2fnoNyY

But the EIS world has an image problem. It is seen as risky
and overly focused on tax benefits. Many commentators
are, in particular, concerned about the poor quality of
research in this investment class. Even the Financial
Conduct Authority (FCA) has fired a warning shot. In a
paper published in February, the regulatory body found
that many advisory firms ‘demonstrated inconsistent and
insufficient research’ and that the poor quality of research
and due diligence across many investment products is a
root cause of sub-standard results for consumers.
Too often advisers and investors focus on the tax benefits
and not the underlying investment. They plunge into EIS
companies and schemes without understanding the
investment they are making. Not surprisingly they can
unwittingly get caught in risky ventures and the EIS world
gets a bad name.
The mindset of the EIS world can perhaps be gauged by
the language used. Many participants talk of ‘tax-efficient’
investing; in fact, one ‘research’ house even includes that
phrase in its name. Another party uses the term ‘tax shelter’
as part of its report title. Both terms imply that the key (and
perhaps only) driver to making an investment in an EIS
product should be driving down an individual’s tax charge,
rather than understanding the investment case. Hardman
& Co deliberately uses the phrase ‘tax-enhanced’ – we
believe that the tax benefits from EIS investing should be
an extra return on the investment, not the main reason to
make it. Another acceptable term is ‘tax advantaged’, which
the HMRC and some participants use.
The industry’s encouragement to advisers and investors
to have a mindset focused on saving tax is demonstrated
by evidence from Google. A search for the term ‘EIS+Tax
Relief’ returns 115,000 results, compared with 5,070 for
‘EIS+Opportunity’ and a mere 2,740 for ‘EIS+Growth’.
HMRC recently commissioned a report looking at which tax
benefits were important to EIS investors. The table is below.
To be fair, the survey sought to explore attitudes to tax, so
there wasn’t an option for investment that respondents
could tick. However, qualitative interviews which followed
up the survey showed that some investors, at least, had
considerations other than tax:
• For some investors ‘loss aversion was a particularly
important factor in decision making’
• Some investments would have been made without the
tax relief because they were driven by entrepreneurial
(e.g. a former businessman wanting to help start-ups
in his old industry) or philanthropic reasons
• Some felt that being part of a group of EIS investors
gave comfort about the business potential
There is research available on EIS to advisers and investors.
Unfortunately, it often falls short of what would be
considered acceptable in other asset classes. For example,
much research fails to consider:
• The past performance of a management team
• Performance attribution – i.e. did one lucky investment
make up for 19 disastrous ones?
• Risk analysis. The FCA paper comments that firms
‘should not rely on the provider’s opinion, for example,
on the investment’s risk level’ – cut and paste won’t do
• The real fee structure, which can include hidden
charges, such as a member of the manager’s team
receiving payment from an investee company
as a director
• The qualities of the underlying investments – not
surprising since much of the work is not conducted
by investment analysts, but by writers with an
accounting background
How important would you rate each of the following in your decision
to invest through the Enterprise Investment Scheme?
50
0
Any tax
advantaged
element
Income
Tax
relief
Capital
Gains Tax
exemption
Capital
Gains Tax
deferral
Loss
relief
Inheritance
Tax relief
Flexibility
of the
scheme
% of all EIS investors saying essential % of solo EIS investors % of syndicate EIS investors
14 EIS Magazine · Yearbook 2016/17