Tuesday, 9 June 2015

Is the use of SEIS and EIS being abused by platforms like Crowdcube







We had a very pertinent comment on one of our blogs yesterday. It stated quite simply that there was no loss of taxes with the use of SEIS and EIS - it was the individuals' money which the taxman had not claimed and which the individuals had chosen to use to support UK businesses.

This is true in the sense that the money has never hit the Exchequer. However we do not live in a society where individuals get the right to say they will only pay tax if its spent on certain things and not others. We all contribute to the common pot which we elect a government to control and spend in our best interests. Or so the theory goes.

We doubt if the Exchequor or the ex Business Minister Vince Cable had any idea that equity crowdfunding would take of as it has from its start in 2011. This surge has been driven by SEIS and EIS. To date on Crowdcube alone we estimate the amount of the tax rebate to be around £30m and growing fast. To date no single business funded this way has managed to achieve its projections; the ones used in the pitch to sell the equity. Many have gone bust.

The platforms have always majored on the idea - gamble £1000 on becoming the a shareholder in the next Facebook and get £500 back instantly against your income tax. It has helped inflate company valuations - a company asking for £500k for 10% knows that to return 10 times that investment to shareholders, they need only be worth £25m not £50m. So it allows them to hike the present valuation well beyond any place that is sensible. You just have to look at the current pitches to see how true this is.

So who owns this SEIS and EIS rebate?

The money is issued in the form of rebate by HMRC, so one could claim they do - its tax due that is not taken. However the individual investing could also claim its is their money - channelled to a different purpose but still spent.

Lets say that by the end of 2016, the total amount across all platforms that has been rebated due to SEIS and EIS totals £200m - where does that come from? The Exchequor will have an idea of the total take from income tax annually and will need to see that money or borrow. Whilst £300m is not a large hole, it is a hole.

Clearly the idea behind this form of rebate is to encourage investment in sustainable new UK businesses and the consequent prosperity - for all. So if equity crowdfunding is failing to achieve this due to the very poor vetting on the platforms and even poorer business plans that pitch, then how is it justifiable or even sensible to encourage it. The only people making money if most of the businesses either go bust or just limp along, are the platforms and administrators.

There are also the lost opportunity costs from not having this revenue in the Exchequor and the mounting costs of failing businesses. The platforms make very ambitious claims about how many new jobs their funded businesses create but they never ever mention the loss of jobs due to the failures and the unpaid creditors. In most cases HMRC are left out of pocket either through tax due or unemployment/wages covererd. For every creditor left unpaid, there is a risk that this business could also go under, be forced to lay off staff etc etc. It is not just a loss to the 150 or so investors.

In the end who owns the tax rebate is not the key question. The more important question is, is this money being used wisely and will the outcome be the desired one? We think the answer to this is no and no. There is no evidence that equity crowdfunding creates sustainable business or any jobs that are not temporary. There is mounting evidence that it encourages reckless business plans and impacts totally innocent decent businesses by leaving them as o/s creditors - all sanctioned by the Government through its SEIS and EIS support. Time will tell. In the meantime shouldn't a better system be set up to allocate SEIS and EIS relief?

3 comments:

  1. What is a o/s creditors? Thanks.

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    1. Companies or people owed money by the company in question are creditors and when a company closes most of these then become outstanding creditors ie they never see their money again. Supporting companies that never have a chance of making it is not just a waste of investors cash but a waste of everyone's time and money.

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