Ascension Media Group

Jun 26

Letter to The Times - Update, and Investors Chronicle

I spoke too soon in my previous post - The Times published my letter today (they got in touch and asked me to shorten it).

I’m pleased that our ASCEND Fund has also been highlighted in an article in Investors Chronicle about effective and legitimate ways to reduce your tax bill which, in their own words, are all legal, and not morally dubious, where they highlight the seed enterprise investment scheme (SEIS):

Jun 22

Letter to The Times

I wrote a letter to The Times yesterday which sadly they have not published, at least not yet anyway.  I think they need to bring some balance to this series on tax avoidance - using tax benefits made available by the government in the way intended by government is not the kind of tax avoidance they are writing about but are readers going to understand that?  Here’s the text of my letter:


Tax breaks for films were introduced for the right reason: to help the production of British movies that might not otherwise have been made. 

Some films may appear to offer little commercial promise but may be culturally significant and seemingly marginal projects can surprise and end up profitable.  It’s notoriously difficult to predict whether a film will succeed.  Governments in the last 15 years, and in particular the Labour governments of Tony Blair and Gordon Brown, sought to address market failure in the British film industry by offering tax incentives.

But poorly designed tax incentives can suffer from the law of unintended consequences.  In 1997, the introduction of rules giving producers a tax deduction for the costs of making a British film under £15million, allowed tax relief to be claimed by anyone who acquired the film when it was finished.

A whole industry was born whereby films were sold to wealthy investors who could take advantage of the tax breaks.  Investors would buy the film, enjoy the tax relief, and lease it back to the producer, paying tax on the rental income over the next 15 years. The whole thing was apparently a very cheap loan from the Treasury - and at first no one seemed to mind.

These so-called “sale and leaseback” schemes became widespread, and before long television programmes, including soap operas, were used to generate tax relief.  Many films that offered little commercial promise benefited from heavy investment.  In 2005 the Government turned off the benefits. 

The introduction of a new business entity called a limited liability partnership was another boon to the industry and allowed new structured products to be created and marketed, using film, television, music and video games as the “investments”.  But all this activity has done little to support sustainable growth in the creative industries, which are vital to the UK economy.  People have poured their money into tax-structured “products” with very little or no risk, instead of investing in companies, backing people to build creative and digital businesses that employ people, pay tax on profits, and generate export earnings and value for Britain. 

A new government initiative launched this year, the Seed Enterprise Investment Scheme, should be a boost for companies in the creative and digital sector by incentivising investors to put money into new enterprises, and we have embraced this by launching the first SEIS fund giving investors an opportunity to back genuine businesses in our sectors.  This week the government has also launched a consultation process ahead of the introduction of new tax breaks in 2013 for the television drama, animation and video games industries.   We are joining the consultation process to help design the rules so that they really benefit companies in our sectors – and aren’t abused for the benefit of those people who just want to avoid tax.

In the Diamond Jubilee and UK Olympics year, as we celebrate Britain, it is time to boost British talent in the right way.

Jun 20

Breaking the Ice - The Times and Icebreaker

Today The Times continues its series exposing tax avoidance schemes and tax avoiders.  In the firing line today after Jimmy Carr and K2 yesterday are three members of Take That and schemes operated by a firm called Icebreaker.  Reading the article this morning I saw that Icebreaker had this to say as reported by the paper:

"The partnerships play a vital role in sustaining the creative industries in the UK and that the music industry would be in jeopardy without their investments".

I’m not sure about that statement.  The jeopardy the recorded music industry is in has to do with the impact of digital technology and changing patterns of consumer behaviour over the last 15 years which the major record companies have been slow to understand and innovate in response to as the landscape in which they operate has dramatically changed.  The jeopardy such that it is would be the same with or without these partnerships’ investments.  These partnerships as far as I can see have done little to build sustainable businesses. And the role they play in sustaining the creative industries as a whole is entirely debatable - in my view they contribute to the adverse selection and moral hazard problems that in the long term do nothing but harm to the creative industries, as I have already written about in a previous post.  The creative industries need investment for sure, but should merit it on the grounds that companies within them offer opportunities to deliver attractive returns to investors (which I firmly believe they do), in exchange for taking on the risk of investment.  But “investment” offers that deliver returns for apparently no risk makes it harder for real businesses to raise money.

