In article last week, the Sunday Times reported that the UK government was looking at plans to “clamp down” on the Enterprise Investment Scheme (EIS).
This investment scheme is a tax exemption that aims to encourage investment in embryonic stage businesses, investment into small business can be fraught with danger, and even riskier and the earliest stages.
By allowing tax benefits the UK government has significantly reduced the risk for investors and promotes investment in innovation and entrepreneurship.
The problem is that many individuals are of the opinion that Enterprise Investment Schemes allow the opportunity for wealthy investors to “avoid paying tax.”
EIS is the foundation that all UK crowdfunding platforms use to drive investor interest in backing UK entrepreneurs. The UK investment crowdfunding sector would suffer greatly if EIS were impeded in some way.
- EIS was launched 1994.
- 26,000 UK companies have received investment since it began.
- £15.9 billion of funds have been raised.
Mark Brownridge, Director General of the EIS Association, explains;
“We are engaged in constructive dialogue with HM Treasury over the Patient Capital Review consultation. There is a clear message coming from them, which is that EIS and similar tax incentivized venture capital schemes need to focus on delivering funding for high-growth, innovative companies.”
Brownridge says the concept of patient capital is very much in line with the overall direction of EIS and his group is putting together empirical evidence to share with HM Treasury to prove this fact.
“For example, in the tax year after investment into solar and renewable energy was restricted, EIS enjoyed its biggest ever fundraising year. So already we have seen that more money is flowing to the target, higher risk areas. And because of changes introduced in 2015 that placed further focus on smaller, younger, higher growth potential companies, an even greater proportion of EIS funds raised since then has been flowing to these target areas,” adds Brownridge. “So, in terms of policy goals, the effectiveness of EIS has increased substantially over the past 18 months, and continues to do so. This is a win all round – the rules have better focused EIS into target areas, and the investment flow has simultaneously increased.”
“We are already facing an extremely uncertain outlook for the economy as the UK leaves the European Union, so it is essential that EIS and VCT funding is maintained in order to help support the vitally-important contribution that venture capital makes. Now is not the time to experiment with whether our economy might prosper without these tax relief schemes. We need the innovation that comes from EIS-funded companies, which by their nature are risk-taking ventures and rely on the tax reliefs to encourage investment into their businesses from private individuals, without which they may not have the risk appetite.”
“EIS investors in growth companies are investors in risk equity and are prepared to invest for the long term and they achieve their returns only when the company is successful,” states Brownridge. “It should also not be forgotten that the most acute market failure currently is in the area that EIS is not particularly active – later stage growth funding.”
Access to funding is the largest challenge for small business creation.
Data from the EIS Association should be taken into serious consideration.
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