Exploring the impact of the Enterprise Investment Scheme 3 decades on

The Enterprise Investment Scheme (EIS) was introduced to the UK 30 years ago with the intention of encouraging private investment into smaller higher-risk and earlier-stage businesses. Alongside the Seed Enterprise Investment Scheme (SEIS), launched in 2012 and aimed at very early-stage startups, these schemes were designed to provide valuable financial support t0 British entrepreneurs and fuel economic growth.

As we mark the 30th anniversary of the EIS, it's clear that significant changes have shaped the landscape; since the EU referendum, investment into British business has stagnated, trailing that of any other country in the G7 and 27th amongst the 30 OECD countries. This subdued level of investment is a central concern for both policymakers and entrepreneurs, with The London School of Economics identifying it as a key factor hindering productivity and impeding the progress of British businesses.

Alongside the ongoing cost-of-living crisis, this situation is negatively impacting productivity, economic growth, and tax revenues. This prompts the question: Are EIS/SEIS still effectively meeting the needs of our evolving investment landscape?

Fostering growth

Over the past two years, rampant inflation and burdensome interest rates have exacerbated the challenge of stagnant investment for both new and established businesses. While EIS and SEIS were created to address investment shortages, as long as startup companies are finding it difficult to get the funding they need to expand, it is clear that more has to be done.

Increased investment in creative businesses has advantages that extend well beyond the business sector. A more vibrant private equity investment market would improve the UK's economy, labour market, and reputation as a worldwide centre of entrepreneurship.

That said, before delving into how they might be improved, it's important to acknowledge the pivotal role these programs have played. Together the EIS and SEIS have helped facilitate almost £30 billion in private investment into 53,000 companies nationwide. In its last EIS statistical report, HMRC revealed that the number of companies raising money through the scheme reached a record high of 4,480 in 2021/22, a 19% rise compared to the previous year. In the same period, funding increased to £2.3 billion, an increase of 39%.  

Considering the need for greater investment, the current popularity of these schemes would suggest that the EIS framework is limited and more must be done to stimulate investment. So what steps might be taken to maximise their impact?

Incentivise and improve

The first step would be around awareness – the EIS scheme in particular is aimed at individual investors, meaning any UK taxpayer who stays within the investment limits set by the HMRC is a potential investor for eligible businesses. 

While traditionally viewed as less attractive due to higher risk, EIS has gained appeal with tax incentives, attracting investors seeking portfolio diversification. These incentives include:

  • Income tax relief:
    • 50% on SEIS investments up to £200,000 in a single tax year
    • 30% on EIS investments up to £1 million in a single tax year
    • £2 million if at least £1 million is invested in knowledge-intensive companies.
  • Capital Gains exemption on any profits arising from the sale of SEIS and EIS shares after three years.
  • Inheritance tax does not apply to SEIS and EIS shares that are held for at least two years.
  • Loss relief: If SEIS and EIS shares are sold at a loss, investors can offset the loss against their Capital Gains Tax.

Given the role that these incentives play in balancing the risks inherent in early-stage investments, it’s important that investors are aware of them to begin with. However, policymakers can take further steps to elevate EIS:

  • Making EIS more attractive to investors through greater flexibility in investment options or reduced risk. 
  • Increasing accessibility for British businesses by widening eligibility criteria.
  • Leveraging EIS to encourage greater investment into secondary markets.

Demand-side reforms could democratise consumer access. Simplifying processes, like enabling businesses to report investments to HMRC for investors, would ease tax relief, benefiting retail investors.

Meanwhile, aligning EIS and SEIS with tax vehicles like ISAs could streamline investment deployment. Solutions like the IFISA, introduced in 2016 for P2P lending investment, could stimulate mainstream EIS investment by aligning tax benefits with ISAs.

In this challenging investment landscape, EIS remains pivotal for boosting investment volumes, necessitating ongoing framework refinement.

Realising potential for British businesses

Over the past three decades, British business and its related investments have weathered tumultuous storms, from global upheavals to economic downturns, all while witnessing Britain's meteoric rise in the IT sector. Today, as we confront the challenges of the present, the question of whether we're harnessing the complete potential of the EIS/SEIS framework is more important than ever.

Highlighting the need for review and reform of schemes like these that stimulate investment in innovative British startups, is about more than just addressing the current shortage; it's about igniting a chain reaction of investment, innovation, and economic resurgence that brings British business back to the fore.

By embracing innovation and collaboration, we can breathe new life into the startup ecosystem and drive sustained growth. The future of entrepreneurship hinges on our ability to harness the full potential of initiatives like the EIS and SEIS, propelling us toward a future where innovation thrives, and prosperity is shared by all.