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The UK government introduced the Enterprise Investment Scheme (EIS) in 1994, and at the time, only a few investment firms were pushing this as an opportunity for investors. Today in 2020, however, the investment category has grown substantially; as has the number of firms turning to EIS funding due to the generous tax reliefs and reassurances it offers investors.
What kind of contribution do EIS companies make to the UK economy, however, and what are the prospects for future years? Does the recent market volatility of March 2020 present any kind of threat to the Enterprise Investment Scheme, and how might EIS evolve?
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The contribution of EIS to the economy
As a 26-year-old scheme, EIS is well-established and widely recognised by investors as a valuable way to mitigate a tax bill whilst generating returns from exciting, innovative UK companies in a range of growing sectors.
According to the Enterprise Investment Scheme Association (EISA), over 28,000 companies have benefited from EIS investment; receiving over £18bn investment between the introduction of EIS and 2019. Investment into EIS reached its peak in the 2015-16 tax year at £1.98bn, with a slight reduction in the following tax year to £1.93bn.
Not only is EIS a source of immense innovation and technological advances for the UK (e.g. in cybersecurity), but EIS investment has also produced many new jobs. Of course, this also benefits the UK government which can then receive more national insurance contributions (NICs) and income tax from these jobs. Additionally, successful and profitable EIS companies also means more corporation tax contributions for HMRC.
The benefits of EIS do not stop there, however. Over the past thirty years, it has helped to create a thriving startup ecosystem in the UK, boosting entrepreneurialism. This, in turn, has increased prestige for the UK economy which can boast of having facilitated expertise within specialist sectors, thus increasing appeal to global businesses.
2020 and EIS
The March budget from the Chancellor made no mention of EIS, rather focusing on containing the economic damage caused by the COVID-19 outbreak. However, the government does seem to be showing its ongoing support for EIS. Advanced assurance for funding is still available to companies seeking EIS-qualified status to show prospective investors. The EISA, moreover, reported in 2019 that these applications have continued to rise over recent years.
However, the government does seem to be cracking down on investors using EIS outside of its intended purposes. In 2020, EIS is set to be more focused on directing investment towards “knowledge intensive” businesses, which feature higher levels of intellectual capital creation, research and transformative/disruptive potential.
COVID-19 has, of course, cast a shadow over the markets and wider UK economy. It is too early to discern the exact effects this will have upon the EIS investment niche, but recent measures by the UK government to stabilise and protect the economy are a positive step in the right direction. Around £330bn in government-backed loans is set to be made available to struggling businesses affected by the outbreak, and this will be extended to EIS companies too. In a sense, therefore, COVID-19 could actually reduce some of the investment risk for some EIS investors, since the jobs and incomes of EIS businesses appear to be made more secure.
One important development for investors from the March Budget, however, concerns the UK government’s decision to slash Entrepreneurs’ Relief. The reasons behind doing this appear to lie in research which suggests the relief has done little to encourage people to set up their own businesses. Nonetheless, this development could, in fact, indirectly benefit EIS by increasing demands to simplify the process of getting Enterprise Investment Scheme (EIS) tax relief.
What do future years hold?
Many factors, trends and uncertainties influence the answer to this question. At the time of writing, the UK is still navigating the transition period with the EU until December 2020, with doubts still hanging over whether this will be extended. There is also the Autumn Budget in November, which some predict might include some painful measures to help pay for many of the handouts in the March budget (e.g. tax rises). The COVID-19 outbreak also raises questions over how long this might affect the economy. Could it stretch into 2021 or even beyond?
Of course, it is impossible to fully predict what will happen. However, despite the uncertainties, the UK is likely to remain an attractive place for investors, both domestic and overseas. The Conservative government with its large majority would, ideologically speaking, likely use this position of strength in the House of Common to ensure this entrepreneurial environment not only survives, but also thrives. Given the track record of EIS in contributing to this innovative ecosystem, the future still appears promising for investors looking to leverage the scheme.
If you are a successful investor looking for EIS opportunities, or if you are a business owner looking for funding, then we’d love to hear from you. Get in touch today to start a conversation with our team, and discuss some of the great investment memorandums we have available:
+44 160 334 0827