choosing to deploy this capital to support small companies, a reflection of this being at the riskier end of the investment cycle. To address this, we established SEIS as the solution, which was supported by the then Chancellor George Osborne,” he said. Ten years on, he says, the tax-advantaged scheme has transformed the landscape of seed-stage funding. “Levelling up won’t happen unless businesses are involved” SEIS funding can play a crucial role in bringing opportunities to areas that have been left behind, which is the essence of the government’s levelling up agenda. “Without this support for early-stage companies post-Covid and a strong start-up pipeline, the government will struggle to achieve its ambition to ‘level up’ the country and to become a tech and science super power it could and should be,” Newmark said. Funding like the type provided by SEIS can enable businesses to engage in levelling up in a strategic way through doing what the private sector does best, driving innovation and unlocking potential. SEIS investment into early-stage companies can be targeted to address regional inequality, tackle concentrations of deprivation, and make towns and communities attractive places to live, work and visit. As a new report published by Business in the Community (BITC) concludes, levelling up won’t happen unless businesses are involved. “Levelling up funding needs to be flexible, long-term, localised and aligned with the levelling up missions to maximise the engagement of business and deliver transformative change,” says the report. SEIS funding can be a solution.
Capital Gains Tax reliefs
Reinvestment relief, where a gain arising on a disposal of any asset, where certain criteria are met, is reinvested in shares in a company on which you get SEIS Income Tax relief Disposal relief, where shares in a SEIS company are disposed of after having been held for three years and certain criteria are met
There are two Capital Gains Tax reliefs within the SEIS:
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ach year, publications such as CB Insights run research reports on the postmortem of failed start-ups, trying to give those heading into battle a better chance of survival. At Nova we are obsessed about this type of data. Our business model is built upon it and designed to address these key reasons for failure in the hope we can mitigate some - or all of it, to the benefit of both the founder and underlying investors. Last year, in their 2021 report, for the first time CB Insights had “Running out of cash” as the number one reason why ventures are failing. This is not due to the business itself being a poor investment, rather the company just failed to raise its next round in the required timeframe. They simply ran out of oxygen. Interestingly, as we enter a period of downturn and economic uncertainty the question at the top of all journalists list is “how will this current climate affect your portfolio” the simple answer is it won't, seed stage company failures and market downturns are not correlated. Arguably it is often the opposite. During an economic crisis, history tends to repeat itself as some of the best, most valuable and transformational companies are started. Instead, the biggest threat to seed stage ventures when this sort of rhetoric starts is investors believing there is a correlation and so retreating from the asset class and reducing the amount they invest. Cash is the oxygen of all pre-revenue seed stage start-ups and the biggest risk is a reduction of free cash in the market So its positive, that in the Mini budget which was subsequently reconfirmed a few weeks later in the emergency budget, the government have clearly stated their backing to both the EIS and SEIS schemes, with the latter getting a boost to how much money each company can receive under SEIS (from £150k to £300k) as well as an increase on the individual investors allowances from £100k per year to £200k per year. However, for both sides of the table to benefit fully from these generous increases, there needs to be a balance between supply and demand. Supply being ventures looking to raise through SEIS and demand being investors looking to use the scheme to invest their funds. Each year, HMRC issues data based on the previous years SEIS and EIS results. Whilst it might not be the most riveting read, it does shine a light on this issue of supply and demand. Looking at the most recent figures, from 2020 to 2021, 2,065 companies raised a total of £175 million of funds under the SEIS scheme. An increase of 4% from the previous year. Most companies receive investments of over £50,000 through the SEIS (64% in 2020 to 2021). In 2020 to 2021, around 39% of companies raised amounts over £100,000, compared to 36% in 2019 to 2020. Moving now to investors, in 2020 to 2021, 9,195 investors claimed Income Tax relief on Self Assessment forms for the SEIS, compared to 8,545 investors in 2019 to 2020. The amount of relief claimed also slightly increased by 6%. Most investors claiming the relief invested £10,000 or less into qualifying SEIS companies (59%). Investments of over £25,000 contributed to 59% of the total amount of SEIS investment raised on which claims were made, which is slightly lower than 2019 to 2020 (63%). Taking all of this data in, if we just look at averages. The average company raised an average of £84,745 in 2020-2021. The average investor invested £19,032. Investors are not using their allowances resulting in companies not being able to utilise their allowances. Supply and demand are not aligned. Worst still, there was a potential shortfall of c. £135m (assuming every company over the period had their full allowance available). This means that you could easily assume, many ventures will have failed due to a lack of capital, as per CBI insights findings. As we look towards the future, and the increases in allowances. We can assume that next year will probably have roughly the same amount of companies as the previous 3 years, circa 2,000. But instead of a collective supply of £300m (£150k x 2000), there will be a supply of £600m (£300k x 2,000). On the demand side, we can expect more of the same, with circa £150m invested through circa 9,000 investors. This will potentially mean that for every £1 of demand, there will be £2 of supply. Going back to the #1 reason for startup failure, we run the risk of what should be a positive step forward potentially having a negative impact on the market. We are therefore left with some actions that we must take, as an SEIS and EIS fund, but also as an industry to try and reduce the potential impact. 1 - We must educate our founders that are new to the tax wrapper and fund raising in general. Each startup now has 3 years to use their allowance. However, £300k can be consumed very quickly for a company with early signs of high growth. Therefore, we may well expect a number of the most promising start-ups will be foregoing part of their SEIS allowance, so they can start to benefit from the much larger pool of EIS funds. 2 - We must educate the investors and their advisors around the benefits of SEIS. With the latest raft of tax changes, especially the change in 45p tax threshold there are now over 850,000 people in the UK that are caught in the highest tax bracket, with 600,000 of those earning over £150k a year - yet, as mentioned earlier only 9,000 people are using the tax advantaged scheme. Recent white papers, such as that by Dr Brian Morretta (link) have shown that the old perception of Venture being part of a portfolio for only the highest risk appetites is out of date. If used in the right way it should be part of most investor portfolios, giving an increase in overall returns. Further misconceptions around PI cover have also been addressed in research performed by NGC where providers of PI have argued there would not be a change to cover if proper steps are taken. (link). We have been given an opportunity by the government to make a real change to the UK Venture space and do so through one of the most generous tax incentivised schemes in the world. But if we are not careful, we run the risk of sleepwalking into the opposite, through starving ventures of the much needed investment that is so vital to seed stage, revenue start-ups.
E
Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
Alistair Marsden
director Nova Growth Capital
thought leadership
An opportunity to make a real change to the UK venture space
novagrowthcapital.co.uk 01513 174250 fund@novagrowthcapital.co.uk
The old perception of venture being part of a portfolio for only the highest risk appetites is out of date.
10
isten in because here’s the big secret about SEIS: You won’t find a more generous and efficient programme anywhere. What other investment vehicle or tax planning tool offers you 50% income tax relief, capital gains reinvestment relief, 0% inheritance tax liability and even gives loss relief protection at your marginal tax rate? All while you pay 0% capital gains on returns? SEIS’s ability to entice investors into early-stage, innovation-led businesses helped pioneer Britain’s last decade of Startup success. It elevates new Startups during crucial development stages and has made Britain dominant in key sectors of the future like disruptive technology and life sciences. Why SEIS needed to change Recently, though, something changed in the UK’s early-stage funding market: Record investment trends began to plateau. Why? Of course, the economic landscape has played its part, but rising inflation cannot be blamed alone. The uncomfortable truth is that SEIS needed updating to stay relevant for Britain’s seed funding market. Investors who wanted to invest more couldn’t. Startups who could have raised more weren’t allowed to. And financial advisers, on the whole, questioned its convenience, and relevance, for their most valuable clients given the relatively low limits put on investors. The market landscape in SEIS 2.0 But changes to the scheme from April 2023 have fundamentally altered the landscape of SEIS and shifted its risk profile for investors: Businesses will be more mature, and so will investors. It’s true that environmental factors may reduce the number of small SEIS investors who invest in single companies over the next 12 months. But allowing more mature companies to raise SEIS, and doubling the investor cap to £200,00 per year, is already establishing a new generation of larger investors being advised on SEIS Funds for the first time. SFC is Britain’s leading and largest SEIS Fund so we know a thing or two about handling new investors, but even for us the demand from IFAs in recent weeks has been unprecedented. This is SEIS 2.0. The start of a fresh revolution in Britain’s early-stage funding market. And a shift in influence from direct investors to SEIS fund management. The importance of portfolio building More influence from SEIS funds means a renewed focus on the importance of portfolio building. Especially now, with short-term headwinds impacting most markets, a portfolio of companies across a broad range of sectors helps to build resilience, spread risk and give you the best chance of delivering outsized returns. In seed investing there will inevitably be failures along the way. In fact, Pareto’s 80-20 law of value means you should expect more failures than successes. But it’s not the failures by which you judge a portfolio. It’s the strength of returns from those that succeed which matter most. Building large portfolios is the best way to deliver success from your investment. Take a recent example from SFC. We exited our investment in a software company called Cognism with a 45x return. Accounting for the tax relief benefits, the return on investment was actually closer to 100x. A single event like this one is enough to deliver the 3x returns we conservatively target for an entire tranche of our fund, yet there would be 19 other businesses in the portfolio potentially delivering additional value. Had Cognism failed, others in the portfolio are there to pick up the slack and vice versa. The importance of diversification Simply building large portfolios is not enough, though. The mix of businesses and sectors can be just as important. SFC is a seed stage specialist SEIS Fund, but we are sector agnostic because we firmly believe in investing across different growth sectors . It’s the best way to invest in the best of British innovation and to spread risk while capturing multiple growth-market potentials at once. We are the only Fund investing in every growth sector, from Life Science and MedTech, to ClimateTech, SpaceTech, Consumer Software and more. This approach was made famous by the film Moneyball, starring Brad Pitt. It portrays the Oakland A Baseball team’s incredible success from adopting a player recruitment strategy designed around diverse skills that complemented one another to create an efficient, effective and resilient whole. They weren’t reliant on just one player not getting injured or performing badly. They had given themselves every chance of success by recruiting for different eventualities. This same law applies to seed investing. A portfolio should be made up of companies that complement each other to create a powerful whole. For investors and advisers, portfolio size and diversification should be at the top of your priority list. This is the best and most sensible way to manage risk and give yourself every chance of success. Welcome to SEIS 2.0: A new dawn for Britain’s early-stage investing market and an awakening to the power of SEIS Funds.
