In 1993, Michael Portillo, Chief Secretary to the Treasury when the EIS was launched, said:
“The purpose of Enterprise Investment Schemes is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.”
The ‘considerable difficulties’ in raising small amounts of capital are still a pertinent feature of the business landscape today and the EIS continues to thrive in helping industries that are struggling to find private investment.
Changes in EIS legislation announced in the Summer Budget 2015 re-emphasised the original purpose of encouraging investment in smaller UK companies. Most recently, subsidised renewable energy generation such as hydroelectric or anaerobic schemes were removed from eligibility for EIS tax reliefs. It is essential to be aware of the market and legislative changes in this area and keep updated on a regular basis.
There is little doubt that these types of businesses can be exciting investments with the potential to generate excellent long term returns; it is important for investors and their advisers to think of them as just that and not just a chance to utilise the tax reliefs available. The EIS is designed to provide companies or sectors struggling to raise capital with a group of investors who are willing to provide the funds and join them on their growth journey.
The industry is looking to invest in sectors that fit with the Government’s original goal for EIS and dry bulk shipping has proved to be great example of this.
Why dry bulk shipping?
- In February 2016, the market reached a historic low point – enabling an EIS to invest in the sector with no debt
- Asset backed business model for EIS and non-contentious
- Global industry, established for thousands of years – offering investors access to a well understood market
- Active secondhand market for ships
- Ability to mitigate key risks
- Favourable tax treatment in UK – tonnage tax instead of corporation tax
Shipping has substantial tax free upside potential should charter rates rise over the next three to five years as is expected. The dry bulk shipping industry currently faces considerable challenges, with charter rates barely covering operating costs and therefore many ship owners and operators that have to cover the costs of debt are operating at a loss. Due to growth in international trade combined with cancellation of new vessel orders and an increased rate of scrapping order vessels, the supply and demand imbalance is expected to reverse. Against a backdrop of steadily increasing worldwide demand for the transport of commodities, it is easy to see why industry forecasters are expecting an improvement over the next three to five years – and which by all appearances is now underway.
The asset backed nature of shipping, in the form of physical ownership of vessels, also provides attractive downside protection for investors. With a typical lifespan of 25 years, ships are normally sold on at a price linked to the current and expected charter rates, as well as retaining a significant scrap value for the steel they are built from.
Dry bulk shipping is a cyclical industry that enjoyed daily revenues of up to USD $70,000 in 2007/08 but with an ensuing flood of orders for new build vessels, the supply of vessels has since outstripped demand and charter rates are reached their historic low of c.$6,000 per day for the Handymax/Supramax vessel type.
However, investment in to EIS is not suitable for all investors so it is important professional advice is sought. Full due diligence should be undertaken by financial advisers and wealth managers alike, both operational and investment, in order that they and their clients can feel comfortable with the investment they are making and be fully aware of all associated risks.
Tranche 1 of TIME:EIS Shipping successfully raised its £5m target at the close of the 2015/16 tax year, which has now been fully deployed with the first vessel fully operational. To find out about our latest tranche and any EIS investment opportunities closing before the end of the 2016/17 tax year please contact us on 020 7391 4747 or firstname.lastname@example.org.