More investors are considering start-ups for their potentially strong returns – and a tempting 30 per cent tax break – but the sector says it still needs almost £7billion to reach its potential.
The Enterprise Investment Scheme is a government-led scheme that helps younger, businesses raise finance by offering investors generous tax reliefs, including income tax and capital gains relief and some protection against losses, in return for such high-risk investing.
Alex Davies, chief executive of Wealth Club, a tax-efficient investing platform said demand from investors has been suprisingly strong over the past year, with people choosing to back firms using technology to drive their business.
Among the popular firms on Wealth Club has been Pavegen, a company that generates clean energy and data from footsteps.
Despite interest from investors remaining robust, according to the Enterprise Investment Scheme Association, more than £6.5billion of private sector equity investment is desperately needed.
Meanwhile, the trade body also found that economic uncertainties caused by both Covid-19 and Brexit, have led to a further shortfall of over £350million.
Mark Brownridge, director general of the EISA, said: ‘As we exit the current pandemic it has never been more important for the Chancellor to incentivise private investment in the country’s fast growth businesses.’
Investors can access companies by investing in an EIS fund which offers a simple way of accessing a portfolio of early-stage businesses, or start-ups.
Investors can claim EIS relief on up to £1million worth of investments in qualifying companies per person per year.
This cap rises to £2million if you’re investing in knowledge-intensive businesses, such as those in the life sciences sector.
But despite the sector’s plea for more funding, things do appear to be going in the right direction.
Alex Davies, chief executive of Wealth Club, a tax-efficient investing options platform, said its customers have ploughed a huge £32million into EIS and SEIS so far this year, up from £21.9million during the same period in the last tax year.
‘Had you asked me in March last year about the prospects for EIS, I would have been pretty negative. I would have also been totally wrong,’ he said.
‘As it’s transpired, since mid-April 2020 we have seen a huge appetite for EIS from investors’.
Alex said businesses that have been most in demand are those with technology at the heart of what they do.
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Other favourites at WealthClub include EnterpriseAlumni, a Facebook of sorts for ex-staff of large corporates and Inotec, a ‘medtech’ firm which has developed a device that treats serious chronic wounds, already used by the US Department of Veterans Affairs.
Alex added: ‘There are a number of reasons for the increase in EIS investment. Firstly, investors believe small businesses are more likely to adapt and prosper as a result of the crisis rather than large ones.
‘Secondly, investors see others across the pond making huge sums from technology stocks.
‘In the UK, you won’t see these types of business in the main listed markets, so investors could miss out unless they look beyond them.’
‘Furthermore, many investors believe tax is going to go up so want to invest as tax efficiently as possible whilst they can.
‘Finally, with investors stuck at home all the time, there’s no doubt they have much more time on their hands to review their investment portfolios.’
EISA’s wish list for Rishi
The EISA has written to Chancellor Rishi Sunak with a seven point ‘wish list’ ahead of the forthcoming budget, detailed as follows:
• Increase the limit for the Seed investment stage from £150,000 to £250,000.
• Provide confirmation that the schemes will continue beyond the current 2025 sunset, to give both businesses and investors the reassurance that they need to remain confident of ongoing funding.
• Amend the EUs State Aid and Risk Finance Guidelines. Brownridge said ‘having left the EU, there are clearly changes to the State Aid legislation, which urgently need clarifying’.
• Change the current restrictions on businesses using the EIS and SEIS schemes from ‘the age of the business’ to ‘the size of the business’, with the objective of opening the schemes to more businesses and enabling more growth and employment as a result.
• Reduce the administration burden for businesses looking to use the schemes.
Brownridge added: ‘The current guidelines have been put together over the past 25 years and are now too complicated and cumbersome for most early stage businesses.
‘Reducing both the complexity and administration would help to drive the use of the schemes.’
• At the same time as reducing the administration and complexity, address technical inconsistencies that arise when one EIS supported business buys another that has benefited from SEIS investment.
• Make more businesses and investors aware of the schemes.
‘Whilst businesses’ understanding of the various types of alternative funding is improving, there is still plenty more that can be done to highlight the importance of EIS and SEIS in providing the necessary growth funding that may well not be available from other more traditional sources,’ said Brownridge.
The EISA is responsible for advising the government on the best conditions to encourage private investors to support growth businesses.
While the scheme has raised over £22billion for over 30,000 businesses since its launch in 1994, the trade body said there is still an ‘investment gap’ that needs to be addressed.
Lord Howard Flight, chair of the EISA, said: ‘Ensuring the businesses with real growth potential have access to the investment they need is critical to the UK’s recovery from the current pandemic.
‘The SEIS and EIS schemes will play a major part in attracting the all-important private sector investment, and we look to the Chancellor to do all he can in his forthcoming statement to simplify, promote and extend the terms of the schemes so that we can be sure that every pound of investment is put to good use.’
A potential win for start-ups and investors
Additionally, all the old drivers of EIS business remains strong, such as restrictions on pensions for higher earners and tax increases on buy to let investment and dividends.
Alex added: ‘EIS is a fertile hunting ground, provided you’re happy to invest early stage and the risks that entails.
‘For the right type of people, such as wealthier and more sophisticated investors, EIS investments can be hugely attractive.’
But EIS isn’t just potentially good for the investor. It’s been pivotal in ensuring start-ups in the UK can reach their potential.
Under EIS, small businesses can raise up to £5million each year, and a maximum of £12million in the company’s lifetime.
This also includes amounts received from other venture capital schemes. The company must receive investment under a venture capital scheme within 7 years of its first commercial sale.
Since its inception 25 years ago, the scheme has helped over 30,000 SMEs and has raised more than £22billion.
Investment into SMEs creates jobs and because of the types of businesses the money goes into, namely fast-growing tech enabled businesses, these tend to be high value jobs.
Alex said: ‘Creating lots of high-value jobs, lots of higher-rate taxpayers and lots of economic growth is a win for investors, companies and the economy.’
EIS tax relief explained
When you invest in an EIS you can get up to 30 per cent tax relief. For example, investing £10,000 could get you up to £3,000 back on your tax return, while any growth is tax free.
In addition, if you have any chargeable capital gains – from the sale of another investment (investment property or shares, for instance) – you can defer the gain for as long as you are invested in the EIS, potentially indefinitely.
Assume you have an income tax bill of £30,000 and a Capital Gain of £100,000 resulting in a £20,000 CGT bill. Invest £100,000 in an EIS and you could get £30,000 income tax relief.
In addition, you could defer your £100,000 gain and the resulting tax liability. This would only become payable if and when you sell your EIS shares.
If you die before realising the EIS investment, the CGT liability would die with you.
Providing you hold an EIS investment for at least two years and on death, it can be passed on free of inheritance tax if the company is still qualifying.
Lastly, EIS gives you a huge protection if things go wrong: you can choose to offset any loss, less the income tax relief received, against your income tax bill. So, an additional-rate taxpayer could effectively reduce a total loss of £1 to as little as 38.5p.
To keep the EIS tax benefits you must hold the investment for at least three years.
The Wealth Club platform lists the majority of EIS funds as well as selected single company deals. Investors can apply for all deals online.