L
Ed PrioR
Head of Investor Services SFC Capital
SEIS 2.0: Time for change and the emergence of SEIS Funds
SFCCapital.com Edp@sfccapital.com
SEIS’s ability to entice investors into early-stage, innovation-led businesses helped pioneer Britain’s last decade of startup success.
Investors will be able to invest a maximum of £200,000 per year in SEIS – previously £100,000 Companies will be able to raise SEIS within three years of trading – previotwosly 2 years Companies will be able to raise £250,000 in SEIS – previously £150,000 Companies must have less than £350,000 in gross assets – previously £200,000
What the managers say
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What are your views of the current SEIS market?
What is the most important consideration for advisers looking at recommending SEIS investment to a client in the current climate?
Venture capital returns tend to be driven by power law dynamics. This means a small proportion of companies account for the majority of fund returns. As such, advisers should be looking for reputable funds, such as Britbots, that build broad portfolios of investee companies. An investee company’s chance of success is improved by a SEIS fund’s ability to offer guidance and make introductions to potential customers and employees. This is generally much easier for sector-specific funds, such as Britbots, where knowledge of a particular investment area, in our case automation and robotics, has compounded over six years of investing in nearly 40 portfolio companies.
Dominic Keen
Managing Partner Britbots
So how are the managers feeling about the SEIS market and overall investment market conditions? Here's what they have to say.
SEIS has often been seen as the poor relation of EIS. What do you see as the key differentiators between the schemes?
Because SEIS funds are amongst the first investor funds to flow into a company, they can be perceived to be more risky than EIS funds. However, in the UK there are many grants and tax credits available to support research and development activities. Given that SEIS-qualifying businesses are often conducting cutting-edge R&D they tend to benefit disproportionately from the such programmes which can act as a free leverage for early-stage businesses. Consequently, the best companies are able to increase their share price substantially (in some cases by five times or more) between their first and second rounds of funding. In such cases, the SEIS investors’ returns dwarf those earned by the EIS investors. It should also be noted that in some early-stage financing rounds, EIS funds are investing alongside SEIS funds. This means EIS funds are often investing on the same commercial terms as SEIS funds, but with much less favourable tax benefits.
Director Nova Growth Capital
Since its inception, SEIS has been a fantastic way for investors to access high-growth potential companies at low valuations, with very significant downside risk protections in the form of tax reliefs. We think the extension of the scheme under the recent budget will add further momentum to the SEIS market. Qualifying companies will now be able to raise £250,000 under the scheme (up from £150,000), during the first three years of their existence (up from the first two years). In short, this means qualifying companies will now be able to raise larger rounds once they’ve progressed further, thereby improving the prospects for their investors.
Fred Soneya
Co-founder and Partner Haatch
We are incredibly positive in our outlook. We are really excited by the changes coming into force in the new tax year and what this will mean for investors but particularly for companies. The new increased investment limits from £150k to £250k is game-changing for companies at this early stage. Not only does it mean more money in the bank so a longer runway but also means that they are able to get further traction on the product or service before they seek their next fundraise. They will be able to really focus on building a transformative business.
This truly is a great time to invest. It is at times when the wider macro environment is facing uncertainties that some of the best companies are founded, built and grown you only need to look at examples from the last financial crisis to see examples such as Airbnb or Uber. SEIS companies are lean and nimble and can capitalise on opportunities.
Obviously, tax reliefs on offer for investors differ. But beyond that, the restrictions on how much can be invested in each company. We celebrated the change in investment limits that was announced in the mini-budget which will see the investment limits rise from £150k to £250k from the new tax year. Our latest offering is off the back of the announcement and launched the UK’s first SEIS fund under the new limits with investors' monies being fully deployed next tax year.
It really depends on what side you are looking at. From the new ventures/dealflow perspective it is doing well. The UK is an entrepreneurial nation - when things get tough we come out fighting. We also have a maturing tech focused start-up ecosystem which means our collective understanding of how to start new ventures, scale and exit is improving. When you couple these together, we are seeing more founders, with a better understanding and experience of the start-up journey, with stronger support networks. Everything you would want when investing at the SEIS stage. However, on the investor side, things are not moving as quickly. The culture in the UK compared to some of our peers is still ‘risk averse’ and therefore our ability to attract new funds as an industry is hampered. We have a growing supply of great founders, solving real world problems in emerging markets, yet the supply of funds raised each year struggles to keep up.
This is an interesting question - The "current climate" would suggest there is something negative impacting this particular asset class. The interesting thing with SEIS ventures is they are by their very nature ‘early stage’ and are therefore only in the process of solving problems, they are not growing markets. In other words, should markets contract, which often impacts most established businesses, it actually opens up an opportunity for SEIS stage ventures to double down. The most important consideration for advisers therefore is the same as during calmer periods. Go for diversification (30+), go for manager diversification (2+) and finally remove any positive or negative bias when planning that diversification.
SEIS is all about that pre-seed stage start-up, so they are riskier. However, the increased tax benefits of SEIS address that added risk. You are then left with the mechanics of the investment, whereby SEIS rounds are smaller, and company valuations are lower. This means you get a much larger amount of equity for considerably less capital. It is this reason that research done by a number of outfits suggest that you need a much smaller portfolio size if you are investing lower down the company valuation.
Investment levels remain consistent with previous years, but we expect that to increase over next 12 months as the profile of investors changes. Recession will reduce the number of smaller direct SEIS investors, but changes to the scheme from next year are already leading a new generation of larger investors, often being advised on SEIS Funds for the first time.
Always choose SEIS funds over the more risky single investment approach. When selecting a fund, prioritise those offering diverse portfolios from key innovation-led sectors. Diversity builds resilience and captures multiple growth potentials in markets known to be less affected by short-term instability. Do proper diligence when choosing a fund – look at track record, outside reference points, longevity and focus areas.
SEIS offers greater tax benefits and gives better return potentials because Startups are captured at better values. Several of our SEIS investments are now 20x, 30x, 40x the original cost. Historically, Startups tended to be very young under SEIS but upcoming rule changes will mean more mature companies qualify, thereby reducing the risk profile of SEIS investments.
Ed Prior
So how are the managers feeling about the EIS market and overall investment market conditions? Here's what they have to say.
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MICAP Data Analysis MICAP Market Snapshot SEIS: government data spotlights resilience in troubled times
MICAP Data Analysis
VCT investee companies
Fees and charges
A unicorn is a private company valued at $1 billion (£718 million) or more. Worldwide, the growth in the number of unicorns has paralleled the global funding increase for new ventures and tech startups. The term unicorn was introduced by venture capital investor, Aileen Lee, in 2013. The moniker was meant to reflect the particular attributes of a unicorn: something highly desirable, but very difficult to obtain.
The average total initial charge has been mostly on a downward trend for the past couple of years. It dropped from 3.61% in February 2020 to 3.35% in October of the same year. By December 2021, it had crept up a bit to 3.43%. Now, it has fallen back to 3.41%. Compared to last year, more fees have declined today than have gone up. We see the biggest drop (27.6%) in the average performance hurdle fee. The initial charge to investee companies has fallen by more than 10% to 2.07%. In previous analysis we noted that this fee has also been in decline for a while, perhaps a sign of improved bargaining position by investee companies. Interestingly, the decline in the initial charge to investee companies has not been mirrored by the initial charge to investors, excluding adviser fee, which has jumped 8.94%. Does this suggest that managers have largely compensated for the drop in fees to investees by pushing up the fees to investors? As can be seen from the following table, two other fees went up: the exit performance fee and the exit performance hurdle.
