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EU State Aid Rules Are Holding Government Back From Supporting Small Business

Posted 4 months ago

EU State Aid Rules Are Holding Government Back From Supporting Small Business
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NextFin is calling on the EU to suspend State aid rules on the Enterprise Investment Scheme to allow increased investment in small businesses struggling to survive amid the coronavirus pandemic.

Currently, State aid rules restrict companies to raise up to £5 million through EIS and SEIS investment in one year. Also to be included within this limit is any other funding received that is considered to be EU State Aid.

There is also a lifetime limitation of £12 million or £20 million for a “knowledge intensive” company. (A knowledge intensive company is one which meets certain conditions for promoting innovation and employing highly skilled employees.)

As NextFin has reported, there are a number of flaws in the government relief packages. Already, it has been revealed that around 800,000 small UK businesses cannot access the government Coronavirus Business Interruption Loan Scheme (CBILS).

According to the EISA, 42% of start-up firms could go bust if the government-imposed lockdown continues for three months or more, resulting in potentially 10 million people facing unemployment. 

NextFin has already discussed how the government can support SMEs through the coronavirus by raising the rate of income tax relief for EIS to 50% and SEIS to 70%. This will stimulate private investment, by mitigating a larger proportion of the risk for investors. Doing so would mobilise millions of pounds of private funding into start-ups, via EIS funds and equity crowdfunding.

In 1999, for example, when Capital Gains Tax exemptions were introduced to the EIS - there followed an immediate rise in both private funds raised and companies raising funds. This was also the case in 2011 - when the income tax rate of relief was increased from 20% to 30% - again, there followed an immediate rise in both funds raised and companies raising funds.

As the EISA have demonstrated, increases in the rate of relief under the EIS scheme result in the mobilisation of private investor’s capital which is passed onto businesses that require a cash injection.

In the words of one private fund manager: “Any improvement in the tax benefits in SEIS / EIS will increase flows of EIS investment into our Start-up Series Fund, which in turn can be passed to businesses in our portfolio.”

The EU has already considered suspending State aid rules to allow coronavirus actions. Ursula von der Leyen, president of the Commission, said that State aid could be permitted in "exceptional circumstances" as a way of mitigating the impact of the Covid-19 virus on the European economy. Commissioners are proposing "targeted options" that EU member states could direct to particular sectors requiring specific support, according to the Financial Times.

CEO of NextFin, Sacha Bright said: “Because we are still a member of the European Union, we cannot breach EU law. Having said that, the EU must act fast and allow the UK to increase the threshold of EIS investments to allow us to mobilise private capital into start-ups, and thus protect millions of jobs. 

They have allegedly already allowed the UK government to provide rate relief, and I am calling on our government to put pressure on the EU to allow us to use EIS as a way to save small businesses and jobs. As the start-up capital of the European Union, the UK surely has a responsibility to ensure the protection of this key sector, especially in the midst of a pandemic which is threatening to destabilise the economy.

“These are unprecedented times, and with the growth and development of many businesses at risk, the EU should consider the current situation surrounding coronavirus and allow members to make their own decisions regarding State aid to protect their most important sectors.


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Author: Sacha Bright & Oliver Murphy

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.

 

 

Tagged: Covid-19 EIS SEIS Start-ups



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