I am concerned that all these headlines will put people off investing in real businesses in the sector, for fear that even state sanctioned tax reliefs such as the Seed Enterprise Investment Scheme and Enterprise Investment Scheme, which are in many cases properly used to raise money for real businesses are somehow just as “dodgy” as these other schemes now being exposed.

Jun 18

Certified Halo - Raising Awareness of the Seed Enterprise Investment Scheme

This morning sees the launch of a campaign by a group called Certified Halo.

Certified Halo are a group of London based startup entrepreneurs in tech who are on a campaign to raise awareness of startups and the opportunities to invest in them.  I met with the founder of Certified Halo Rayhan Rafiq Omar and his colleagues a few weeks ago when they contacted me about the campaign. I listened to their objectives which are borne out frustrations that many startup entrepreneurs face and with which I empathise.  I thought I would share some of those (and mine) here.  Today and tomorrow Rayhan and his colleagues, who are all founders of new enterprises in digital media and tech, are flyering the City and Canary Wharf as the launch of the campaign to raise awareness of startups and the opportunities for individuals to invest in new and early stage enterprises, which have been given a boost by the Seed Enterprise Investment Scheme (SEIS).  One problem they cite is that many people aren’t even aware of the SEIS, which is something we have found since we launched the first SEIS fund in the market - our ASCEND SEIS Fund.  Raising awareness of the SEIS is one of the objectives of the campaign and we have got behind Certified Halo to help raise that awareness.

Awareness of new enterprises and how to access them

This is a big issue.  A lot of people are aware of Silicon Roundabout but very few people have any idea how to access investment opportunities emanating from the creative entrepreneurs setting up new enterprises there. So far there are a few VC firms that have backed companies in the sector but these are not open to most private investors and in the main, VC funds invest at a later stage than seed stage (which for us doesn’t necessarily mean as early as a person and an idea, but can be a business that is up to two years old, with a product or service built and ready to take to the market or may already be in the market and now looking to scale).

Awareness of the SEIS

Another problem.  The Government introduced the SEIS scheme in December 2011 to take effect from 6 April 2012 (subject to the formality of Royal Assent which is expected in July 2012) and still very few people know anything about it.  The idea behind the SEIS is sound - it is to encourage investment in new enterprises which otherwise fall into the equity gap and should lead to employment, earnings on which tax is paid, exports and growth for UK plc.  But it won’t lead to anything if no one knows anything about it.  Even many IFAs I have been speaking to know very little about it or had not understood it, and had already formed the view that it is not something they will be considering for their clients.  In part that’s also a result of a wider cultural issue which is another problem for start ups in the UK.

Culture and education

As Certified Halo note in their flyer, the US has a culture that allows companies like Google, Apple, Cisco and others to start up, innovate and deliver outsize returns to investors.  There are two reasons why: 1. It is as normal to invest in start ups as it is to invest in exchange traded stocks and funds; and 2. Investor love business and innovation and want to be part of the story and share in the rewards.  It’s different here.

I agree with that.  There is a real cultural issue in the UK where entrepreneurship is little understood and rarely supported.  Not everyone can be a entrepreneur, nor should they be, but  if more people understood entrepreneurship then this would lead in my view to two things.  Firstly more people would be more entrepreneurial, which is not the same as being an entrepreneur, but has ramifications for entrepreneurs (I’ll explain why below) and secondly there would be more investment available from private individuals for entrepreneurs as a culture of allocating a small portion of one’s portfolio into new enterprises, perhaps through SEIS/EIS/VCT funds, as an asset class would develop.

More entrepreneurial people in industry is a good thing for entrepreneurs.  Take for example an entrepreneur who has a new product to bring to the market and who wishes to obtain retail distribution via a major high street retailer.  He has to persuade the buyer at that retailer to take the product, which being new, carries a risk.  It doesn’t matter how good that product is, how much better or cheaper than existing products it might be, if the buyer is not entrepreneurial he or she simply won’t take that risk.