Average
0
40,000
80,000
120,000
Minimum subscription of open offers
100,000
60,000
20,000
Mode
Min
Median
Max
18,750
10,000
5,000
15,000
Like the other government-backed venture capital schemes, the Seed Enterprise Investment Scheme (SEIS) is intended to help increase economic growth in the UK. We go to press just as the new government of Rishi Sunak kickstarts its tenure by launching a fiscal plan centred essentially on growth. On 17 November, chancellor of the exchequer Jeremy Hunt announced a government plan that aims to prioritise “stability, growth and public services”. A stable financial system will facilitate the smooth flow of funds between investors and companies in need of funding and, by doing so, boost economic growth. Growth is the only way that businesses can earn more customers, increase profitability, and experience great opportunities for further expansion. To sustainably fund public services, again, growth is the only way forward: it will serve to raise living standards and level up the country. The Autumn Statement therefore set out measures to stabilise the economy and set the groundwork to boost growth and productivity by “investing in people, infrastructure, and innovation”. While many of the growth strategies announced by Mr Kwarteng in September have been usurped by the need to control debt levels and reinstate fiscal discipline, the government’s stated commitment to support innovative businesses should be a boon for the Seed Enterprise Investment Scheme (SEIS), which was introduced in 2012/13 to help young promising companies raise money when they are starting to trade.
Setting the stage for growth
The government created its venture capital schemes for the purpose of realising its growth ambition for the economy. These approved State aids and tools of economic growth have made important contributions to job creation and productivity growth. Growth remains the common investment strategy of the SEIS open offers. Growth investors are attracted to companies that are expected to grow faster than average. As growth is the priority, companies reinvest earnings in themselves in order to expand, in the form of new workers, equipment, and products. As a result, these companies offer higher upside potential. In SEIS, the attraction is to potentially explosive growth. Some have argued that the Autumn statement was actually rather light on growth, but SEIS could well take up the gauntlet and offer a notable growth story for the foreseeable future thanks to the extension of its reach provided by the several recent budget events.
SEIS & Government: a common strategy of growth
Most companies receive investments of over £50,000 through the SEIS (64% in 2020 to 2021). In 2020 to 2021, around 39% of companies raised amounts over £100,000, compared to 36% in 2019 to 2020.
Investment size by company
In 2020 to 2021, companies from just one sector (the Information and Communication) accounted for £72 million of investment, which makes up 41% of the amount of SEIS investment received. The next 3 largest sectors (the Professional, Scientific and Technical, the Wholesale and Retail Trade, Repairs, the Manufacturing sectors) together account for 32% of investment. The proportion of SEIS investment by industry sector in 2020 to 2021 has increased in the Information and Communication sector and decreased in the Manufacturing sector, compared to the previous year. This change in sector composition is attributable to the pandemic, whose sweeping lockdowns brought manufacturing to a standstill while at the same time speeding up the digital transformation.
Investment sectors: Information and Communication dominates
Despite the Covid-19 pandemic and its aftermath, the number of companies raising investment under SEIS remained consistent at 2,065 in 2020 to 2021. This compares to 2,070 in the previous year. However, the amount raised by these companies slightly increased by 4% to £175 million compared to £169 million in the previous year. The risk-to-capital condition introduced a requirement for growth and development to the SEIS for the first time in 2018 to 2019, and it is expected that this will have had a short-term impact before the industry adjusted.
SEIS remained popular despite the pandemic
SEIS is a great asset to the UK SME sector. If utilised correctly, it can strengthen the backbone of UK commerce, creating profitable businesses that end up being acquisition targets in the c.£50m range.
Alistair Marsden - Director, Nova Growth Capital
The SEIS open offers target an average of 328.50% return.
Proportion of investors and amount of investment, by size of investment (investment on which Income Tax relief was claimed), 2020-21
75 to 100 50 to 75 25 to 50 15 to 20 10 to 15 5 to 10 2.5 to 5 1 to 2.5 0.5 to 1 up to 0.5
INVESTORS
PROPORTION OF INVESTORS
PROPORTION OF AMOUNT INVESTED
AMOUNT OF INVESTMENT (THOUSANDS)
AMOUNT INVESTED
0%
10%
20%
5%
15%
Source: gov.uk
Proportion of SEIS investors claiming Income Tax relief and amount of investment by investment band, 2020-21
Source: HMRC
The percentage distribution of funds raised under the SEIS by investment band, 2020-21
100 to 150 50 to 100 25 to 50 10 to 25 up to 10
COMPANIES
FUNDS RAISED
PROPORTION OF COMPANIES
PROPORTION OF FUNDS RAISED
40%
60%
200 150 100 50 0
Amount of funds raised by new and old SEIS companies, 2012-13 to 2020
RAISING FUNDS FOR THE FIRST TIME
RAISING FUNDS THROUGH SUBSEQUENT ROUNDS
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
AMOUNT (£ MILLION)
2,500 2,000 1,500 1,000 500 0
250 200 150 100 50 0
NUMBER
AMOUNT OF INVESTMENT
NUMBER OF ENTERPRISES
Number of companies raising funds and amount raised, 2012-13 to 2020-21
Comparison between the proportion of funds raised under the SEIS by different industry setors, 2019-20 to 2020-21
J. Information and Communication M. Professional, Scientific and Technical G. Wholesale and Retail Trade Repairs C. Manufacturing N.Admin and Support Services; O. Public Admin, Defence and Social Services S. Other services activities; T. Households; U. Overseas I. Accommodation and Food K. Financial and Insurance Q. Health and Social Work R. Arts, Entertainemnt and Recreation P. Education H. Transport and Storage F. Construction L. Real Estate Unknown Sic2007 A. Agriculture, Forestry and Fishing; B. Mining and Quarrying D. Electricity, Gas, Steam and Air Conditioning; E. Water, Sewerage and Waste
0.0% 10.0% 20.0% 30.0% 40.0%
2019-20
2020-21
The much-awaited fiscal statement came in an environment where growth is hard to come by and taxes are rising, which makes SEIS even more attractive. There are currently 9 open SEIS offers, just over 12% of the 74 SEISs listed in the MICAP database. SEIS remains a small sector. Perhaps greater interest generated by high inflation and tax rises could grow the sector to offer more opportunity for the right investors and more funding for the right companies. SEIS offers great tax efficient benefits to investors in return for investment in small and early-stage startup businesses in the UK. For every £1 an investor puts into SEIS, they save up to 64p in income and capital gains tax. They also qualify for IHT exemption, potentially saving up to another 40p per £1 invested.
Open offers
SEIS is intended to recognise the particular difficulties which very early-stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing Enterprise Investment Scheme (EIS). While admittedly riskier, these new businesses offer the potential for some of the highest returns realised in the market. The current SEIS open offers target an average of 328.50% return, with 250% being the most common target return. The corrosive effect of inflation means that, over time, a penny could be worth less than when it was first dropped into the piggy bank. So, the high returns targeted by the open SEIS offers could potentially protect a portfolio against the threat of inflation.
Target returns
SEIS is an initiative designed to encourage investors to back high-growth and start-up businesses. The current open offers target on average 8.33 investee companies as part of their portfolio offering, with 10 being the most common target number. Diversification of this nature is aimed at spreading the risk with the intention of the success of some outweighing the failure of others.
Investee Companies
In conformity with their mandate, the open SEIS offers invest in early-stage companies (60%) and seed-stage businesses (40%). MICAP defines the former as, “A post revenue company that is yet to become profitable or has only been profitable for less than two years” and the latter as, “A company at its setup stage with an idea for a product or service, perhaps engaging in R&D.” The high risk profile is immediately clear, but it’s interesting that there is a fairly even split of focus from current SEIS offers. Diversification across these maturities may be a way to offset some of the very earliest, seed stage risk, while retaining access to what are likely to be lower equity prices. Introduced for the purpose of helping small, early-stage companies raise funds through individual investors, the SEIS scheme has been very successful in its original aim.
Investee company types
In addition to investing in several different companies, the open SEIS offers also invest in several different industries, sectors and risk profiles to create a diversified portfolio. This diversification helps to decrease non-systemic, or company-specific, risk by ensuring that no single company has too much influence over the value of the holdings. For the open SEIS offers, 54.5% of the market is made of technology companies. Amid a turbulent start to the year for global markets and early signs of a pullback in venture capital, the UK tech ecosystem has held up remarkably well in 2022. So, these SEIS offers are capitalising on a dynamic sector full of promise. While London is the most important tech hub in Europe, the UK is also home to a number of other burgeoning tech hubs that compete on the global stage, cities like Oxford, Bristol, Manchester and Cambridge. In second place is the General Enterprise sector, accounting for 27.3% of the market. The large variety of businesses in this sector can provide significant diversification, which is essential during inflation to achieve long-term returns in a risk-adjusted manner. Pharmaceuticals & Biotechnology, another high-growth area, accounts for 18.2% of the market for the open SEIS offers. In this sector too, the UK occupies an enviable place. With the introduction of its Life Sciences Vision, the government hopes to further the country’s position as a global leader in the life sciences sector. The open offers are poised to profit from life sciences, which the government predicts “will be one of the great drivers of growth in the twenty-first century.” During inflationary periods, experts suggest making the most of your returns by investing in assets that have historically delivered returns that outpace the rate of inflation.
