Sunday, May 28, 2023

Record number of companies raising money through Enterprise Investment Scheme

New figures published by HMRC show that the number of companies raising money through the Enterprise Investment Scheme (EIS) grew to a record high of 4,480 in 2021/22, a 19% rise compared to the previous year, with funding increasing to £2,305m, up by 39% over the same period.

The figures show that usage of the EIS bounced back following the pandemic and even surpassed the levels prior to the pandemic. In 2019 to 2020, 4,215 companies raised a total of £1,905 million of funds under the EIS scheme.

EIS investment in 2021/22 was largely concentrated in the Information and Communication sector which accounted for £785m of investment (34% of all EIS investment).

The Enterprise Investment Scheme (EIS) offers tax reliefs to individuals who subscribe for new shares in a qualifying company. This allows EIS companies to raise up to £5m each year to grow their business, up to a maximum of £12m over a company’s lifetime.

There are a number of qualifying rules for EIS. For example, the scheme applies only to companies that have a permanent establishment in the UK, are not listed on the stock exchange and do not have gross assets worth more than £15m before the EIS shares are issued (and not more than £16m immediately afterwards). The relief also only applies to new or relatively new companies, as EIS investment can only be received if it’s within seven years (10 years for knowledge intensive companies) of a company’s first commercial sale.

The new data also shows a similar trend with respect to start-up companies raising funds under the Seed Enterprise Investment Scheme (SEIS). The number of companies raising money through the SEIS also grew to a record high of 2,270 in 2021/22, an 8% rise versus the previous year, with funding increasing by 16% over the same period.

The Seed Enterprise Investment Scheme recently received a boost with increased limits from 6 April 2023. Under the SEIS, companies up to three years old (previously two years old) can receive a maximum of £250,000 (previously £150,000) of investment. Companies wishing to benefit from the SEIS must not have gross assets over £350,000 (previously £200,000) when the shares are issued and have fewer than 25 full-time employees. SEIS funds raised in 2023/24 are therefore expected to increase still further to provide valuable support for start-ups and young companies.

Commenting on the new figures, David Brookes, tax partner at accountancy and business advisory firm BDO, said: “The latest figures show an encouraging rebound in the numbers of companies benefitting from the Enterprise Investment and Seed Enterprise Investment Schemes. Both offer valuable funding opportunities for new and growing businesses, particularly in the tech space, which are so crucial in helping to drive economic growth.

“However, there are growing numbers of advance assurance applications for both EIS and SEIS that are being rejected which is a cause for concern. While it’s absolutely right that the tax authorities are alert to any attempt from parties to benefit from tax reliefs they are not entitled to, there is a growing sense that officials are being a little over-zealous in their interpretation of the rules which is hindering spin outs and follow-on funding for older companies.

“The complexity of both schemes and their qualifying criteria are also barriers to greater take-up, and there is a strong case for reform. For example, although the gross asset limit for SEIS companies has increased from 6 April 2023, the gross asset test for EIS qualifying companies remains at £15m. This was a figure first introduced 25 years ago. Raising this threshold to take account of inflation could provide an important source of EIS funding for ambitious and growing mid-market businesses that are currently unable to access growth capital.”

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