No room at the inn
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Robin Sheppard, chairman of Bespoke Hotels, argues that a minor change to the Enterprise Investment Scheme could be of enormous benefit to the hospitality sector, and to the economy as a whole.
The Enterprise Investment Scheme (EIS) was first introduced in 1994, to help small, unquoted trading companies raise capital for growth, and to incentivise private investors to buy new shares in unquoted companies.
According to the EIS Association, '[EIS] fulfils a much needed role in encouraging private investment into small and growing British companies and fostering the innovative, entrepreneurial spirit that drives private enterprise.'
There are some in the hospitality trade, however, who are unable to access this important source of investment at a time when – it hardly needs reiterating – the sector needs all the help it can get.
The big banks are hardly in the most speculative of moods, preferring to keep their money under the bed. The 20 per cent VAT rate discourages many small hotel and guest-house owners from expanding, preferring instead to keep turnover under the VAT threshold, rather than being forced to hike prices by one-fifth.
That’s the sort of differential that makes prices appear expensive to the end consumer whilst providing miserable returns to the owner. The relief of a strong pound and in-bound tourism numbers is more than offset by the rapidly disappearing disposable income of the Great British public.
So why can some, and not other, hospitality businesses access capital via the Enterprise Investment Scheme?
The informal rule is that, if a business derives more than 20 per cent of its income from bedrooms, it is categorised for EIS purposes as a hotel – and hotels have, since 1997, been excluded from the EIS.
The argument is that property-based businesses are relatively low-risk, given that, whatever the trading returns, there will always be a capital asset, and there may be some appreciation of the property value.
Most people would say that, in the current economic conditions, the risk-mitigation of property-based enterprise is negligible. Try telling small hotel-owners that their business is risk-free.
So enterprising, ambitious pub/inn/restaurant-owning entrepreneurs who want to expand and diversify their business with some bedrooms are excluded from the most obvious source of investment.
There was speculation in the hospitality press recently that the Chancellor would announce changes to the EIS in his autumn statement. Unfortunately nothing transpired, but it does seem to indicate that this subject is at least on the political agenda.
The economic justification for the EIS is that the cost to the Treasury is more than offset by the employment and tax revenues from those businesses which are boosted, and even saved, by the injection of EIS capital.
There’s every reason to think that the net benefits to the Treasury would be increased by readmitting hotels to the EIS and removing this barrier to entrepreneurialism.
Robin Sheppard is chairman of Bespoke Hotels, a hotel management company.