The introduction of the Risk-to-Capital rule could disrupt the future funding landscape for both new and growing pub businesses, a serial sector investor has warned..

Due to be given Royal Assent as part of the government’s financial bill today (8 March), the new rule, announced by Chancellor Philip Hammond in last November’s budget, has been designed to stop investors receiving generous tax breaks, of up to 30%, for investments in low-risk businesses, via tax-efficient schemes, such the Enterprise Investment Scheme (EIS) and Venture capital trusts (VCTs).

Steven Kenee, partner at investment manager Downing, told MCA that the changes could significantly impact how new pub companies are invested in, in the future. He said these kinds of funds have historically played a large part in allowing young, independent, dynamic companies of the future to grow, “and it is not clear whether that will be the case going forward”. He added that it could well mean we see fewer new large-scale pub companies developing in the future.

On the potential impact on new companies, Kenee said many of the most successful, fast-growing small to medium-sized pubcos of today, such as Oakman Inns and Restaurants, Upham Brewery, City Pub Co and Brewhouse and Kitchen started life by raising EIS funding.

“It is far from clear whether these companies would be able to raise funds under the new rules and whether or not they could have ever got off the ground was it not for the EIS relief to encourage investors to back new companies with no trading history,” he warned.

The new rule is also likely to stifle the continued growth of existing companies, he added. “Many companies which raised funds in the last year or so to develop and open their first few pubs were hoping to raise further funds this year to allow them to get to the critical mass needed to be able to start accessing other sorts of finance such as bank debt, PE, etc,” said Kenee. “It is now unclear if these companies will now be able to raise further funds which could mean they get stuck at two or three units rather than becoming the next Oakman Inns or City Pub Group.”

Kenee said there were pub businesses that Downing has invested in to open their first two or three pubs who are now looking for investment to fund the next few, “and we can’t do it”. “It is not speculation, it is a known issue and we don’t know what the answer is,” he said.

Brigid Simmonds, chief executive of the British Beer and Pub Association, told MCA: “Tax relief for people investing in EIS schemes was primarily established to give entrepreneurs and investors tax incentives in return for ‘risky investments’. Consciously excluded from EIS schemes were investments in property and hotels. Whilst this will inevitably impact on investment in the sector, particularly outside London, it is perhaps unsurprising that these changes, in relation to existing freehold pubs, have been made.

“Clearly it is important the government continues to look to support the pub sector through reducing the very significant tax and regulatory burdens.This will stimulate the necessary investment for the sector to evolve and flourish.”

Kate Nicholls, chief executive, UKHospitality added: “We lobbied hard against changes when they announced although this is still a valuable funding vehicle for supporting start-ups and it has been useful for businesses in the sector. Our job now is to communicate with the Government the need for a flexible system that allows investment in small and medium-sized businesses without barriers to growth.”