This is something that needs to be examined in education.  Education in the UK is focussed on preparing people for employment.  It does this by preparing people to become equipped with qualifications which serve as signals which they take into the employment market in order to attract employers’ attention for interview and employment.  If the focus of education policy were to equip people with the skills to make a living as opposed to obtaining a job, if enterprise and entrepreneurship were taught in schools, we would have better equipped entrepreneurs and a better understanding and appreciation of it amongst the employed (and many private investors).  That would be good for everybody.

Complexity of the Seed Enterprise Investment Scheme

The SEIS rules are complex.  Unfortunately they need to be, because tax incentives have a habit of being abused.  See my post here about Project Finance v Company Investment in the Creative Industries.  The rules are new and we will be reviewing how they work in practice and offering our ideas to Government to simplify it without making it more vulnerable to widespread abuse, so the costs of compliance borne by companies and new enterprises reduce.  At Ascension we can manage these costs as we have been studying the legislation ever since it was published and we have many years’ expertise in tax and experience in EIS and VCT compliance - but to an entrepreneur on his or her own, the costs of compliance can be a very significant portion of the available finance.

Good luck Rayhan and Certified Halo!

The Certified Halo website is here:

Jun 12

Project Finance v Company Investment in the Creative Industries

I was at the excellent Oliver and Ohlbaum media conference a couple of weeks ago where the topic under discussion by a panel of eminent investors and entrepreneurs was whether the UK has the right environment for investment in the creative industries. When the panel discussion was thrown open to the floor, a representative of an investment firm stood up and made a speech about how the problem in the sector is the lack of availability of funds investing in projects i.e. in films, television programmes and the like (as opposed to investment in the businesses that make such films, television programmes, video games etc).

Not surprisingly the panel were non-plussed. Eventually one of the lead panellists responded by asking a question of his own: “Why on earth would anyone invest in projects instead of companies”?

It’s a good question.

One of the issues for the creative industries which makes it more difficult for creative companies to attract investment of any kind is the effect of two common causes of market failure described by economists as: (i) asymmetric information, which leads to the problem of adverse selection, and (ii) moral hazard. Non-economists will have become familiar with the latter term, as it has been much discussed since the onset of the financial crisis; in essence in the creative industries it means a misalignment of interests between investors and owners of creative businesses. Asymmetric information essentially means that it is impossible for investors to know as much about the potential success of the creative endeavours as the creative businesses and it leads therefore to terms being demanded for the best projects being unattractive to the creators, who in turn only offer the more questionable projects to investors.

One of the objectives of government policy has been to encourage the production of films that might not otherwise be made and there are reasons for encouraging such an outcome. Some films may have little commercial promise but may be culturally significant and some marginal projects can sometimes surprise and generate a commercial return. It’s notoriously difficult to predict whether a film will be a success or a failure.

Governments in the last 15 years, and in particular the Labour governments under Blair and Brown, sought to deal with the market failure by offering tax incentives. I would argue that these tax incentives have done nothing but harm to the creative industries by exacerbating the causes of market failure through adverse selection and moral hazard.

Let’s examine the history of tax incentives introduced for British film. These were introduced by the Labour government that swept into power in 1997 after a long period of being left out in the cold.

In the Finance Act 1997 a 100% tax deduction for expenditure on film was introduced. The idea was to give producers a complete tax deduction for the costs of making a British film under £15m (known as Section 48 after the relevant section in the Finance Act 1997) or if the budget was over £15m, a similar tax deduction but spread over a few years was available (known as Section 42 relief after the section in the 1992 Finance Act). That was the idea but it quickly spawned a new beast – sale and leaseback transactions. Crucially the expenditure that qualified for the tax deduction was not only available to the person spending the money on making the film, but also to a person who acquired the film when it was completed. Thus a whole industry was born whereby films were sold to and acquired by vehicles set up by financiers for wealthy investors who could take advantage of the tax deduction for acquiring a film. The film was then leased back to the producer so he or she could do what they wanted to do with the film, i.e. get it distributed into theatres. The investors took no risk on the film, they simply got a 100% tax deduction upfront and had to pay tax on the lease rental income over the next 15 years. The whole thing worked by effectively giving the investors a way of generating a refund of tax which they then had to repay over a 15 year period – in effect a very cheap loan subsidized by the Treasury. The firms that promoted these schemes made a fortune in fees (and they also may have deferred the tax on their profits by doing sale and leaseback transactions themselves!).

