Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
The Enterprise Investment Scheme (EIS) was introduced by the Major Government in the 1990’s to incentivise greater personal investment in small companies. It has been a great success and is the envy of Venture Capital investors in the EU. £27bn has been raised via the EIS financing of 52,000 new businesses. I have been Chairman of the EIS Association (EISA) for some 12 years.
The Enterprise Investment Scheme Association is a not-for-profit organisation with 270 members in total, including special terms for Financial Advisers. It has increased UK investment in smaller Venture Capital businesses which might otherwise struggle to raise the needed equity finance. Since its introduction every Chancellor up to 2015 has approved and widened the scheme. In 2011 and 2015 restrictions were introduced required to meet EU State Aid rules. There is now the ability to get rid of these.
The Seed Enterprise Investment Scheme (SEIS), established for smaller scale investments, has attracted talent to the UK and enabled many small entrepreneurs to start their own business here. Following the announcement by the Chancellor of the Exchequer on 23 September 2022, the limit which businesses can raise under SEIS will increase to £250,000 from April 2023 – a two thirds increase. The gross SEIS asset limit will increase to £350,000 and the age limit from two to three years. The annual investor limit will be doubled to £200,000. These changes should help over 2,000 small businesses.
It was good news too that the Chancellor announced that the EIS will be extended beyond the current end date of 5 April 2025. No further details are yet available, and it is not known whether there will be a new Sunset Clause, or whether the Sunset clause will be abolished. Depending on the Northern Ireland Protocol, it may be necessary to obtain EU approval of the EIS on an ongoing basis.
EIS has been particularly important in supporting new high-tech businesses, a very large proportion of which have got going with EIS finance.
It has surprised me that over time I have encountered many MPs of all three Parties who did not know about the existence of EIS and how important it has been in growing the UK Venture Capital commitment. Over recent years the EU has imposed a series of requirements on EIS which have served to increase the underlying costs e.g., particularly lawyers’ bills, inappropriate for small business.
To help support the net zero agenda the higher limits which apply to “knowledge intensive” companies will also apply to clean tech and green tech.
In my view, although there is an upfront cost of the tax incentive of EIS, it is more than made up for by the tax revenues generated from EIS investing. These comprise Income Tax on individuals’ pay; Corporation Tax; VAT on EIS investor purchases; National Insurance; Stamp Duty, Fuel Duty etc. EIS and SEIS are thus attractive fiscal measures costing the Treasury little or nothing on the one hand; but providing an attractive fiscal incentive to invest in EIS qualifying small and medium sized businesses, on the other.
Scope for reform is the removal of complicated tax rules required by the EU when the UK was a member, where there is no longer the need for the UK to impose such EU requirements. They add to costs and unnecessary regulatory complexity.
One such restriction is that companies must generally be less than seven years old when they first receive EIS funding. This can be particularly prejudicial to businesses in the UK regions, and in my view that an age limit has no bearing on the ability of companies to raise funds. I therefore believe we should revisit whether this restriction is still appropriate, bearing in mind the freedoms that Brexit has given to the UK.
Some three years ago I was contacted by the French tax office who advised they wanted to talk to me about EIS. I assumed, wrongly, that there was something in the UK’s management of EIS to which they objected to. Rather, they had observed how successful EIS had been in the UK in stimulating small business investment and wanted to understand how EIS worked. Subsequently France installed a different but comparable tax incentive.
The Government and Treasury have appreciated that there was considerable uncertainty for entrepreneurial business with the looming Sunset Clause, and so I welcome the announcement by the Chancellor. This helps maintain investors’ trust going forward, and hopefully secures long term investments for the UK’s small and growing businesses.
Finally, it is interesting to note that EIS/SEIS qualifying businesses survived well during the covid lockdown. They are now likely to be seeking fresh capital over the coming year to finance expansion.
This piece was updated on 21/10/22.