Calls for EIS shake-up to support P2P growth
The UK government has been urged to amend Enterprise Investment Scheme (EIS) rules to allow more peer-to-peer lending platforms to utilise the scheme.
The EIS is designed to help companies raise money to grow, by offering tax reliefs to individual investors who buy shares.
However, lending is not a permitted activity under the EIS rules, whereas broking is allowed.
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This means that P2P platforms are unable to hold loans on their balance sheet if they were funded with EIS capital in the preceding three years, and instead can only act as a broker.
Typically, early-stage P2P platforms are purely funded by the crowd, while more mature firms will want to take on some balance sheet risk alongside their funders, giving them ‘skin in the game’.
Industry stakeholders warn that the EIS rules are holding back more established P2P platforms from growing their business.
“I think the issue is that as businesses grow and mature, they want to expand their sources of funding, including their balance sheet,” Mike Carter, head of platform lending at the 36H Group, told Peer2Peer Finance News.
“If you started your firm with EIS money you can’t do that, which restricts the platform as it grows.”
Peer2Peer Finance News understands that at least one P2P platform encountered issues due to the EIS exclusion and decided to set up a complicated legal structure to be able to take on balance sheet risk.
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Fintech trade body Innovate Finance submitted a response to the Treasury select committee over the summer, following the committee’s call for evidence on the venture capital market. It recommended that EIS rules be changed to include lending risk as a permitted activity without the three-year look-back restriction.
“[The exclusion of lending risk] is a material drawback in building a lending or insurance business using EIS funding because most early-stage companies will have raised funding in any three-year period, and that funding will likely have included EIS investors,” Innovate Finance said.
“In effect it means the business must operate only as a broker and cannot take advantage of the profit on the risks it is originating, and this holds back the growth of the business. This is also relevant given the decline in P2P lending due to the continued tightening of financial promotion rules by the Financial Conduct Authority which is causing platforms to leave the P2P industry.”
Peer2Peer Finance News understands that the Treasury select committee has not yet responded to the submission. The Treasury select committee said it does not comment on written evidence submissions.
A government spokesperson said: “Balance sheet lending is not permitted under the EIS as EIS companies could ‘on-lend’ tax advantaged investment to other companies who do not qualify for the reliefs and do not match the profile of the schemes’ target company. This would risk diverting capital away from the genuinely high-risk enterprises who struggle to access finance.”
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Another industry stakeholder, speaking to Peer2Peer Finance News on the condition of anonymity, disagreed that the EIS rules should be amended to incorporate lending. The stakeholder said that firms should look at why the scheme exists in the first place – to avoid market failure – and should not get a tax break simply for wanting to embark on balance sheet lending.
There is plenty of capital around from other sources at the moment, the stakeholder said, and warned that excessive demands on the scheme could lead to it being reined in, like R&D tax credits for small and medium-sized enterprises which were cut back in last year’s Autumn Statement.
Under EIS, companies can raise up to £5m each year and a maximum of £12m over the company’s lifetime. This also includes amounts received from other venture capital schemes. The company must not have assets worth more than £15m before any shares are issued and must have less than 250 employees.