It was all perfectly legal, but not the right outcome the policy ought to have been seeking. The film sale and leaseback legislation led to all sorts of schemes, notably television programmes (including soap operas!) at one point were being used to generate the relief, which was only clamped down on in 2002 (along with some other alleged loopholes being exploited). But the overall Section 48 relief, originally supposed to be available for a short period, was actually extended to 2005.

Separate to this but of great significance in what was to come was the introduction of the limited liability partnership in the Limited Liability Partnership Act 2000. This new form of business entity, which had limited liability like a company but is tax transparent i.e. doesn’t pay tax itself but its taxable profits and losses are shared by its partners, was a boon for the industry allowing new structures to be invented. From 2002 onwards new schemes started being offered in the market, which have led to cases, some as yet unresolved, as HMRC goes through the process of reviewing and challenging them. Some of these involved “double-dipping” (getting tax relief for the same expenditure twice), whilst a whole new swathe of so called GAAP schemes was born (so called as they relied on the rule that the tax treatment follows the Generally Accepted Accounting Practice) to create losses which could then be allocated to the partners in different ratios to different members by the agreements governing those limited liability partnerships. Time and again HMRC shut down one alleged loophole (restricting the loss relief available to actual capital invested in 2005 or restricting the availability of the loss relief in 2007) only for the scheme operators to find a new way around the rules. I should make it clear here that I am not suggesting any impropriety or professional misconduct or on the part of any of those operators or giving an opinion on the legality or otherwise of those schemes.  That’s for HMRC to decide in due course.  So far the biggest case heard though is the case of Eclipse 35 LLP, which the First-tier Tribunal recently decided on in HMRC’s favour.

Eclipse 35 LLP

This scheme was operated and promoted by Future Films.  In summary 289 “investors” put up £50m of their own cash into a limited liability partnership which was supplemented by a £790m loan from a subsidiary of Barclays.  This total of £840m was then paid out as follows: £503m to Disney, of which £497m was deposited with Barclays and Disney kept £6m; £293m to Barclays as prepayment of interest on the loan; and £44m to Future Films.  Eclipse 35 LLP entered into a licence agreement with Disney for two films, which provided for annual payments to be made over 20 years.  In practice the initial £503m payment covered the entire 20 years.  Eclipse also entered into a distribution agreement with another company in the Disney group which guaranteed to pay Eclipse £1.022bn over 20 years.  Disney’s obligation to pay this was secured by Barclays – which had £497m plus interest to cover the payment stream.  After year 1 until year 19 in the accounts of the LLP, the interest expense, license fees and admin costs offset the profits from the distribution agreement with Disney, and it is only in year 20 that the LLP showed a net profit of £242m which would be taxable on the members.  So overall, all the money went round in a circle in year 1, thereafter the only transactions were accounting entries and in effect, the only real money flowing was from the investors put in £50m, of which £44m went to Future Films and £6m to Disney.  Why would they do this?  The answer is in the detail of those accounting entries and the fact that the tax treatment follows the accounting treatment.  The limited liability partnership paid out £293m in interest expense in year 1 and therefore generated an accounting loss of £293m.  To the 40% tax payer investors, this loss was worth £117m.  So they put in £50m and got back £117m.  In theory they would be required to pay £97m (being £242m at 40%) in 20 years, but even so the scheme appeared to offer free money for some.  HMRC won their challenge of the scheme at the First-tier Tribunal on the grounds that the scheme wasn’t operating a trade, hence the tax payers were denied the upfront loss relief they claimed but still could be liable for tax on the profits of the LLP in future years.  Future Films are appealing the decision. 

