What does the future hold for the Enterprise Investment Scheme (EIS)? - Business Leader News

What does the future hold for the Enterprise Investment Scheme (EIS)?

Introduced in 1993, Enterprise Investment Schemes (EIS) have for more than two decades been a crucial way for investors to help fund small UK businesses.

EIS has been a popular introduction, with over 24,500 individual companies receiving investment through the scheme since the launch of EIS into Britain.

Business Leader Magazine takes a look into EIS and its impact on funding for small businesses.

Upon its creation, EIS was designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares in those companies that qualify – marking for the investor a tax efficient way to invest in small companies.

What makes the scheme even more attractive is the ‘carry back’ facility, where investments can be applied to the preceding tax year.

Commenting on the initial launch of EIS in 1993, Michael Portillo, then Chief Secretary to The Treasury, 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 EIS scheme stayed relatively untouched until 2012 when chancellor George Osborne announced the creation of The Seed Enterprise Investment Scheme (SEIS), to help entrepreneurs receive funding to create start-ups, which would come with tax breaks to encourage investors who might otherwise perceive such entry-level investment as too risky.

SEIS is designed to de-risk investments in new businesses and SEIS allows individuals to back companies up to £100,000 and provides them with 50% tax relief.

Furthermore, profits made from the sale of equity are exempt from capital gains tax, whereas losses can be potentially offset against it. Judging by the restrictions, it is clear the scheme is designed for those looking to invest in new tech start-ups and other higher risk categories.

Investors can take no more than 30% of the business and the companies must be unquoted, have less than 25 employees and assets worth no more than £200,000.

According to the HMRC, EIS benefits are as follows

Income tax relief. Standing at 30% of the cost of its shares, to be set against the individual’s income tax liability for the tax year in which the investment was made. Relief can be claimed up to a maximum of £1m invested in such shares, giving a maximum tax reduction in any one year of £300,000.

Capital gains tax exemption. If a client has received income tax relief, and the shares are disposed of after they have been held for the qualifying period, any gain is free from CGT. If no claim to income tax relief is made, then any subsequent disposal of the shares will not qualify for exemption from capital gains.

Loss relief. If the shares are disposed of at a loss, investors can offset the amount of the loss, minus any income tax relief given, against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.

CGT deferral relief. Individuals and trustees of certain trusts can defer payment of tax on a capital gain, where the gain is invested in shares of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose.

Business Property Relief. There can be 100% inheritance tax (IHT) relief on EIS investments after two years through business property relief (BPR).

Benefits of EIS and SEIS

So, how have businesses benefitted from the scheme? According to statistics from the EIS Association, thousands of businesses have benefitted from both the SEIS and EIS. In 2016-17, 3,470 companies raised a total of £1.8m of funds under the EIS scheme. In 2015-16, 3,545 companies raised £1.9m of funds. 2,260 companies received investment through the Seed Enterprise Investment Scheme (SEIS) and £175m of funds were raised, down from 2,405 and £182m in 2015-16.

Over £9.7bn of private funding has been raised by EIS companies across the UK since the scheme’s inception; with funding options being raised for various businesses including small ‘friends and family’ rounds – business angel investments where individuals are contributing skill as well as funding -through to formal public offers and EIS funds.  The number of professionally managed EIS/SEIS funds is growing and the sector is becoming more established, potentially spelling a bright future.

On how the fund has helped a business grow, Mark Brownridge, Director General at EIS Association, comments: “An example of how EIS has helped a company is Flubit.com.

“Flubit is an online marketplace for UK products, through which users receive on average a 10% discount compared to Amazon.co.uk. It has just launched its B2B offering, SKUcloud.co.uk, through which websites and apps will be able to generate revenues through the sale of any of 55 million relevant/targeted third-party products to their users, directly on their own website.

“Three high-net worth individuals invested in Flubit.com using EIS, the number of external investors has grown to 50 of which 29 have invested via EIS, providing around a third of its total funding.

“Not only that, but many of Flubit’s investors found out about it from the original three EIS investors, demonstrating how EIS plays an important role in helping to create networks of angel investors who often collaborate to help businesses grow.”

The abolition of EIS and SEIS schemes

But what would be the impact if EIS and SEIS schemes were to be abolished?

Goncalo Vasconcelos, CEO of Syndicate Room, says it would be a bad idea to
abolish it.

He said: “EIS has been around for 17 years. It brings a vitality to businesses. All around the world people ask me to talk about EIS relief. They often don’t understand how good it is and how to use it, but it’s not just for wealthy people.

“Funders can invest £1,000 through us and get income tax relief like a high-net worth person.

“The difference is high-net worth people tend to know more about it as they get advised. Independent Financial Advisor’s typically don’t understand EIS, but it’s one of the best tax reliefs you can get.

“The Government has been cracking down on EIS – because, as always with tax relief there will be companies that don’t use it within the spirit it was intended- to support high-risk entrepreneurs.

“Around 90% of job creation comes from start-ups and scale-ups. To cancel EIS would be a bad decision.”

Brownridge is in agreeance, believing that this would, in a worst-case scenario, see Britain’s entrepreneurial economy struggle to compete with those across the world.

He said: “The UK has set a precedent in creating a conduit that connects the UK’s investors with its growing pool of entrepreneurial talent. Without schemes like these in place, the alternative finance arena could be perceived as too daunting for investors. This connection is vital for the growth and scalability of many of the UKs successful SMEs.

“In a worst-case scenario, we would see Britain’s entrepreneurial economy struggle to compete with those across the world, including those from Europe, the US, and China. With these schemes, UK companies are leading the way in their respective sectors. They are also scaling nationally and internationally, creating more jobs which support families across the country, and gives training to those employees to help them grow as people and citizens. By supporting these businesses at early stages, we, as a nation, can receive all the fruits that come from a thriving entrepreneurial economy at a later stage.”

Mark concludes: “Without schemes like this in place, there would be both an investment and economic growth deficit today and in the future. This would not just be from the failure of small and mid-sized enterprises, but also the cost of unemployment, a skills deficit, and a lack of investment into regions across the country.

“As 99% of the UK’s private sector companies are SMEs, we need to nourish these businesses and support them to grow to continue to benefit our nation.

“With some potential economic and political turbulence on the horizon, Government-backed schemes such as SEIS and EIS are a great way to ensure that our entrepreneurial economy continues to thrive and provide stability for families and workers across the UK.”