UK start-ups and growth businesses pinning their hopes for funding on schemes such as the enterprise investment scheme and venture capital trusts would be wise to move quickly to secure the cash they need. With the UK Government now embarking on a review of these schemes, time may be running out to take advantage – at least in the current form of EISs and VCTs.
The review is a potentially negative consequence of the Patient Capital Review, a Treasury-backed investigation into whether small and growing businesses in the UK are able to secure the funding they need for the future. The review offered many positive recommendations, but raised question marks about the effectiveness of EISs and VCTs as a means of offering targeted support for businesses raising cash – hence the Treasury’s move.
Any curtailment of these schemes would be unfortunate. They offer very generous tax relief to investors prepared to take the risk of buying equity in small companies – to qualify, a business must be unquoted, have fewer than 250 employees and assets of less than £15m; usually, it may not raise more than £5m in any one financial year.
In return for backing such companies, investors get a big chunk of support from the taxpayer. In a VCT, a collective fund run by a professional fund manager, investors get 30 per cent upfront tax relief – so it costs only £700 to invest £1,000 – and income and profits are tax-free; they can invest up to £200,000 in VCTs in any one tax year.
The EIS has a higher annual investment allowance of £1m and can be used to put money into individual businesses or a managed fund. Like VCTs, the EIS offers 30 per cent upfront tax relief and tax-free returns, but the scheme also enables investors to defer paying tax on previous capital gains and to set any losses incurred against tax. EIS shares are exempt from inheritance tax too.
A separate initiative, the Seed Enterprise Investment Scheme (SEIS), operates similarly to the EIS, but only covers investments in the very smallest businesses; it has a lower annual investment allowance, of £100,000, but more generous upfront tax relief, of 50 per cent. It is also part of the Treasury review.
These schemes have raised sizeable sums for growing businesses. A recent survey by the Association of Investment Companies found that the VCT sector alone had provided £225m of funds to 115 businesses during the 2015-16 tax year – and to good effect, with VCT-backed businesses averaging an increase of 60 employees per company since VCT investment. Data is harder to come by for the EIS and the SEIS, but recent figures from HM Revenue & Customs suggest as many as 5,500 companies received funding through the two schemes in 2015-16, with investment totalling more than £1.8bn.
The Treasury does not appear to be suggesting that these schemes should be abolished altogether; ministers are simply questioning whether companies raising money through them would have been able to pick up funding without tax-incentivised schemes, the costs of which are picked up by the taxpayer.
Nevertheless, it makes sense for those considering using these schemes – companies and investors alike – to move as quickly as possible. They may not be around in their current guise beyond the end of this tax year.