Finally the government abolished the Section 42 and Section 48 reliefs entirely in 2005 and replaced them with what in my view should have been introduced in the first place, a tax credit that is available only to the film production company.

Another type of scheme that has emerged since 2005 has been the “protected” or “limited life” EIS or VCT. This has been a structure designed to shelter the investor from the normal risks of investing in companies and get a return, a large part of which is from the tax sheltered which in the case of VCTs was worth 40% (now 30%) after only 3 years (now 5 years). Funds were set up which had a limited life of 3 or 5 years, offering investors capital preservation and even a dividend stream (actually paid out of a proportion of the investor’s subscriptions which weren’t actually invested in any companies at all).

The upshot of all of this is that by comparison investing in companies, even companies making films, television programmes, video games, concerts and festivals etc where these structures couldn’t be applied, looked positively eye-wateringly risky. These structures attracted a lot of money, so it’s not a lack of available capital that the creative industries suffer from, but pitted against tax-structured products offering guaranteed returns with very little or no risk, a company trying to build a business which can’t offer guaranteed returns and no risk suffers by comparison. In fact so much money was available that the constraint for the industry was a lack of available product, so more and more questionable projects got financed simply because investors couldn’t lose. In fact plenty of money has even been invested in blockbuster Hollywood movies, not because those films needed UK investors’ money to get made but because extremely cheap finance was made available to the US studios behind them. UK firms were keen to get involved and offer their wealthy clients a cheap or even free investment, the cost of which was subsidised by the UK taxpayer. Some of that investment could have been put to use in building companies and permanent jobs.

Which brings us back to that very good question – why would anyone invest in projects rather than companies? Surely it is always better to invest in a company, where you are backing a management team and people to build a business that usually has a diversified product portfolio? It is businesses not projects that get sold to larger companies for strategic premiums or can be IPO’ed generating spectacular capital returns for investors. The reason is because poorly designed tax breaks can and have been manipulated to make investing in projects, which should be a riskier endeavour than investing in companies, perversely more attractive. Some would say that does help the health of British creative companies as they need access to finance for projects from multiple sources. That last part is correct but in my view part financing projects with a tax subsidy the use of which is directed by the market is not the right outcome for policy. In so attempting to cure market failure through tax incentives, the Labour government created exactly another, worse, market failure, riddled with adverse selection and moral hazard.

At last however there is a new tax regime that promises to herald a new era in investment in businesses in the creative industries. This tax year sees the introduction of a new tax relief scheme, the Seed Enterprise Investment Scheme, a junior version of the Enterprise Investment Scheme offering investors up to 78% tax relief for investing in new ventures and zero capital gains tax when the investments are sold. Ascension Ventures, a creative and digital sector investment firm, has launched the UK’s first Seed Enterprise Investment Scheme fund, called ASCEND (Ascension Seedcapital for Creative Enterprise and Digital). The firm has also launched a complementary Enterprise Investment Scheme fund, called Ascension Creative Enterprises EIS Fund (offering investors up to 58% tax relief on investment and zero capital gains tax when the investments are sold) to provide follow on capital for graduates from the ASCEND SEIS Fund.

We at Ascension have launched two funds aimed at investing in a new generation of companies, not projects. We are doing so with the support of the SEIS and EIS and doing exactly what the government wants – channelling investment into new enterprises and supplying growth capital to businesses that will build sustainable businesses in the UK’s creative industries, generating employment, earnings, including export earnings, and value for Britain. The SEIS should be a fantastic boost for the creative and digital sector. We and others will be planting seeds today and I believe we will look back in a few years’ time at some mighty oaks that were born around this time.

There is much to be celebrated about Britain’s creative industries – British creatives are often seen picking up awards around the world at film and games festivals. There is a great pool of creative talent in this country but it needs business support and capital, otherwise that talent will move overseas. Sir Jonny Ive is a great British creative whose talent helped transform a near bankrupt company, Apple, into the most valuable company on earth. In Diamond Jubilee year, as we celebrate Britain, we’re going to plant some seeds so that our British talent wins more than just awards or helps overseas companies become world class, and build some world class companies of our own.

