Income raised by small UK businesses through the Enterprise Investment Scheme dropped by a fifth in 2016, according to new statistics from HMRC.
Figures from the tax office for the 2015/16 financial year revealed the total amount raised via the tax break fell by over £200m. The significant fall in finance is a concern for entrepreneurs seeking to raise working capital for higher risk ventures.
The Enterprise Investment Scheme was launched in 1994 to encourage investment in smaller firms and help founders raise finance. Investors are able to receive a 30 per cent tax break off a maximum £1m yearly investment.
Ray Abercromby, a partner at financial services firm Smith & Williamson, suggested “constant tinkering” by government may have left the Enterprise Investment Scheme too complicated for potential investors, after introducing restrictions on the issuing of shares.
“We are seeing the changes at the Summer Budget 2015 take effect,” Abercromby said of the declining uptake of the Enterprise Investment Scheme.
Reforms included restrictions for existing shareholders alongside an investment limit for firms. Companies were also required to meet a number of new conditions to qualify.
“Businesses and investors now have to pay very close attention to the structure of their businesses. The changes have forced individuals, who just want to get on and grow their business, to focus on the structure of the business in case they accidentally fall foul of the rules,” he explained.
“At first glance, the changes appeared to discourage investment in the UK’s small and scale-up businesses, the lifeblood of our economy, and these statistics indicate that could be the case.”
Legislative changes dictated by EU regulations led to the decline in uptake of the Enterprise Investment Scheme, and Abercromby suggested a review of how the scheme is structured could see a surge in popularity.
“Post-Brexit, the government may choose to look at the relief associated with the Enterprise Investment Scheme and return to pre-2015 levels. It has proved to be very popular and beneficial to the economy as a whole, and could be a way of encouraging UK small business growth,” he added.
Figures showed only a slight decline in money claimed through the Seed Enterprise Investment Scheme (SEIS).
Offering tax breaks of 50 per cent on investments up to £100,000, SEIS is considered a generous spin-off of the older scheme, designed to generate investment in early-stage companies.
Crowdcube co-founder Luke Lang explains what the SEIS and EIS startup tax breaks actually mean
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