Investment sectors
There is no income tax relief for dividend income arising from investments in SEIS shares. So, just as is the case with EIS, any returns from SEIS will be mostly in the form of capital growth, rather than dividends. The following table shows the target growth for the current open SEIS offers.
Target dividend
OPEN OFFERS
average mode minimum median maximum
328.50% 250.00% 172.00% 250.00% 1000.00%
Target growth
Given that there have been SEIS investee exits at 100x and above, before SEIS tax reliefs, even the maximum target return here could be viewed as reasonable. Clearly, there are no guarantees of that type of success, although SEIS investment managers are very much focused on this sort of potential.
The following table shows the averages of the various fees and charges relevant to the SEIS sector. Needless to say, no investor pays all the fees listed. Individual SEIS companies may not levy any explicit charge at all. Instead, they may deduct administrative and other fees as part of the costs of running the business. In relative terms, the fees aren’t cheap, but the possibilities are endless.
Fees & charges
Average SEIS charges
average charges
Initial Charge to Investors Excluding Adviser Fee Initial Charge to Investee Company Total Initial Charge AMC Charged to Investor AMC Charged to Investee Company AMC Annual Performance Fee Exit Performance Fee Annual Per Hurdle Exit Performance Hurdle Initial Deal Fee Exit Deal Fee Annual Admin Charge
1.21% 3.95% 4.83% 0.33% 1.55% 1.75% 0.00% 23.33% 0.00% 121.67% 0.28% 0.11% 0.11%
AVERAGE
For this section, we rely on MICAP data to help give you a snapshot of the size of the market, as well as the fees and charges you can expect to see from SEIS offers. All data is accurate as of 18 November 2022.
Market snapshot
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The VCT fundraising season got into full swing in September and was a time of several rounds of impressive fundraising. During the pandemic and at a time when the UK’s young companies have needed it most, the VCT sector has raised £685 million for investment in small, innovative UK businesses. Where reported, open VCT offers target an average £1,000,000 in fundraising, less than the historical average minimum fundraise of £2,400,000. Whatever the reason, lower fundraising targets bring in more investors. That is what happened last year, when a 7.5% drop from the previous year allowed the most popular offers to be filled well in advance of the end of the tax year. Overall, 13 of the year’s 22 offers (comprising 20 of the 30 individual VCTs raising funds) were fully subscribed before 5 April 2021. Much of the investment went to support healthcare, science and technology businesses which have helped in the battle against coronavirus, said the AIC. “It demonstrates that demand for VCTs and the benefits they bring investors remains high at an extremely difficult time,” said former AIC boss Ian Sayers.
Leveraging its market overview position, MICAP is able to offer IFAs exclusive insight into the wider SEIS market. As a sister company of MICAP, we are able to offer the following snapshot of data, which is updated in real time, and pulled from the MICAP website.
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Leveraging its market overview position, MICAP is able to offer IFAs exclusive insight into the wider EIS market. As a sister company of MICAP, we are able to offer the following snapshot of data, which is updated in real time, and pulled from the MICAP website.
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SEIS: government data spotlights resilience in troubled times
15
The Seed Enterprise Investment Scheme (SEIS) has shown a remarkable ability to withstand adversity and bounce back from difficult events, and the current HMRC data mirror this quality. The latest SEIS investment data from the government are HMRC’s first estimates for 2020 to 2021. The statistics also include figures for 2018 to 2019 and 2019 to 2020, ‘with small revisions and minor updates, arising from the receipt of a small number of further EIS1 and SEIS1 forms for these years.’
There was an increase in the number of investors claiming income tax relief on self-assessment forms for the SEIS in 2020 to 2021. It jumped to 9,195 investors, compared to 8,545 in 2019 to 2020. The increase is remarkable because it happened at the height of the pandemic; SEIS appetite remained strong even though EIS investing was not quite as resilient. The amount of relief claimed also slightly increased by 6% in line with the increase in funds raised by companies in 2020 to 2021. Most investors claiming the relief invested £10,000 or less into qualifying SEIS companies (59%). Investments of over £25,000 contributed 59% of the total amount of SEIS investment raised on which claims were made, which is slightly lower than 2019 to 2020 (63%). What the above data shows is a significant appetite among smaller investors for the tax reliefs on offer and the potential high growth. The figures also highlight the fact that SEIS is not just for ultra high-net individuals. Although, anyone invested at this risk level should have either the experience to understand the risks involved or have worked with an IFA to ensure suitability has been carefully considered.
More investors claimed income tax relief under SEIS
In 2020 to 2021, companies from just one sector (Information and Communication) accounted for £72 million of investment, which makes up 41% of the amount of SEIS investment received. The next three largest sectors (Professional, Scientific and Technical, Wholesale and Retail Trade, Repairs, Manufacturing sectors) together account for 32% of investment. The proportion of SEIS investment by industry sector in 2020 to 2021 has increased in the Information and Communication sector and decreased in the Manufacturing sector, compared to the previous year. This change in sector composition is attributable to the pandemic, whose sweeping lockdowns brought manufacturing to a standstill while at the same time speeding up the digital transformation.
The number of new companies raising SEIS funds in tax year 2020 to 2021 increased by around 3% from the previous year, and the amount raised by these companies also grew by 6%. This data might suggest that the types of CEOs and companies that seek out SEIS funding, some of which could well have been created since the start of the pandemic, were not put off by conditions at that time. Indeed, some of the businesses set up during the pandemic may well have done so to take advantage of a new opportunity or ideas spurned by the virus and knowing that funding through SEIS would assist. The figures also seem to indicate that SEIS investment managers can react with speed, which can be crucial to investees and to be able to take advantage of the best deals.
More new companies raised more SEIS funds
What is disposal relief
If disposal relief is due, you will not have to pay capital gains tax on a gain on your disposal of SEIS shares. The following conditions have to be met:
you must have held the SEIS shares for at least three years you must have received SEIS Income Tax relief in full on the whole of your subscription for the SEIS shares and none of the Income Tax relief must have been withdrawn
Companies that can use the scheme
A company can use the scheme if it:
The investee company and any of its subsidiaries must:
carries out a new qualifying trade is established in the UK is not trading on a recognised stock exchange at the time of the share issue has no arrangements to become a quoted company or a subsidiary of one at the time of the share issue does not control another company unless that company is a qualifying subsidiary has not been controlled by another company since the date of incorporation
not have gross assets over £350,000 (from April 2023) when the shares are issued not be a member of a partnership have less than 25 full-time equivalent employees in total when the shares are issued
If a company has received investment through the Enterprise Investment Scheme (EIS) or from a venture capital trust, you cannot use SEIS.
Innovation-led Startups give investors more upside potential and better protection against short-term headwinds because they are nimble and more resilient to outside forces.
Ed Prior - Head of Investor Services, SFC Capital
The patient capital gap: Early-stage startups & the struggle to get funding
A new study has identified a £1.5 trillion growth funding gap that the UK needs to close to lift the economy out of stagnation and compete on a global scale with countries like the US.
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This ‘funding gap’ — the amount of capital that local startups would ideally want to raise from local investors but can't — equates to £75 billion a year for the next twenty years, according to the new report. The UK's GDP has been on a downward trajectory in recent months and a recession is becoming more of a certainty globally, making the need to find new sources of growth more urgent. Zurich-based VC firm Lakestar, which conducted the study, argues that unlocking new pools of capital in the UK would ensure an economic transformation similar to that achieved in the 1980s. But, as things stand, the UK is at risk of falling behind other global economies due to a lack of growth funding, especially for tech companies, the researchers note. Already, “Hong Kong and Singapore have almost caught up with London as an attractive financial centre, with Dubai making great strides.” It’s true that the UK still has the highest number of unicorns in Europe. However, there is a substantial financing gap that hinders the UK’s ability to commercialise first class innovation, scale the ventures, and build globally competitive businesses. The result is that none of today’s top ten UK companies was founded or truly scaled up in the last 20 years. This is very different to the dynamism of the US where seven of the ten were created in the last two decades. “When UK unicorns need to raise financing to scale globally, they almost always turn to foreign investors for investment. So, UK and European superstars are largely US-governed with an increasing dependence on US infrastructure,” says the report. "The next wave of economic growth cannot replicate the winning formula of the past. New sources of growth are required.”
