Patient capital tax reliefs should be focused on places with the weakest economies

Our response to the Patient Capital Review consultation

Author: Jack Airey   |   07/09/2017

The Patient Capital Review

The Treasury-led Patient Capital Review has published a consultation seeking views on how to increase the supply of capital to growing innovative firms. In our response we have argued that tax reliefs offered as part of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) should be enhanced in places with structurally weak economies. Restrictions on the type of companies permitted within the scheme should also be reviewed.

Context

The Enterprise Investment Scheme (EIS) provides investors with 30% tax relief on investments of up to £1 million a tax year in shares of smaller, high-risk companies. The Seed Enterprise Investment Scheme (SEIS) provides 50% tax relief on investments up to £100,000 and encourages seed investment in early-stage companies.

In 2014-15 a total of £1.8 billion was invested in British companies through the EIS. Of this, £850 million (47%) was invested in companies registered in London and £332 million (18%) in companies registered in the South East. Just £129 million (7%) was invested in companies registered in the North East, North West and Yorkshire & the Humber. A similar geographical analysis is true for the SEIS.

These figures highlight the successes of London’s venture capital network and the weaknesses of such networks in other parts of the across the country.

Data accessed from EIS Table 8.4 and SEIS Table 8.14, Enterprise Investment Scheme and Seed Enterprise Investment Scheme Statistics: October 2016

Recommendations to Patient Capital Review

As government takes a more muscular approach to supporting the national and, thereby, local economies – a primary aim of the industrial strategy green paper is “to help every place meet its potential” – the Treasury should increase the rate of tax relief offered as part of the EIS and SEIS in places whose economies are structurally weakest.

Capital markets may always favour London, but weighting the EIS and SEIS in this way would make these places immediately more attractive to angel investors and the like. It would foster local entrepreneurialism, attracting expertise as well as new investment, and extra investment in local companies would have positive knock-on effects for other parts of the local economy.

At the same time the Treasury should review the restrictions on companies and sectors permitted to use the EIS and SEIS schemes, with a view to the confluence of places and industries. For instance companies within the FinTech sector are not eligible for EIS and SEIS tax reliefs. These restrictions could be lifted in some places where an industry is fledgling.

How could this work?

This kind of support should be place-specific and by local authority boundaries. In our report The Making of an Industrial Strategy we propose these tax relief in these places are enhanced to 60% for the EIS and 80% for the SEIS.

Which places?

In our aforementioned report we identify the thirty structurally weakest economies in England. We refer to these places as stuck. They are penumbra economies that have not recovered from the 1980s, performing poorly on multiple indicators, both long term demographic trends and more immediate short term economic performance. They have weak labour markets and much of the growth experienced in the past few decades has been in poorly-paid and insecure sectors such as retail. Many have attracted a great deal of investment from central government and the European Union, but structural issues persist. As we argue in the report, they require greater top-down intervention.

The thirty places we identify as stuck are listed in the table below (and on this map). As can be seen, they are small towns and rural places, cut adrift of big cities, where votes for exiting the European Union were high, and with a strong representation of marginal seats.

Enhanced EIS and SEIS support may not be appropriate to some of these local economies – for instance those whose accessibility is, for the short term at least, poor. However in places such as Blackpool and Tendring, the second and third structurally weakest economies, such support would provide a much-needed boost. It would kick-start a more resilient and diverse local economy and attract higher-skilled people to work and live in their areas too.

Why should they be supported?

Without lifting the floor underneath the country’s most struggling places, there won’t be a successful industrial strategy for the nation as a whole. A locally-tailored enterprise tax relief regime may be a departure from orthodoxy, but all arms of the state should be harnessed to support the prospects of places most stuck. Our proposal should be one part of a recalibration of economic policy to include the small towns of England and their rural hinterlands.