The legislation around the SEIS is complex running to over 60 pages. It is hoped that this will make it harder for others to use the SEIS to concoct schemes that defeat the spirit of the legislation. The rules need to be tough and HMRC needs to police them stringently. Past experience has shown how, if I may be permitted to mix economic metaphors, poorly designed tax rules can lead to bad money driving out good.

Mar 21

Finance in the Creative Sector

Excellent article in this week’s The Economist (and not just because they very kindly make reference to our ASCEND SEIS Fund)….

The Economist makes excellent points we have been banging the drum about for a while and we think the time is ripe now for investment in the creative industries, particularly with the support of the Government through the introduction of the Seed Enterprise Investment Scheme which, despite its low limits of £150,000 per company, should be enormously valuable to companies in the creative sector.  £150,000 wouldn’t go a long way in many other sectors, but the impact of digital technology has dramatically reduced the investment requirements for creative enterprises right across the supply chain from creation, production, distribution and marketing.  Valuable intellectual property rights can be created nowadays with very little investment in expensive capital equipment and using the Internet and harnessing social and mobile platforms to reach audiences and consumers in a targeted, trackable and cost effective way.

That’s one of the reasons why, as The Economist also notes, start ups in the creative sector fare better than other young businesses in other sectors.

Mar 12

Ascension News: Opening an office in Mumbai

We’ve made an exciting announcement today, which I reproduce the text of below.  I’m very excited about connecting the companies we work with and strategic partners in India.  I think we are all aware of how important the emerging markets and especially the BRICS economies.  I think India in particular has a lot to offer going forward and it is of course natural and quite straightforward for us to start building our overseas footprint there, where we already have a great many connections….Watch this space!

Ascension Media Group LLP, the creative industries and digital ventures firm, announces that it is opening an office in Mumbai, India.

The office, which is situated on Mumbai’s famous Marine Drive, is the first international office to be opened by the firm, which is also investigating opportunities to expand its footprint in other emerging markets.

According to a report on the Global Media and Entertainment Outlook by Price Waterhouse Coopers in July 2011, the Indian Media and Entertainment Industry is forecast to reach $31.7 billion by 2015, growing at 13% per annum from 2011-2015.

Ascension Media has appointed Parminder Vir OBE, Director of PVL Media and an award winning television and film producer with 25 years of experience in the industry, to lead this initiative.

Announcing the move, Ascension Media Group Founder and CEO, Sanjay Wadhwani said: “India is an enormously exciting market for us and the companies in the creative industries and digital media sectors that we work with. For example, there are more than 884 million mobile phone subscribers in India, nearly three times as many as in the United States. Most of these subscribers are using older 2G handsets, but smartphone adoption is gathering pace, particularly amongst the young, and it is through mobile that most Indians will access the internet. Younger smartphone users, those between 15 and 25 years old, spend on average nearly 2 hours a day on entertainment and browsing. Android is the leading platform due to choice and price of handsets, and on that platform more than 80% of users played a game in the last month – India is the fastest growing market for interactive entertainment and video games in the world.

India is a great place as she “gets” the creative industries, as evidenced by the worldwide export boom in Bollywood. There is also a significant amount of wealth in India looking for opportunities to invest overseas and we will help those investors to access attractive investment opportunities in the UK creative industries.”

Parminder Vir said:

“The emerging markets are vital export markets for the British creative industries. The new and growing opportunities for the creative industries cannot be ignored by companies seeking to expand internationally. The growth drivers are digital media, domestic demand, availability of finance and talent - making India an increasingly attractive market for the UK creative industries.

I have known Sanjay for many years and welcome Ascension Media Group’s ambition to be one of the leading players in the Indian Media and Entertainment Industry. We aim to help our businesses navigate the burgeoning Indian market, through our relationships with key partners in India, which is a key export market for British creative industries’ output. In addition we aim to be the bridge for inward investment from India into the UK creative industries”.