Early-stage funding gap and what it means
The early investment that the Seed Enterprise Investment Scheme (SEIS) provides to a business is normally used to facilitate business growth and stimulate income generation. High growth often requires high capital in order to sustain the growth. SEIS funding can provide new businesses with a competitive advantage, especially when they are navigating unpredictable business territories. SEIS investment is mutually beneficial for both business and investors. The company receives essential capital as it begins trading, and the investor acquires some ownership of the business. SEIS investors, who choose to accompany a business from the earliest stage in its life cycle, are looking for a healthy return on their investment. For the economy as a whole, the importance of such investments is obvious. For many SEIS investees, which have much potential but no revenue yet, failing to raise capital simply means the end of the startup. This would mean that the country would forego the new products or services that would have been created by these new businesses and the resulting new wealth from the new markets. It also means that potential earnings due to these entrepreneurial businesses, which help boost national income, are lost. These proceeds could have added to the government’s tax revenue and spending, resulting in investment in struggling sectors and human capital.
quote
- name surname, job title, company name
UK: highest business startup rate Vs low business development rate: Opportunities for investors
The UK economy is suffering from low productivity and poor investment. This has weighed heavily on GDP growth since the 2008 financial crisis, with output per worker stagnating and productivity remaining among the lowest of any advanced economy. Increasing productivity requires investment in productive enterprise. However, investment in the UK, as a proportion of domestic output, has fallen from about a quarter of GDP in 1990, when it was broadly in line with that of other developed economies, to just over 16%. It is now well below that of most advanced economies. One significant cause of this is that lending to business by banks, as a proportion of UK domestic lending, has declined from 31% in 1988, to eight per cent in 2019, just before the pandemic. As the proportion of lending to business has decreased, lending to individuals and real estate lending – neither of which are a type of investment which will help to boost long-term productivity – have increased. Lending to business accounts for only 5% of UK banking assets compared with 14% of eurozone banking assets. This means that despite the UK having the highest business start-up rate in Europe and world-leading research, it has performed badly when it comes to growing and developing businesses. In the UK only 3% of start-ups grow to over 10 employees over a three-year period, putting it among the worst performers in the OECD. This is in part driven by the market failure described as the patient capital gap, or finance gap, which sees banks failing to invest in small and medium-sized enterprises (SMEs), even when there is demand from creditworthy businesses, due to access to easier returns from alternative investments. It's clear that this leaves a broad range of opportunities open to SEIS investors. The risk premium of very early stage businesses means it is unattractive to many mainstream lenders, particularly in economically challenging times. But, the tax advantages, including substantial loss relief, combined with the expertise of specifialist SEIS investment managers to identify the highest growth potential in the best deals can be particularly attractive to the right investors. What's more, it's generally the case that the earlier the investment, the cheaper the equity, setting up SEIS investors for the prospect of a very steep growth curve. Having said that, while very fast growth is absolutely possible, investors should remember that SEIS is generally not a short term investment; where a company is at a point very close to its inception, it may have an investment horizon of five to ten years or more, before it has developed enough to prove its value sufficiently to third parties willing to acquire it. Since realisation of SEIS growth is only available at exit, this is an important point to take note of. The government has recognised the lack of financing and its impacts in its industrial strategy and has once again called for ‘a review of what actions could be most effective in improving productivity and growth in SMEs’. The Treasury also looked at how to increase the supply of capital available to help grow innovative firms, as part of its 2017 Patient Capital Review. The consultation paper for this notes that ‘a lack of supply of appropriate capital appears to be one important factor that contributes to fewer firms scaling up’.
Long-term investment is key to closing the funding gap
Despite these challenges, the picture is not entirely bleak and there are encouraging episodes in the UK’s funding story. Following the publication of the Small Business Equity Tracker 2022 by the British Business Bank, Christine Hockley, managing director, Funds, at British Patient Capital, said: “In a record year for UK equity investment in the UK’s smaller businesses, the British Business Bank’s Small Business Equity Tracker highlights British Patient Capital’s contribution to a remarkable £10.8bn invested in growth stage companies in 2021.” She added that British Patient Capital’s growth-stage deals averaged £32.9 million in size over the period – considerably larger than the overall equity and VC/PE market, and demonstrating a successful focus on supporting later-stage growth companies. British Patient Capital was also among the biggest contributors of deals to academic spin-out companies, at 24% of the total Bank deals. However, the Small Business Equity Tracker also shows that the UK has a lower proportion of VC deals and investment going into deep tech and R&D-intensive companies than many other countries, and that this is the primary cause of the overall UK-US VC funding gap. “Whether leading the charge on ground-breaking gene therapy, driving the global race to develop and deploy vaccines, or developing quantum computing capability that will enable life-changing discoveries, these sectors are not only central to addressing global challenges, but are critical to the UK’s own prosperity,” Hockley said.
Source: Lakestar
£1.5 trillion of growth financing required to fuel the next wave of UK wealth
2020
2040
6
4-5
<1
5-7
£6-7tn
£10-11tn
New growth companies
Traditional incumbents/ Other
2-3%
Annual economic growth
FUELLED BY
>10k High growth companies
100 Champions/ Superstars
£150m Average financing per company
CREATING
£5-7tn Value
£1-1.5tn Revenue
>3m New jobs
Total growth financing required by 2040 translating to an annual financing need up to £75bn
£1.5 trillion
UK's top companies today dominated by the same companies as in the 1980s
MARKET CAPITALIZATION OF TOP 10 PUBLIC COMPANIES £ trillion
0.8
0.7
1.5
9.1
2021
2000
None of the top 10
companies built or scaled after 2000
7 of the top 10
1980
1990
2010
+3.1%
+2.3%
+0.6%
Incremental value created
Value created in 1980
UK growth relative to Europe
Historically, 1980s with largest value creation compared to the rest of Europe
REAL GDP €trillion (adjusted to purchase power)
+1.0pp
-0.5pp
-0.8pp
+0.1pp
+1.5pp
3x
4x
4,000£
21,300£
1,400£
5,100£
3x lower growth financing Total growth financing per capita, 2000-2021
4x lowervalue creation Value creation of growth companies per capita, 2000-2-21
0.52x
0.51x
0.45x
0.37x
Science publications per 1k inhabitants
World-class patents per 1k inhabitants
Entrepreneurship ratio percent
Growth investments GBP per capita
Unicorns per 1k inhabitants
FUNDAMENTAL RESEARCH
COMMERCIALIZATION
SCALING
The gap to the U.S. in numbers
On par in research, but losing in commercial success Key indicatiors, indexed to U.S. level
Despite the UK having the highest business start-up rate in Europe and world-leading research, it has performed badly when it comes to growing and developing businesses.
SEIS qualifying trades
An investee company must use the investment for a qualifying trade. Most trades will qualify, including any research and development which will lead to a qualifying trade. However, the company may not qualify if more than 20% of its trade includes things like:
coal or steel production farming or market gardening leasing activities legal or financial services property development running a hotel running a nursing home production of gas or other fuel exporting electricity banking, insurance, debt or financing services
Business type
Micro small medium large
95.5% 3.9% 0.6% 0.1%
Size (number of employees)
Amount
% of all businesses
Turnover (millions)
1-9 10-49 50-249 250+
5,337,075 210,550 35,620 7,655
636,893 649,883 720,540 2,139,334
2018 2021
0% 20% 40% 60% 80% 100%
36%
SMEs have sought external finance
On average, 56% of SME's have sought external finance in the last three years, as found by the British Bank 2021 SME Finance survey
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I
Tom Wilde
Partner Shoosmiths
Do the Government changes to SEIS investment limits go far enough?
