Britain’s got talent, and a lot of its talent is being Enterprise Investment Scheme (EIS) funded.
The EIS’s combination of upfront tax breaks and capital gains tax benefits mean it is a powerful incentive for investors considering backing entrepreneurial companies.
A combination of factors has led to an increasingly developed ecosystem in the UK concerning EIS investment opportunities. There is a renaissance in UK entrepreneurship funding across a range of markets including software, biotech, robotics, waste-to-energy and even the creative industries.
The alternatives for investors, in a close-to-zero interest rate environment and tightening of other areas of investment, means that there has been an increasing supply of capital by private investors in this space. The EIS scheme has become a critical component of the UK’s entrepreneurial finance ecosystem.
For companies seeking risk finance, EIS investors provide an important source of funding where venture capitalists (VC) or private equity funds might still be unwilling to invest. The growth in popularity of the EIS scheme has also led to the emergence of many specialised EIS funds that provide some of the elements of a VC fund to help allocate and manage EIS investments more systematically.
Numerous platforms have also emerged that make access to individual EIS investment opportunities, as well as EIS funds, easier.
However, as economists say, there is no such thing as a free lunch. The economic reason for the government to provide this tax break is that investors are backing risky investments – ones that often cannot get access to finance from banks or large institutional investors. It ought to lead to UK private investment directed to UK companies, funding UK jobs and UK tax receipts.
The ongoing HM Treasury Patient Capital review discusses – among many other policy tools – how this powerful tax incentive can be used to incentivise more investment in innovative knowledge-intensive companies, for longer.
The November Budget speech is likely to include some changes to the EIS rules. It is not yet known what these will be, but some options under discussion include an increase in the holding period of the investment above the current three-year period and a narrowing of the qualification criteria. Commentators expect, in particular, a greater focus on high-growth, knowledge-based companies at the expense of capital-preservation schemes.
Any changes are likely to only come into effect in the next tax year, so potential EIS investors will have time to adjust their investment strategy before any allocations they might make to EIS funds, or direct investments, before the start of the 2018 tax period.
• EIS tax breaks mean it is a powerful incentive for investors considering backing entrepreneurial companies.
• Clients might consider a mixture of investments into individual companies and EIS funds.
• EIS investments naturally carry a substantial risk.
A good first step for would-be EIS investors is to join one or more of the crowdfunding platforms and research opportunities to get a sense for how different companies are presented and what information is available. It is also possible to access EIS funds on a platform, directly or through an IFA. This lets investors reach professionally managed pools of EIS investment opportunities – akin to a mini-VC fund. Depending on the amounts an investor can commit, they might choose to develop a mixed portfolio of individual company investments and EIS funds.