The UK's decision to leave the EU was not the outcome the markets expected and the true implications for business post Brexit will become more apparent over time
While there are some signs of investors beginning to settle (and in fact recent data has surprised on the upside), economists and other commentators remain broadly pessimistic.
Nevertheless, as Britain begins what is likely to be a lengthy negotiation stage, a few initial observations can be made – in particular regarding tax-efficient investment in smaller businesses.
EU restrictions
To encourage investment into small and growing companies tax advantaged investments were introduced by the UK government – namely venture capital trusts (VCTs), the enterprise investment scheme (EIS), the seed enterprise investment scheme (SEIS) and more recently, social investment tax relief (SITR).
The rules originally proposed to govern such tax advantaged schemes were tightened to comply with EU State Aid rules. These changes restricted the amount of capital a company was able to raise through such schemes, and the time period in which they are able to raise it.
The EU State Aid rules were met with frustration from the industry, as many argued that they seemed to run counter to the scheme’s objectives. Despite ongoing efforts to lobby both the UK government and the EU for a reversal, no progress has been made to date.
Post-Brexit – a lighter burden?
Britain’s exit from the EU may change this. It is possible that Brexit may result in venture capital schemes no longer being constrained by complex EU legislation such as EU State Aid. If so, this could mean vastly increased scope for the government to support small and new business through the VC industry in the UK.
The cost to the government of these tax-efficient investment opportunities is relatively insignificant compared with the potential benefits to the wider economy. Many commentators have therefore argued the government could look at repealing the EU rules to encourage additional investment to boost growth at a time of prolonged uncertainty.
It is important to note that until Britain concludes the process of leaving the EU under Article 50, it will continue to have the same rights and responsibilities as it does currently in terms of access to the single market and financial regulation.
In addition, there is the possibility that Britain may choose to have continued access to the single market and directly engage with companies that operate within the EU. If so, the VC industry could still be subject to EU legislation to ensure fair market competition. Until the withdrawal process begins, therefore, no one can be sure of the precise implications for tax-efficient investments.
So what does this mean for private investors?
While it’s true that in times of uncertainty there is likely to be reduced demand for all types of investment, if economic conditions do indeed deteriorate then tax-efficient investments could be seen as a smart move. With change always comes opportunity, and smaller companies can be more nimble when it comes to responding. Smaller firms’ fortunes also tend to be less correlated to stock market swings than their larger counterparts, making them an attractive option for diversifying a portfolio.
The challenge comes in deciding which companies would be able to weather a post-Brexit storm of uncertainty.
When it comes to tax-efficient schemes, the insight of a professional fund manager can be invaluable in helping private investors make better informed investment decisions. Unlike in listed markets, where information and shares are publicly available to all investors, there is knowledge asymmetry in private markets which can put individuals at a disadvantage. This means the role of the fund managers becomes even more critical. They review as many companies as possible within their identified investment sector, most of which would not be accessible to the public, and are equipped with an extensive knowledge of the market as a result. This gives them a greater awareness of a company’s competitive positioning and the potential market opportunities.
Invest with the experts
At CoInvestor, we are working to enable individual investors to draw on this knowledge and have built a platform which enables private investors to invest in alternative assets such as EIS and SEIS alongside those fund managers. Each investment listed on the platform is one that a fund manager has already been committed to. Consequently, each opportunity has been subjected to rigorous and detailed investment processes by the fund manager’s team. By listing on the platform, they invite you to join them as a co-investor.
As most tax-efficient investments are generally long term, conducting sufficient due diligence and research is an essential part of the process. Investing via the CoInvestor platform means that all these administration processes are taken care of, leaving you to focus on the opportunities themselves.
Charles Owen, Founder and Director, CoInvestor