1
shoosmiths.co.uk (0) 3700 868 713 tom.wilde@shoosmiths.co.uk
n the now infamous mini-budget in September, the then Chancellor Kwasi Kwarteng announced a number of extensions to the Seed Enterprise Investment Scheme (SEIS) due to come into effect in April 2023. First, the amount of SEIS investment a company can raise would increase from £150,000 to £250,000, with the limit for the amount an individual investor could invest annually under SEIS doubling from £100,000 to £200,000. In addition, more companies would become eligible to raise SEIS investment as the trading time limit would be extended from two to three years and the gross assets limit would be increased from £200,000 to £350,000. Although nearly all the other tax measures announced in that ill-fated statement have been reversed by the current Chancellor Jeremy Hunt, it was announced in the Autumn Statement that the SEIS changes will be preserved and come into force in April 2023 as originally planned – a rare survivor of the Kwarteng/Truss era. It is likely that the reason these changes remain unscathed is two-fold. First, the Government remains (and wants to be seen as remaining) committed to, in the words of the Autumn Statement, “ensuring cutting-edge innovative firms have access to finance to invest and grow”. Second, maintaining these extensions comes at a relatively low cost to the Exchequer. The Government’s own figures contained in the Autumn Statement anticipate that this won’t cost the Government anything in 2023-24, with the additional costs thereafter being relatively small at £25 million in 2024-25 and £20 million in each of 2025-26, 2026-27 and 2027-28. Whilst it is worthwhile considering whether the changes in the SEIS investment limits do go far enough, it should be acknowledged that these extensions not being reversed is in itself a great result given the current backdrop of U-turns and the giant hole in the public finances. However, if the changes are considered in isolation without reference to the current economic climate, one can make a good argument that the changes do not go far enough. It must be remembered that the SEIS legislation is every bit as complex as its big brother, the Enterprise Investment Scheme where an individual investor can subject to certain conditions invest up to £2 million in any one tax year and a company can raise up to £20 million in its lifetime if it is seen as “knowledge intensive”. There is a strong argument that the complexity of the SEIS is disproportionate to the amounts that can be raised and the tax relief which can be claimed by investors, and this author’s view is that the increases do not change that. Whilst in percentage terms the increases in limits look impressive (for example, a 66.67% increase in the amount a company can raise), the actual amounts involved are relatively small. Will a company being able to raise an additional £100,000 under SEIS in its lifetime, or an investor being able to invest an additional £100,000 annually under SEIS make enough of a difference to drive a large increase in SEIS investment? We will see but I think it’s doubtful. For those investors who already invest larger amounts, or companies who are looking to raise larger rounds, an additional bit of SEIS relief might be a ‘nice to have’ but it’s unlikely to be a game-changer. The extensions will no doubt benefit some companies who are looking to raise around £250,000 as it means their whole investment round could fall within SEIS and the additional complexities of raising funds under both SEIS and EIS (eg the need for tranched completions) will fall away. It will also benefit those companies who just fall outside the existing gross assets limit and the trading time limit. But is this a missed opportunity? Arguably so - an extension of the amount a company can raise to £500,000 with a similar uplift in the amount an individual investor can invest under SEIS would, in my view, have been much more successful in attracting investors to the scheme, and enabling companies to raise significantly more funds under SEIS. But suggesting such increases were achievable or realistic given the economic chaos of the past few months is, quite frankly, pie in the sky (or should that be scorpions in the jungle). Against that backdrop, any increase in limits is hugely welcome. So, whilst a good argument can be made that in theory the changes do not go far enough, in reality we must say that they do…for now.
Will a company being able to raise an additional £100,000 under SEIS in its lifetime, or an investor being able to invest an additional £100,000 annually under SEIS make enough of a difference to drive a large increase in SEIS investment?
Britbots Haatch Ventures Nova Growth Capital SFC Capital Comparison table
Head of Marketing & Investor Relations
britbots.com dominic@britbots.com
Manager video content
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Blackfinch Mercia Oxford Capital Worth Capital Comparison Table
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Opening Statement Acknowledgements and thanks Key Findings
gordon pugh
Executive Business Development Manager
Jessica Fox
haatch.com 07958 213122 jessica@haatch.com
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22
Manager Name Year Founded AUM (in total) / AUM (SEIS) Description of offer Launch Date Underlying assets Target no. of holdings Target return Target FundraiseR Investment Objective Investment horizon Minimum Investment Inital Fee AMC Other Fees (including those charged to investees
SEIS solutions comparison
Offer Name Year Founded AUM (total)/AUM (EIS) Description of offer Launch Date Underlying assets Target no. of holdings Target annual return Target FundraiseR Investment Objective Investment horizon Minimum Investment Inital Fee AMC Other Fees
Nova Growth Capital 2018 £5.9M The Nova Cofoundery SEIS & EIS Fund invests into early stage tech driven companies. It's dealflow is exclusively investing into startups generated from the Nova Cofoundery - a venture studio. The venture studio supports founders and their start-ups through the crucial years, with the aim to reduce the key risks of failure. 2018 - Technology Fund / Sector Agnostic 40 companies within the Nova Cofoundery SEIS & EIS Fund 10 companies The targeted return on yr 3 is £1.72 for each £1 invested. This does not include any SEIS/EIS tax reliefs. Open ended ever green structured. Growth Typical industry investment horizon in is 6-10 years. Nova will aim to exit in year 6 where possible. £10,000 No entry fee to investors No entry fee to investors PERFORMANCE FEES: 20% performance fee taken upon exit. Hurdle rate is £1.50 to the £1 invested. Nova charges its fees to the portfolio companies 5% initial fee and 2% AMC.
Haatch Ventures Haatch Ventures in 2018, Haatch Angel in 2013 Total AuM £34m, Total SEIS AuM £6m The Haatch SEIS Fund offers investors access to a portfolio of 10-15 digital transformation companies at the very earliest stage. The companies wil use the capital to go-to-market and importantly begin to commercialise their business. The current offering was the Uk's first SEIS fund that launched under the new SEIS limits meaning investors can invest up to £200k as monies will be deployed in the 2023/24 tax year. Haatch is targeting a 10x return on monies invested. Originally launched SEIS Funds in 2021. We are on the 4th SEIS Fund 10-15 investee companies 10x return on monies invested across the fund £4m See target return above. We are investing in growth focused digital transformation businesses that are targeting stellar returns for investors 5-10 years £10,000 10% N/A - we do not charge an ongoing annual management charge We do not charge portfolio companies any fees. We charge a simple investor fee model of 10% initial, no ongoing annual management fees and then a performance fee on exit of 25% at 1-5x and 30% at 5x+.
Predominantly SEIS-qualifying companies The British Robotics Start-Up Fund 2017 Evergreen (next close at end-December 2022) At least 60% SEIS-qualifying (with the remainder EIS-qualifying) 12+ 20% annual growth £3 million each year Risk - balanced capital growth, tax optimisation 6-8 years £10,000 0 0
EIS-qualifying companies The British Robotics Scale-Up Fund 2019 Evergreen (next close at end-December 2022) EIS-qualifying (comprising of top-performers from the Start-Up Fund) 10+ 20% annual growth £2 million each year Risk - balanced capital growth, tax optimisation 4-6 years £10,000 0 0
£13 million (all SEIS & EIS) Over the past six years, the British Robotics funds have invested in 33 companies, backing entrepreneurs creating productivity-boosting technologies, particularly in the areas of robotics, artificial intelligence and automation. The Fund will continue this technology focus and seek to capitalise on major global trends such as shortages of skilled labour, the transition away from fossil fuels, supply chain inefficiencies and the depletion of natural resources.
4.9% fee to company & 25% performance fee once capital has been returned
SFC Capital 2012 £100m+ Britain's leading SEIS Fund Manager with an EIS Fund and Angel Investor Network alongside. Winner of Best SEIS Fund Manager 2020, 2021, 2022. 2014 £60m c. 20 companies per tranche 25% £3.5m per tranche Deliver 3x returns to investors over the lifetime of a fund 7 years £10,000 Nil Nil Investor fee: 30% performance fee above £1.25 hurdle rate Investee companies fees: 6.5% initial / 1% annual (capped at 3.5% for the life of the investment)"
manager Name Year Founded AUM (total)/AUM (EIS) Description of offer Launch Date Underlying assets Target no. of holdings Target annual return Target Fundraise Investment Objective Investment horizon Minimum Investment Inital Fee AMC Other Fees
EIS solutions comparison
manager Name Year Founded AUM (total)/AUM (EIS) Description of offer Launch Date Underlying assets Target no. of holdings Target annual return Target Fundraise Investment Objective Investment horizon Minimum Investment Inital Fee AMC Other Fees (including those charged to investees
The recent Autumn Statement, delivered by the Chancellor, Jeremy Hunt, has not given the UK’s 5.5 million small businesses a huge amount of confidence in the Government’s commitment to sparking the economic growth we as a country need in order to avoid recession.
We pointed in particular to the cut to R&D tax credits for small and medium sized businesses as an egregious error, one that will have a negative impact on R&D levels in the UK which will compound over time, making us poorer and less productive in the long run. The decision to cut R&D tax credits came just before ONS figures were released showing that businesses with fewer than 250 employees contributed £24.3 billion in investment in R&D last year, a higher total than for companies with more than 250 employees, who contributed £22.6 billion. Innovation provides the greatest contribution to economic growth in the long term, and increasing R&D investment has long been the 'holy grail' of attempts to boost productivity. However, the full benefits of innovation rarely accrue to the firms involved, and R&D projects are high-risk and notoriously difficult to fund, especially for small firms. The UK’s tax credit policy has been a successful attempt to redress this imbalance, until the Chancellor’s decision to slash the funding just a few weeks into his new job – a decision, more likely than not, that was made using out-of-date figures and assumptions. It is obvious that the Government needs to think again and reverse course before this change is introduced in less than six months’ time, driving a coach and horses through small businesses’ plans to hire skilled staff, apply for funding, look for collaboration partners, and build something new.
