This article is kindly contributed by Daniel Kiernan, Associate Director at Intelligent Partnership, an organisation which provides training, research and reports on investments to financial advisers, planners and wealth managers. Daniel’s contact details are at the end of this article.
There have been a few very positive moves by the government to support investment in the ‘real’ economy over the last few months.
By ‘real’ economy, I mean small and medium sized enterprises (SMEs) – firms with less than 250 staff. These firms employ 95% of the UK’s workforce and account for 50% of the total turnover in the private sector (£3,132bn). They are also where the future giant companies of tomorrow will be found! Finally, smaller companies tend to spend a higher percentage of their capital in the UK. It’s a vital sector for the UK economy and one that the government knows will be vital to a successful economic recovery.
So what has the government done?
Well firstly, it has continued to support the already very successful Enterprise Investment Scheme (EIS) scheme. This scheme uses generous tax breaks to encourage investment into SMEs. Two years ago the government overhauled the scheme and widened the parameters for qualifying companies, increased the amount of income tax relief available to 30% and did away with the idea of a cap on loss relief. And in the March 2014 budget it announced that the sister Seed EIS scheme, which is aimed at very early stage companies, would be made a permanent feature of the tax planning landscape.
In the same budget it disqualified any firms whose revenues were primarily based on Renewable Obligation Certificates (ROCs) from EIS status. This follows on from excluding Feed in Tariffs (FiTs) in 2012. Both ROCs and FITs are subsidies for renewable energy projects and the feeling is that projects that are already receiving one subsidy, should not receive another. This is actually clear thinking from the government – the aim of the EIS is to encourage investors to put their capital at risk in SMEs and these kinds of projects were diverting money away from SMEs. It’s another step that supports the real economy.
The government has also announced that it will be allowing Peer-to-peer lending in ISAs from 2015. This is a great move. ISAs are one of the most popular saving and investment products in the UK, with 45% of households having at least one ISA. However, ISA users are forced to invest their money into stocks and shares – usually via an expensive fund manager. This has the effect of funnelling more and more money into the largest companies. Giving ISA investors the option to avoid the ‘city’ and invest directly into SMEs via peer-to-peer lending will be a boon for the real economy – and a boon for the investors too who can achieve some much needed diversification by adding a different asset class to their ISA.
The Treasury has also promised to look at the possibility of including debt-based securities issued by crowdfunding platforms in ISAs. This is actually more farsighted than the FCA, who in their recent regulatory paper on crowdfunding included debt based securities in the same category as unquoted equities issued on crowdfunding platforms. My view is that debt based securities where there are assets, cash-flows to service the debt and a defined exit at the end of the term, are much less risky than unquoted equities in small companies, with no income, an unclear exit and the possibility of being diluted if more shares are issued. The Treasury has indicated the direction of travel and let’s hope debt based securities, which are also a means of providing capital to SME’s, follow peer-to-peer lending into people’s ISAs.
Social Impact Investments
Finally, the government is bringing in a new tax relief for investment into social investments, called Social Investment Tax Relief (SITR). Starting on the 6 April, 30% tax relief will be offered to investors in community interest companies (CIC), charities and community benefit societies (Bencoms). Eligible organisations (with a maximum of 500 employees) will be able to receive up to €344,827 (£290,000) of investment through this scheme over three years. This measure will hopefully help encourage investment into projects that, as well as providing a financial return will also have a measurable, positive social impact.
Currently, central bank low-interest rate policies force people to invest. This is a deliberate effort to try and unlock capital and get the economy moving again. However, much of this capital has flowed to the mainstream stock markets – hence the strong performance of equity indices over the last three years. But these firms have tended to hoard cash since 2008, and in any event they often spend their money in overseas operations. The money is not finding its way back into the real UK economy – the economy most of us work in and the economy that matters to us day to day. These measures to try and re-direct some of that capital to the real economy are very welcome.
Daniel Kiernan, the author, is Associate Director at Intelligent Partnership. He can be contacted on +44 (0) 203 375 1700 or at email@example.com.