Feb 22

Enterprise Investment Scheme - Unapproved versus Approved

It’s that time of year again when investors are considering tax efficient investment strategies.  Gaining popularity this year is the Enterprise Investment Scheme because of the increase in the income tax relief from 20% to 30%, making it compare very favourably against VCTs which don’t offer the same CGT reliefs and require a longer hold period before gains become capital gains free.

A comparison between EIS and VCT is the subject of another post but here we compare Unapproved and Approved EIS funds.

Firstly, Approved in this context means HMRC Approved.  It does not mean that the fund is approved by anyone giving an opinion about the quality of the investments, investment team, investment strategy or anything in fact.  It doesn’t even mean that the investments made by the fund are pre-approved as actually qualifying under the EIS.  The only difference between an Approved and an Unapproved fund is that the Approved fund prospectus has been reviewed by HMRC and, provided the fund invests at least 90% of its assets in EIS qualifying investments within the 12 months following closing the fund, then investors in the fund will be treated as having made the EIS investments as at the date the fund closes and not, as is the case with an Unapproved fund, when the fund actually invests in the EIS investments.  Apart from another minor difference - there being no £500 minimum investment in Approved EIS fund – that’s it.

If there was ever a case of the tax tail wagging the investment dog choosing one fund over another because it is Approved is it.  In fact there are many good reasons to favour Unapproved over Approved.  Leading publication Investors Chronicle summarises the point pretty well:

“From an investment perspective, an unapproved fund is potentially in a better position as it has longer to choose its investments and build a more diversified portfolio. This can mean approved funds spread their risk over fewer investments due to the time restriction.”

“An unapproved fund gets its income tax relief on the date of each investment, provided it qualifies. Ultimately, when choosing an EIS, you have to balance certainty of tax relief with the potential for better returns.”

Another reason to favour Unapproved over Approved is the flexibility over the use of the available income tax relief.  Here’s an example:

An investor in an Approved EIS fund rushes to get their investment in before the 5 April 2012 deadline and makes a £100,000 investment.  As it is an Approved fund he/she can claim 30% income tax relief against their 2011/12 income or, if they elect to treat some or all of the investment as having been made in the year ended 5 April 2011, only 20%income tax relief in that prior tax year.  The investor won’t be able to claim any income tax relief in the tax year ended 5 April 2012 without making a new investment in an EIS in that tax year (or if the fund manager blows the Approved fund status).

If the investment is made in an Unapproved fund, either before or after the 5 April 2012 deadline (but obviously before the fund closes which it must do before the manager can invest from it) the position is different.  Income tax relief is available following each investment by the manager so assuming the manager takes up to 2 years to invest the fund and manages the timing of investment so the fund is deployed equally over the 2 years.  Then the income tax relief is available across 3 tax years, all of which are at 30% (assuming no changes in the legislation applying to the year ended 5 April 2014).

Here’s an example with a £100,000 investment in an Unapproved fund which commences investment after 6 April 2012.  If the fund is deployed equally over the two years ended 5 April 2013 and 2014 then the investor has the following options:

  1. Treat £50,000 as having been invested in the year ended 5 April 2012 giving income tax relief at 30%; and
  2. Treat £50,000 as having been made in the year ended 5 April 2013 giving income tax relief at 30%


  1. Treat £50,000 as having been invested in the year ended 5 April 2012 giving income tax relief at 30%; and
  2. Treat £50,000 as having been made in the year ended 5 April 2014 giving income tax relief at 30%


  1. Treat £50,000 as having been invested in the year ended 5 April 2013 giving income tax relief at 30%; and
  2. Treat £50,000 as having been made in the year ended 5 April 2014 giving income tax relief at 30%


  1. Treat £100,000 as having been invested in the year ended 5 April 2013 giving income tax relief at 30%

Finally, as noted above an Approved fund must invest 90% of the total subscriptions in EIS qualifying companies within 12 months.  Private company investments take a lot of due diligence and time with management prior to investment to get right so unless at fund closing there’s already a good pipeline of investments in place and on which the fund manager has been carrying out the necessary due diligence, that’s not a lot of time to source, win and diligence opportunities that merit investment, IMHO.  YMMV.

This blog post is for information only and does not constitute investment or tax advice.