Small innovative companies are still great bets for the future – despite Autumn Statement R&D body blow
EIS thresholds increased
The Seed Enterprise Investment Scheme (SEIS) is a valuable scheme for small, innovative firms, allowing them to raise money more easily from investors. It is therefore welcome that the Autumn Statement contained in its small print a commitment to increase the amount that businesses can receive through the scheme, which will go up from its current level of £150,000 to £250,000 next April. Businesses using the scheme will be able to have gross assets of up to £350,000, up from the current limit of £200,000, and will be eligible if they have up to three years of trading history, instead of just two. At time of writing, it was unclear whether the previously-announced plan to close SEIS in 2026 is going ahead, or whether former Chancellor Kwasi Kwarteng’s pledge to keep the scheme going past 2026, as called for by FSB and mentioned in the September mini-Budget, has been retained. The R&D tax credit scheme had 89,300 applications worth £6.6 billion in 2020/21, nearly 79,000 of them from SMEs, and supported R&D expenditure of £38.1 billion. SEIS, by contrast, was used by 2,065 companies, who collectively raised £175 million through it. Small businesses and start-ups would also welcome improvements to the process used to participate in SEIS and in the Enterprise Investment Scheme; at present, these systems are too administratively arduous and slow, and for relatively small initial investments (e.g. such as those that may be needed for knowledge-intensive firms at the very start of their life cycles), it is possible that the complexity of the relief schemes presents a barrier.
Increasing knowledge of R&D schemes
open to them, our research has found. Across all small businesses, only 41% were aware of the availability of R&D tax credits, and only 12% had applied for the relief in the previous two years. It is still our position that Government awareness campaigns to help small firms grasp the range of help available to them through the tax system if they engage in R&D would be welcome. Small businesses pay their tax liabilities and should be receiving their fair share of reliefs. The complexity of the tax system hinders this process.
Joined-up thinking needed
technology and the proliferation of high tech start-ups which have blossomed over that time. To turn our back on that success is wrong. The Prime Minister’s recent call to “harness innovation to drive economic growth” is quite the opposite of what he and his Chancellor proposed in the Autumn Statement, by slashing support for innovative but under-resourced small businesses with less than six months’ notice. For everyone’s sake, we call on the Government to reconsider, and to make the R&D tax system a realistic and helpful option for small firms with a big idea.
Tina McKenzie
Policy and Advocacy Chair, Federation of Small Businesses (FSB)
S
24
Chancellor Jeremy Hunt gave his long-awaited Autumn Statement on 17 November, a plan that promises ‘a shallower downturn’ and ‘higher long-term growth’ among other positive outcomes for the British economy.
The fiscal statement included several announcements impacting businesses, although the majority were largely changes to rates and thresholds rather than radical new measures. Coming in the wake of great confusion that sent markets into a tailspin, the announcements do provide a measure of stability and certainty for businesses. “Our priorities are stability, growth, and public services,” said the chancellor as the country battles high inflation and a recession that started in Q3 2022, according to the Office for Budget Responsibility (OBR). The new chancellor has reversed nearly all the measures in the Growth Plan 2022 by his predecessor. Jeremy Hunt sought to position his policies in the old tradition of Conservative orthodoxy: spurring innovation, getting people into work, making sure the country pays its way and seizing the ‘post-Brexit freedoms’ to stimulate growth. “The United Kingdom will always pay its way,” he said.
The Autumn Statement 2022: tax increases, spending cuts and fiscal interventions to balance the government's finances
Source: Bank of England
We are also interested in any problems the tax reliefs may cause for the tax system, and the scope for reform.
Rt. Hon. Mel Stride MP - Chair of the Treasury Committee
Economic outlook: local impact of a global crisis
The Autumn Statement comes as “The global outlook has deteriorated markedly throughout 2022 amid high inflation, aggressive monetary tightening, and uncertainties from both the war in Ukraine and the lingering pandemic.” (IMF) The UK has not escaped the global predicament, as evident from the central bank’s latest quarterly Monetary Policy Report: “Inflation is too high. High energy, food and other bills are hitting people hard,” the Bank of England says in its Monetary Policy Report - November 2022. The latest government data shows UK GDP was still 0.4% below its pre-pandemic level in Q3 2022. Office for Budget Responsibility (OBR) expects overall UK GDP growth of 4.2% this year, largely due to strong growth in the second half of 2021. But GDP will fall in 2023 by 1.4%, before rising by 1.3%, 2.6%, and 2.7% in the following three years. The provider of independent analysis of economic and budgetary issues also expects a rise in unemployment from 3.6% today to 4.9% in 2024 before falling to 4.1%. Output is also expected to see a peak-to trough fall of 2.1% in the year from Q3 2022. On the inflation front, the OBR now expects price rises to peak at 11.1% in Q4 2022, compared with the peak of 8.7% in its March forecast. Inflation will then fall over 2023 to 3.8% in Q4 2023 and to fall below the 2% target by Q2 2024. Between Q3 2024 and Q2 2026, inflation is expected to turn negative as energy and food prices fall. The independent forecaster estimates that government support announced this year, including the Energy Price Guarantee (EPG) and cost-of-living payments, will offset half of the fall in household incomes in 2022-23. The OBR also says that the EPG and other cost-of-living support will boost private demand over the winter, making the recession 1.1 percentage points shallower overall.
Following are some key takeaways from the fiscal statement that could impact small businesses in general and SEIS in particular.
What does it mean for SEIS?
The government’s plan to tackle the cost-of-living crisis and rebuild the UK economy will not change headline tax rates, but will tinker with thresholds and allowances. Faced with a recession driven by high inflation, the government has opted for a balancing act of tackling the inflation to reduce the cost of living, granting energy support, and providing targeted support to growth areas.
Income tax personal allowance frozen for a further two years to April 2028
The Income tax personal allowance will remain at £12,570 from April 2023 until April 2028. By freezing the personal allowance, the tax take will rise as people’s incomes rise with inflation. More people will pay tax—and more people will pay tax at higher rates as a result. This is because people’s personal allowance will not increase even as they earn more over the years. As a result, they will move to a higher tax bracket, and therefore keep less of their money. Frozen income tax allowances typically benefit SEIS, which offers income tax relief of up to 50% of the amount invested in SEIS-qualifying companies.
Income tax additional rate threshold reduced from £150,000 to £125,140
This will have the effect of increasing taxes for those on high incomes. And more people will be brought into the additional rate following the change. As taxes take a bigger bite into people’s income, more of them are likely to turn to tax-advantaged schemes like SEIS, seeking the solace of generous tax reliefs.
VAT registration threshold frozen at the current levels for an additional 2 years
The VAT registration and deregistration thresholds will remain at the current level of £85,000 for a further period of 2 years from 1 April 2024. This ‘stealth tax’ means that if SEIS investees and other small businesses earn more revenue as a result of rising prices, they will have to register to pay VAT.
R&D tax relief reduced
The deduction rate for the SME scheme will be cut to 86% and the credit rate reduced to 10%, to tackle ‘abuse and fraud in R&D tax relief for SMEs’. This will represent a massive loss for innovative and SME companies, which may now require more financial support to move innovative ideas forward. On the other hand, SEIS and the other venture capital schemes could take up some of the slack.
Support for the biggest growth sectors
The government will support Britain’s biggest growth sectors, including digital, green technology and life sciences, through measures designed ‘to reduce unnecessary regulation and boost innovation and growth’. Enhanced public-sector support in this area will benefit the growth ecosystem including SMEs and their investors. This could give a boost to schemes like SEIS that cater to some of the UK’s fast-growing companies
Targeted support for small businesses
The government will launch a package of targeted support to help companies with business rates costs worth £13.6 billion over the next 5 years. The chancellor will freeze business rates multipliers in 2023-24. The relief for retail, hospitality and leisure sectors will be extended and increased, and there will be additional support provided for small businesses. These measures are good news for the SMEs that are the subject of SEIS and the other tax-advantaged schemes.
Investment Zones programme refocused
The government will refocus the Investment Zones programme to catalyse a limited number of high potential clusters, working with local stakeholders, to be announced in the coming months. This initiative could provide potentially huge benefits to SEIS investors, especially if it leads to the creation of university spin outs driving the kind of disruptors that are often top targets for SEIS investment, outside Oxbridge and the other usual centres.
Capital gains tax allowance reduced
The Autumn Statement outlines a two-phase reduction in the tax-free allowance down from £12,300 to £6,000 in April 2023, then down again to £3,000 in April 2024. This means that from April 2024, individuals and businesses selling assets will pay up to an additional £930 for those on the basic rate (10%); and £1,860 for those on the higher rate (20%). This measure could bring some investors to SEIS, which offers two separate capital gains tax reliefs: a reinvestment relief and a disposal relief.
Looking forward: the ‘stealth’ tax burden
The Autumn Statement introduces significant stealth tax rises for the middle and top of the income distribution. With individuals and businesses facing a greater tax burden, people will have to pay more attention to their tax affairs to help reduce the pain. Many could turn to financial advisers in their search for good financial planning to mitigate the impact. The government has stepped up effort to tackle tax avoidance, evasion, and non-compliance. HMRC received an additional £292m at Spending Review 2021 to expand their work to tackle non-compliance and bring in additional tax revenue. By 2027/28, it’s projected that this will generate £350m from tackling tax fraud and £375m from reducing non-compliance by wealthy taxpayers - a total of close to three quarters of a billion pounds! These projections imply very strong impetus behind HMRC’s activities in this area. That puts any tax planning methods that are government -backed, in a strong position, so the statement in the budget documents, that, "the government is increasing the generosity and availability of the Seed Enterprise Investment Scheme" is a powerful message that SEIS is 100% legitimate.
