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Tightening of EIS Rules Takes £200m off Amounts Raised In 2018-2019

Posted 5 months ago

Tightening of EIS Rules Takes £200m off Amounts Raised In 2018-2019
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According to figures released by HM Revenue & Customs, £1.8bn was invested into 3,905 companies, down from £2bn the previous year. 

Investment via the Seed Investment Enterprise Scheme (SEIS) has also fallen. In 2018-19, 1,985 companies raised a total of £163 million of funds under the SEIS scheme. This is a decrease from 2017-18 when 2,430 companies raised £195 million.

EIS investors receive 30 per cent income tax relief on investments of up to £1m in return for investing in some of the UK’s most high-risk start-ups, and can invest up to £2m in so-called “knowledge-intensive companies”.

According to accountants Price Bailey, the ‘risk to capital ’ rules, introduced on 1 December 2017, mean that entrepreneurs must demonstrate to HMRC that there is a “significant risk” of a capital loss on their shares exceeding the “net investment return”. This is leading to nearly 1 in 10 applications for Enterprise Investment Schemes (EIS) being rejected or withdrawn.

Further, it is clear that London still dominates the funding market as 49% of all EIS funding is flowing to companies in the capital. Technology companies also look to be holding strong, attracting 30% of total funding. However, it has been concerning to see a 54% reduction in deals worth £4m or more.

Chand Chudasama, Partner at Price Bailey, comments: “The dramatic erosion of pension tax relief allowances, and historically low interest rates, boosted investment into companies qualifying for EIS/SEIS. The new risk to capital rules are having a significant chilling effect on the market and are pushing up the cost of raising venture capital via EIS/SEIS by well over a half in order to access meaningful levels of investment for growth.”

“Deals of £4 million or more are an important barometer as this funding typically flows to true scale up businesses who are then able to make some real inroads into a marketplace. This dramatic reduction will no doubt harm many good companies’ ability to take the risks that entrepreneurs need to take in order to grow their businesses.”

He adds: “We are expecting to see an increase in rights issues as a consequence of the economic fallout from COVID-19, many of which could qualify for EIS relief. Businesses are likely to assume that because their initial share offers qualified, secondary offers will too. 

“HMRC could decide that the new shares do not qualify for EIS relief under the new rules, or if business plans have significantly changed since the initial share issue. Businesses should allow themselves plenty of time for the approval process or risk missing out on investment.”

CEO of Nextfin, Sacha Bright, said: “This goes to show how effective the EIS scheme is. If the government increases or decreases the Scheme’s allowances, it seriously affects the amount of investment businesses receive. 

"In 2012, for example, the government introduced SEIS and increased EIS allowances. As a result there was an immediate increase in investment to early-stage businesses. And in 2017 we saw a decrease in investment when restrictions are imposed. 

"It's a shame that the EU is road-blocking our government through state aid rules preventing the UK to invest in one of its most successful sectors. The UK government is unable to increase EIS allowances, which is a proven method to deploy private investor’s capital into early stage businesses.

"If Europe is truly a Union, holding itself up as a beacon of freedom, surely it should act fast on behalf of the British people and its European residents to relax state aid rules and encourage the British government to increase EIS/SEIS allowances to save our startups, and in turn protect millions of jobs.” 

Authors: Oliver Murphy & Sacha Bright

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: business eis equity crowdfunding alternative finance P2P



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