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The latest EIS and SEIS statistics for the year 2018-19 have been released by HMRC, revealing investment in both schemes has fallen on the previous year.
HMRC reports that, in the 2018-19 tax year, 3,905 companies received investment through the Enterprise Investment Scheme (EIS) totalling £1.8 billion, a decrease of £200 million (10 percent) from 2017-18.
Investment through the Seed Investment Enterprise Scheme (SEIS) faced a sharper decline. A total of 1,985 companies raised £163 million, down 16.4 percent from 2017-18, when 2,430 companies raised £195 million.
Stricter rules on venture capital investing introduced in December 2017, can be attributed to the downturn in EIS investments. The new rules dictate that entrepreneurs must prove to HMRC that there is a “significant risk” of a capital loss on their shares exceeding the net investment return. Per the latest estimates, nearly 1 in ten applications are being rejected or withdrawn due to the firmer rules.
Companies from the Information and Communication sector continued to thrive as they accounted for £543 million of investment (30 percent of all EIS investments). Meanwhile, 65 percent of all EIS investments were allocated to businesses registered in London and the South East, totalling nearly £1.2 billion.
SEIS investments show a similar trend, with the Information and Communication sector accounting for 34 percent of all SEIS investment (£55 million). Further, companies registered in London and the South East received £110 million of investment (71 percent of all SEIS investments).
1,530 companies raised funds under the SEIS scheme for the first time in 2018-19, a decrease from over 1,700 in the previous year.
CEO of Nextfin, Sacha Bright, said: “This goes to show how effective the EIS scheme is. If the government increases or decreases the scheme’s allowances, it seriously affects the amount of investment businesses receive.
“In 2012, for example, the government introduced SEIS and increased EIS allowances. As a result, there was an immediate increase in investment in early-stage businesses. And in 2017, we saw a decrease in investment when restrictions are imposed.
“It’s a shame that the EU is road-blocking our government through state aid rules preventing the UK to invest in one of its most successful sectors. The UK government is unable to increase EIS allowances, which is a proven method to deploy private investor’s capital into early-stage businesses.
“If Europe is truly a Union, holding itself up as a beacon of freedom, surely it should act fast on behalf of the British people and its European residents to relax state aid rules and encourage the British government to increase EIS/SEIS allowances to save our start-ups, and in turn protect millions of jobs.”
The EIS and SEIS schemes are part of the UK government’s initiative to support small and medium enterprises. It’s designed to encourage investment in ambitious UK-based businesses by offering significant tax relief for investors.
Both schemes are very similar but have key differences, with SEIS focused on smaller enterprises. SEIS offers Income Tax relief of 50 percent against the amount invested. EIS, in comparison, gives investors 30 percent tax relief.
SEIS-backed businesses have a lifetime investment limit of £150,000, and investors can expect tax relief benefits of up to £100,000 each tax year. Investors are exempt from Capital Gains Tax (CGT) on any gain from the sale of shares if they have been held for three years.
Further, there is a CGT write-off of 50 percent of the amount invested in the same tax year. Shares are generally inheritance tax (IHT) free, as long as they are held for an initial period of two years. If the shares are sold at a loss, investors can offset them against CGT or Income Tax.
While SEIS is targeted for companies in their infancy, EIS is designed for small and medium enterprises. An investor can invest up to £1m per tax year. An EIS-backed company has a lifetime investment cap of £12m – or £20m if the business is “knowledge intensive.”
Investors are exempt from CGT for any gain made from the sale of their shares after three years and can defer up to 100 percent of their investment against any CGT accrued up to 1 year before or three years after disposal. Like SEIS, shares held are generally IHT free, and if shares are sold at a loss, investors can offset this amount against CGT or Income Tax.
The annual statistics from HMRC, which can be viewed in full here, detail the number of companies that have received investment through the EIS, SEIS, and Social Investment Tax Relief (SITR) schemes, and the total number of funds raised.
It also provides an industrial and geographical breakdown of companies, the distribution of businesses by the amount of funds raised, and the distribution of investors by the size of their investment.
Following Brexit, there is a possibility that investors will look to invest their money at home, in the UK, rather than abroad. Equally, some key investors could choose to take their business out of the UK, which could be a setback for SMEs.
So, while the effect of Brexit is yet to be ascertained, these annual figures should be carefully examined in future years to recognise the trends in investment, including the industrial and geographical breakdown.
We at Key Business Consultants specialise in SEIS and EIS tax. If you would like to get some advice or have a friendly chat with a highly experienced team in this area, please don't hesitate to contact us.