Investment for businesses through government relief schemes falls
The amount raised by companies through the government’s Enterprise Investment Scheme (EIS) has fallen by more than £230m, figures released by HMRC show.
In 2015-16, a total of £1,647m of funds was raised under the scheme, compared with £1,881m in 2014-15. The number of companies seeking investment has also fallen slightly.
Launched in 1993, EIS allows investors to claim 30% income tax relief on up to £1m, if the shares are held for at least three years. There is no minimum investment. After the shares are sold, any gains are not subject to capital gains tax. Any losses can be set against the individual’s income tax obligation for the year. More than 26,000 companies have gone through the scheme so far, raising more than £15.6bn in funds.
The majority of investments (57%) through EIS have been companies raising funds for the first time. This shifted for the first time in 2015-16, with more firms seeking subsequent rounds of investment (52%).
While the biggest impact has been on the EIS scheme, the HMRC data also shows the number of firms applying for the government’s Seed Enterprise Investment Scheme (SEIS) is down, although the average investment remains the same at £76,000. SEIS was introduced in 2012 to offer support to early-stage companies looking for investment, by offering tax relief at a higher rate (50%).
In 2015-16, 2,225 companies raised £170m overall. This compares to 2,340 companies in 2014-15 that raised £178m. The number of companies seeking advice as to whether they are eligible for the schemes – known as advance assurance requests – is also slightly lower in 2016-17, compared with the previous tax year.
The downturn has been blamed in part on changes to the schemes’ eligibility criteria, announced in the 2015 summer budget. Companies must now seek their first investment within seven years of their first commercial sale (although there are exceptions). A new cap of £12m was also introduced on the total amount a business may raise through the schemes in its lifetime.
“The constant tinkering with these government-backed tax schemes is causing uncertainty for small businesses and investors alike,” says Ray Abercromby, partner in business tax at Smith and Williamson. “At first glance, the changes appeared to discourage investment in the UK’s small and scale-up businesses.”
Mark Brownridge, director general of the EIS Association, says: “Our greatest concern from these figures is that there’s been a meaningful drop in the number of companies raising money via EIS for the first time. Well in excess of 1,000 businesses raised money from EIS in 2014-15 for the first time, but that fell by some 300 in 2015-16.
“EIS has over the years consistently proved itself to be of significant benefit to the economy as a whole and at a time, post-Brexit, when access to finance is increasingly cited as a major barrier to starting up a new business, the government should be doing all it can to support the important role EIS plays in empowering entrepreneurs and encouraging UK small business growth.
“We continue to believe the 2015 rule changes are counterproductive and not in our economic interests.”
Luke Lang, co-founder of equity crowdfunding platform, Crowdcube, says: “The availability of generous tax reliefs, such as EIS and SEIS is vital for stimulating investment in early-stage businesses. Our investor community has invested £200m in EIS and SEIS eligible businesses – [and] that amount more than doubled between 2014 and 2015.
“[But] while the availability of these tax incentives is important, it’s not the only motivation for investors. Fintech pioneer Monzo, which was not eligible for EIS or SEIS, raised £2.5m on Crowdcube in March.”
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