Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
When it comes to early-stage investing, few options are as attractive to UK investors as the Enterprise Investment Scheme (EIS). Not only does it offer access to some of the country’s fastest-growing startups, but investors can also benefit from tax benefits (e.g. 30% up-front Income Tax Relief). Yet, what is happening with EIS trends? Is EIS growing in popularity?
Below, we offer some reasons why EIS has experienced a general fall in funding over recent years. This is balanced with a recognition that the scheme still offers many advantages to other tax-efficient “vehicles,” such as Venture Capital Trusts (VCTs). Moreover, funding for EIS remains dominant compared to other VC schemes.
We hope these insights are helpful to you. To learn more about our EIS projects and other early-stage opportunities, visit our portfolio page. For enquiries regarding our latest projects and funding, you can reach us via:
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EIS funding lower
In 2021-22, funding for both EIS and SEIS (the Seed Enterprise Investment Scheme) hit an all-time high of £2.3 billion. This was in the midst of the post-COVID “boom” in 2021, when Step 4 lockdown restrictions were largely lifted and the economy grew by a whopping 8.7%.
Investor optimism was on the rise, with many putting their money in the UK’s fast-growing startups which had seemed to weather the worst of the pandemic storm. GDP continued to grow, albeit at a slower pace of 4.3% in 2022. By this point, however, cracks were showing in the UK’s economy.
Inflation had started to escalate in 2021, largely due to penned up aggregate demand which suddenly unleashed as consumers were allowed back to offices and highstreet shops. Demand-pull inflation was then exacerbated by cost-push inflation in 2022, when Russia invaded Ukraine and wholesale energy prices soared.
At the worst point, UK inflation hit 11.1% in October 2022 and interest rates rose repeatedly to try and cool down the economy. All the while, early-stage investors were wondering how to navigate this turbulence prudently.
Given this backdrop, it is hardly surprising that EIS funding fell. In 2022-23, total investment through the scheme was down to £2.0 billion. However, it is worth putting this in wider perspective. Whilst this represented a 15% drop compared to the previous year, the wider European Venture Capital sector saw a much greater fall of 45%.
Despite the UK’s challenges, therefore, it still offered investors tax advantaged schemes even amidst difficult economic conditions. Indeed, 2022-23 was still the fourth highest amount raised on record under EIS.
Looking ahead with EIS
HMRC is typcically a year behind regarding the publishing of VC figures. The more following tax year (2023-24) may not have information published for a while. Yet, it is reasonable to expect results which are similarly subdued, as in 2022-23. After all, in 2023, the UK economy only grew by 0.3% and interest rates loomed at over 4%, putting constraints on business investment.
However, looking ahead in 2024, there are reasons to be more optimistic about the EIS landscape. Inflation seems to be cooling, now standing just above the Bank of England (BoE) target at 2.3%. This raises hopes for interest rate reductions later in the year, hopefully leading to higher consumer spending and business investment.
Lower rates make it cheaper for businesses (e.g. startups) to borrow so they can effectively fund their expansion plans. They also reduce investor incentives to put their money into “safer” investments, like UK government bonds (gilts) due to the lower rates on offer.
One concern for investors is the outcome of the 4 July 2024 general election. Whoever wins power is likely to face difficult decions about the economy. Plausibly, this will mean a continuation of the current tax burden (the highest in the UK for 70 years). Or, we may see a widening of contractionary fiscal policy – i.e. higher taxes and/or lower spending.
EIS compared to other VC schemes
Investors looking to invest tax-efficiently into early-stage opportunities in the UK are usually faced with three main choices: EIS, SEIS and VCTs. The latter raised £1.2bn in the year leading to March 2022. EIS performed better at £1.66bn in total funding.
This is a general trend which can be seen across multiple tax years. Whilst VCTs offer many attractive benefits (e.g. tax-free dividends), EIS arguably offers a greater range of benefits to investors and founders. The include loss relief, Income Tax relief and inheritance tax (IHT) relief provided certain conditions are met.
If you are interested in EIS opportunities, please consider getting in touch with us to explore our exciting range of early-stage opportunities. Our exclusive investor network is the perfect place to find tax-efficient, pre-vetted EIS projects which can help diversify your holdings and open up new avenues for portfolio growth.
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