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Three decades ago, the Enterprise Investment Scheme (EIS) was launched. The goal, assigned by the UK government, was to encourage investment into smaller, higher-risk companies (with high growth potential). The hoped-for outcome was more innovation, job creation and boosted economic growth.
30 years later, is EIS still fit for purpose? How well has the scheme travelled, and what might the future hold? Below, we explore these questions in more detail for our early-stage investor readers. To learn more about our EIS projects and other startup opportunities, visit our portfolio page. For enquiries regarding our latest projects and funding, you can reach us via:
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The successes of EIS
Since its launch in 1994, EIS has helped 32,965 individual companies access funding totalling over £24bn, or around £800m in capital raised per year. The scheme has risen markedly in popularity in recent years, with a record level of £2.3bn invested in 2021-22.
The scheme has evolved since its birth. In 2004, the annual individual investment limit was raised from £150,000 to £200,000. Two years later, the Seed Enterprise Investment Scheme (SEIS) was launched to complement EIS, building on its success.
In 2011, the annual individual investment limit for knowledge-intensive companies was raised from £500,000 to £1m. SEIS followed suit in 2023, expanding the annual investment limit from £100k to £200k.
A different world for EIS?
The world was a very different place in 1994 when EIS was launched. The government was still licking its wounds after Black Wednesday in September 1992, causing huge reputational damage to the Conservative Party. A three-year recession had only recently ended in April 1993. As the UK economy recovered, EIS offered a much-needed boost to growth.
Today, in 2024, the global and national landscapes have changed. Brexit, the pandemic and the cost-of-living crisis have shifted the macro variables. Low overall business investment and poor worker productivity continue to blight the UK, especially since the 2008-9 Financial Crisis.
Can EIS help address these challenges while still meeting the needs of founders and investors?
Adapting EIS to a changing world
Remember the brief EIS timeline above? What is striking about the scheme is its resilience and adaptability. Over 30 years, it has endured despite multiple governments composed of different political parties. Indeed, EIS has expanded and changed to stay relevant and effective.
For instance, in 2018, the Knowledge Intensive Fund (KIF) was introduced to attract more investment to the UK’s “knowledge-intensive” companies under EIS. Rather than only investing in single EIS companies, investors could now invest in g ten, twenty or more EIS-qualifying firms simultaneously via a single fund. This has allowed more investors to access EIS opportunities and has opened up more diversification strategies.
However, what about the UK’s “under-investment problem”? This has proven very difficult to shift since 1990, during which time other G7 economies have consistently outperformed by 4 percentage points. The last 15 years have been especially anaemic for productivity growth, contributing to our wage stagnation problem.
EIS and its sister scheme (SEIS) appear designed to combat these problems. Yet they persist. Why? One argument is that the schemes are not strong enough to address these issues. However, to lay all of the blame at the feet of EIS is simplistic and unfair.
Both EIS and SEIS are intended to raise investment in a specific area of the economy—early-stage businesses. In this respect, the billions raised by the schemes since their inception speak for their successes. However, this is not to say more cannot be done.
A roadmap for EIS
Given EIS’s potential to raise private investment and boost growth, a strong argument can be made for its expansion. Yet, it remains relatively unknown among many individual investors. This could partly be due to a lack of promotion by the government and financial advisers. However, another problem is that many investors misunderstand EIS.
EIS is sometimes seen as unappealing due to its high-risk businesses. Yet, many of these are mitigated by due diligence and tax incentives (e.g. loss relief and up-front 30% income tax relief). Tax relief, in particular, can result in dramatic increases in real returns for investors. However, the calculations involved are often complex. So, the benefits of EIS are not immediately obvious compared to, say, the benefits of a Lifetime ISA.
At Bure Valley Group, we offer an exclusive EIS investor network where many investors have shared ideas about how EIS could evolve positively. These include:
- Increasing the attractiveness of the scheme by making investment options more flexible.
- Widening the EIS eligibility criteria for British businesses.
- Using EIS to encourage more investment into the UK’s “secondary markets”.
The process for claiming tax relief (i.e. reporting to HMRC ) could also be made far easier. Another way forward is to build stronger links between EIS and other tax-efficient “vehicles” for retail investors – e.g. ISAs and pensions.
Invitation
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Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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