Industry body sets best practice guidelines for tax based investments

The Enterprise Investment Scheme Association (EISA), the representative organisation for members involved in investing in businesses through the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), has published best practice guidelines to ensure that there is fee transparency within the industry.

Investee companies and investors using intermediaries to source and manage investments under the schemes are frequently both charged fees and the EISA guidelines are designed to bring complete transparency to enable level playing field comparisons to be made between all parties.

CEO of the EISA, Mark Brownridge commented, “In the post-Covid world, there is a need to re-emphasise the benefits of EIS and SEIS as an attractive means of investment both for investors and early stage growth businesses We believe that transparency and clarity are important ingredients in this, which is why we have published the guidelines. Rightly firms are open to decide on their own fee structures, but as the industry association we are keen to see best practice being applied with both businesses and investors being fully aware of the fees they are being charged.”

An area that often causes confusion for financial planners is whether fees are being charged to the investor or the company, and how much of the investment is eligible for Income Tax relief. It is worth noting that the net effect of fees, whether charged to the company or the portfolio, is broadly similar in that the investee company is provided with a reduced level of available investment.

The Research, Education and Marketing Committee of EISA, in conjunction with leading financial planners, has formulated the guideline principles for advisers, so that they are equipped to ask investment managers the right questions enabling them to provide clear advice to their clients with accurate fee comparisons.

The guidelines focus on the level of fees charged at the outset and the anticipated fees that will fall due over the first five years of the investment, highlighting the impact on the amount of funds actually available for investing, the indicative level of tax relief available to investors, and clarity on what success fees may be payable by the business.

Chairman of EISA’s Research, Education and Marketing Committee, Martin Fox who has been driving the work said, “‘The complexity and variety of EIS fees has been highlighted by financial planners, for some time, as a barrier to making EIS recommendations simpler. By producing these guiding principles and inviting planners and advisers to ask the right questions of EIS managers, we are giving planners and advisers the tools to make fair comparisons”.

NOTES TO EDITORS:

Contacts:

Mark Brownridge. mark.brownridge@eisa.org.uk

Martin Fox. Martin.Fox@bulletin.co.uk

Images of Martin Fox and Mark Brownridge attached

The EIS Fee Transparency Guidelines published by the EISA are as follows:

1. All fees should be clearly stated, when they are payable, and by whom.

2. Fees charged to companies matter as much as fees to investors. Both have an impact on the final outcome for investors, and it is misleading to say that fees charged to companies means that it is ‘fee free’ for investors. All fees charged to investee companies should be disclosed.

For example, fees for services that are needed or mandatory on the investee company, such as consulting or monitoring services, should be disclosed.

3. There should be clarity on whether fees are fixed or variable. For example, where monitoring fees might depend on the size of the company. Where appropriate a range can be given, but it should be clear as to the basis being used to decide on the final amount.

4. It should be clear as to how long fees are payable for, and in what circumstances this can change.

5. There needs to be clarity on which elements are subject to VAT and which are not. Just to say that VAT is charged as applicable is not sufficient and each fee should clearly have its VAT status given.

The net amount of an investment that will be used to purchase shares should be clearly stated.

6. There should be clarity on success fees, and whether these are calculated on returns that include tax benefits, or not. It should be clear whether these are calculated on a per company or fund basis. Disclosure should include the amount of any options or warrants that the manager may receive, as well as any other investment the manager or team may make that is on different terms from those by their customers.

The overall guiding principle is that investors should be able to readily compare fees openly and between different companies and know that all fees are declared.


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