Reactions to the fiscal announcements
Generally speaking, the chancellor’s Autumn Statement has seen a mixture of positive and negative reactions from the business community. Industry bodies have generally responded with restrained criticism or muted approval. The general consensus amongst business advocacy groups and industry bodies appears to be that 'stabilising the ship' is a first concern and that this budget goes some way to achieving that. As for the market, the pound fell by roughly 1% against the dollar, but this was only a small dip when compared to the extreme plummet in value that was seen after Kwasi Kwarteng’s mini-budget back in September. The FTSE 250, meanwhile, traded slightly lower in the immediate aftermath of the announcement but has since largely recovered. Ultimately, the Autumn Statement looks set to go some way towards stabilising the economy in the wake of the turmoil caused by the mini-budget.
Source: ONS, OBR
% 30 25 20 15 10 5 0 -5 -10 -15 -20 -25
2018 19 20 21 22 23 24 25
Projection
ONS data
12 10 8 6 4 2 0
2004 07 10 13 16 19 22 25
Forecast
Annual inflation rate (% change)
GDP growth projection based on market interest rate expectations
The BoE expects inflation to fall sharply from the middle of next year
Real GDP
115 110 105 100 95 90 85 80 75
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
March 2022 forecast
November 2022 pre-measures forecast
November 2022 forecast
Q4 2019 + 100
What is SEIS capital gains reinvestment relief?
When you dispose of an asset and make a gain you usually pay capital gains tax for the tax year in which you dispose of the asset. Reinvestment relief enables an individual who has disposed of an asset — that would give rise to a chargeable gain — to treat a maximum of 50% of the gain as exempt from capital gains tax, where they have reinvested all or part of the amount of the gain in qualifying SEIS shares. If you get SEIS income tax relief on an acquisition of shares, then you can claim reinvestment relief as well. You cannot get reinvestment relief unless you also get SEIS income tax relief. To get full reinvestment relief you must invest in qualifying SEIS shares an amount at least equal to the chargeable gain.
Chancellor of the Exchequer Jeremy Hunt
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The current crisis has put start-ups and start-up ecosystems everywhere in grave danger. How can a scheme like SEIS make a difference in the UK?
Historically, economic downturns have been when great fund vintages with super-sized returns have occurred. As such, investing over the forthcoming eighteen months should be seen as an opportunity rather than time of danger. Entry valuations are coming down to reasonable levels; staff lay-offs at larger technology companies are making top talent available for smaller start-ups; and inefficient businesses are being “flushed-out” of the system. The economic downturn will require start-ups to be financially disciplined and extremely customer-focused. The ones that are successful in doing this will set a solid platform for future growth over the forthcoming years.
The IMF forecasts UK GDP growth of 3.6% for 2022, and 0.3% for 2023 – that’s down from 0.5% at the time of its previous forecast (made in July). How will SEIS fare in the slowing economy?
As large businesses struggle to grow their revenues during a downturn, they increasingly need to look for ways to better control their costs. Adopting automation is one way to achieve this and start-ups developing relevant technologies traditionally have been counter-cyclical, meaning that they actually thrive during tougher economic environments. Consequently, SEIS-eligible companies that are developing productivity-enhancing technologies in areas such as robotics and applied artificial intelligence are likely to progress well in this environment.
What steps would you like to see the government take to boost investment into early-stage British companies?
Schemes like SEIS are extremely good at encouraging greater investment interest into early-stage technology businesses in the UK. Nonetheless, we feel more could be done to encourage the adoption of emerging technologies across the wider economy. We’ve long thought that a government-backed “early-adopter voucher” scheme to help de-risk new technology adoption by small-and-medium-sized businesses (SMEs) would be a helpful complement to the SEIS scheme. Whilst initiatives such as the capital super-deduction tax break are extremely welcome (and should be extended beyond 2023), they are quite complex. A more straight-forward voucher system would reduce the cash-flow barriers that prevent SMEs from trialing and rolling out new technologies to boost their productivity.
We disagree that startups are in grave danger. There have been two budgets in the last few months where SEIS has been endorsed. In the latest budget, the SEIS changes were retained as the government is supportive of the schemes and they understand that the underlying companies support growth in the economy. Something that is much needed! The SEIS makes a difference and investment in young and exciting companies is to be welcomed. The biggest challenge is investor confidence! Later-stage markets have seen a real downturn which is in turn affecting later-stage funding. We invest much earlier in the lifecycle of a company where valuations have been and continue to remain attractive however of course as our portfolio progresses and raises later-stage monies the market does affect this. Ultimately though there is a lot of VC money out there and it will go to the very best companies out there.
In our view, they will fare better than most. Every existing industry is looking for new ways of doing things better, more efficiently and more sustainably, and SEIS companies are often the starting point for these changes. For example, we invested in AeroCloud, which provides innovative IT solutions for the aviation sector using AI, at the height of the pandemic when no one was flying but airports were looking to make cost-savings and to do things more efficiently. Aerocloud was the perfect answer for them, they are cheaper and far more efficient than the legacy players in the aviation sector and have excelled over the last few years. They are now closing their Series A investment round.
I think the key things are communication and education - they need to find new ways of telling investors and companies about SEIS and EIS and how the schemes can help!
I think this is true for start-ups in the later stages, where valuations have been frothy for way too long, and approach to investment has been questionable time and time again. Right now, the UK pre-seed and seed stage ecosystem is strong, and quite often during downturns it gets stronger, due to the very nature of the ventures and founders that make it hum. If we all start to perpetuate this false belief it is in trouble, it may just run the risk of becoming a self fulfilled prophecy.
This is a question I always struggle with. The way I see it is, there has been a reason not to invest every year since I was born.. 42 years ago! The data shows time and time again that the people who retracted their investment strategy at these times fared worse over the long term. It really doesn’t always have to be doom and gloom - there is room for more optimism here!
Promote, much more, the schemes it already has in place to UK and international investors
SEIS is a critical driver of Britain’s growth funnel. It propels innovation-led Startups through the first stages of development and should be a key tool in our march towards growth. As awareness of the scheme increases, we expect growth in the amount invested under SEIS.
Early-stage markets are less impacted by environmental factors. SEIS investments go into companies at the beginning of their innovation and commercialisation journey so tend to be uncorrelated to general macroeconomic trends because they are more resilient to short-term challenges. With larger investors making up for the loss of smaller investors exiting the market, we’re also confident the flow of capital will increase.
The importance of the upcoming rule changes cannot be overstated. It is brilliant news for investors and startups. Now we need to raise awareness for the scheme. Too many have never heard of the SEIS, let alone understand its benefits. It’s the responsibility of industry leaders like us to change this by working in partnership with the government.
Learning objectives CPD and feedback About Intelligent Partnership Disclaimer
Learning objectives
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Covered in section 2: Market Update
Identify the main developments and news in the SEIS market
Evaluate the key fees and charges applied by SEIS managers
Covered in section 3: Consideration for Investment
Outline the statistical trends in SEIS investment and tax relief in recent years
Covered in section 4: Industry Analysis
Benchmark products and providers in the market against one another
Covered in section 5: Managers in Focus
Define some of the key events likely to impact SEIS in the near future
Covered in section 6: What’s on the Horizon
Outline budgetary developments that could be impactful to SEIS
How did you do?
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Covered in section 2, Market Update
Identify main developments and news in the SEIS market
Covered in section 3, Consideration for Investment
Covered in section 5, Managers in Focus
Outline regulatory developments that could impact the SEIS in the near future
CPD and feedback
Intelligent Partnership has achieved accredited status from the CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
Readers of the EIS Industry Update can claim up to two structured CPD hours towards their CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to test your knowledge and obtain a CPD certificate readers will need to complete a short online test and provide feedback on the update. This includes 10 multiple choice questions to demonstrate learning and a feedback form to assist in the compilation and improvement of future reports. To claim your CPD visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates. Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
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This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Neither the contributors, their firms, affiliates nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. This publication is based on the authors’ understanding of the structure of the arrangements detailed, the current tax legislation and HM Revenue & Customs practice as at November 2022 which could change in the future. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. This material is not intended to constitute legal or tax advice and we recommend that prospective investors consult their own suitably qualified professional advisers concerning the possible tax consequences of purchasing, holding, selling or otherwise disposing of EIS-qualifying shares. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Neither the contributors, their firms, affiliates nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. This publication is based on the authors’ understanding of the structure of the arrangements detailed, the current tax legislation and HM Revenue & Customs practice as at October 2022 which could change in the future. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. This material is not intended to constitute legal or tax advice and we recommend that prospective investors consult their own suitably qualified professional advisers concerning the possible tax consequences of purchasing, holding, selling or otherwise disposing of EIS-qualifying shares. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
