The EIS Patient Capital Review sought to strengthen the ability of growing innovative businesses to obtain long-term ‘patient’ finance.
HM Treasury has defined patient capital as long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses.
The EIS Patient Capital Review found that the UK is successfully encouraging many new start-ups. However, there is increasing evidence that the UK is lagging behind other countries in the longer-term process of scaling up successful companies.
The Latest Changes
The introduction of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) has helped develop a thriving start-up community. However, the review was clear that one of the ways to tackle the lack of capital availability was to extend the investment limits for existing EIS and VCT schemes. For example, many UK businesses find it difficult to secure investments of between £5m and £20m.
In the Autumn Budget 2017, the Chancellor announced that the £1 million investors limit in the EIS will be doubled to £2 million where any amount above £1m is invested in knowledge-intensive companies.
The Chancellor also increased the annual investment limit for knowledge-intensive companies receiving investments under the EIS and from VCTs to £10 million from the current limit of £5 million. The lifetime limit remains at £20 million. There were also some changes extending the company age limit when knowledge-intensive companies can begin to attract funds.
The Effect of These Changes
These changes took effect for investments on and after 6 April 2018. They are subject to the normal state aid rules. Consequently, these new measures are beginning to drive greater private investment into knowledge-intensive companies across the country.
The review also commented that some of the asset-backed EIS investments were not in the spirit of the rules. As such, the Finance Act 2018 introduced a new Risk to Capital test.
The latest changes to the scheme encourage those taking a riskier approach. They might herald the start of a move away from lower risk EIS investments. However, we would not be surprised if the Treasury makes further moves in the future. These may well limit the type of companies that can receive EIS investments.