HMRC reduces the number of approvals for the funding of small businesses
HMRC has reduced the number of approvals it gives for the funding of small businesses through the Government’s flagship Enterprise Investment Scheme (EIS).
HMRC approved only 62% of the total of 3,270 requests from SMEs to raise money through the EIS submitted in 2018/19, down from 75% in 2017/18* (year-end April 5), says Growthdeck, the private investor network.
Over the last 10 years **HMRC had been approving an average of 85% of applications under the EIS scheme.
EIS enables private investors to invest in the shares of small unlisted companies. In exchange for taking on the risks involved in investing in small companies investors are granted tax breaks.
As an effort to push investors towards investing in higher risk businesses the Government has made a number of restrictions to EIS but that seems to have had the result of less overall businesses getting permission to raise money through EIS.
Since 2015 HMRC has excluded businesses that have been trading for over seven years and businesses backed by assets exceeding £15m from raising money through the EIS. This has reduced the pool of businesses that now qualify therefore restricting access to key Government supported funding for many SMEs.
Growthdeck adds that many small businesses are also struggling to secure funds from traditional sources, as Brexit uncertainty slows lending from UK banks. This has highlighted the importance of alternative Government schemes, such as EIS.
Gary Robins, head of business development at Growthdeck, says: “I don’t think anyone really wants to see the amount of money raised for SMEs reduced. The new Government should take the opportunity of the November Budget to reverse the restrictions.”
“Schemes such as the EIS have proven they are hugely effective in channelling funds into small businesses. However, these latest reforms are restricting this.”
“Expanding the EIS could ensure that small businesses secure the investment they need to continue to drive the UK economy forward post-Brexit.”
The Enterprise Investment Scheme (EIS) gives income tax relief of up to 30% on private investments into fast-growing UK businesses to help reduce the funding gap for small businesses. The EIS has been hugely successful in raising money for SMEs, generating over £20bn of investment for investments into small businesses since 1993.
Urgent reforms to EIS needed to ensure small businesses secure funding
Growthdeck adds that urgent reforms to the EIS scheme are needed to ensure more funding is channelled into growth businesses. These reforms could include:
- Increase the income tax relief on EIS investments from 30%. Plans were halted several years ago over fears that the European Commission may object to this. However, with the UK leaving the EU, this is less of an issue
- Loosen restrictions on EIS investments into businesses that have been trading for over seven years. This would increase the pool of businesses that are eligible to receive investment and help older companies enter into new markets and expand
- Increasing investment limits through the Seed Enterprise Investment Scheme (SEIS), which is designed to capture smaller, earlier-stage businesses. The limit is currently £150,000, which does not go very far for fast growing businesses in need of capital
The EIS allows investors to:
- Invest up to £1m per annum
- Reclaim 30% of the cost of investment against their income tax bill
- To not pay Capital Gains Tax (CGT) on any gains realised after three years
- Claim further income tax relief should an investment result in any form of loss
- Defer capital gains tax due on the sale of another asset by re-investing the gain in an EIS-qualifying company
- Save inheritance tax on any EIS-qualifying shares held for over two years
Number of businesses approved for EIS drops to its lowest level in seven years in 2018/19
*Source: HMRC, approvals through the EIS Advance Assurance Applications
*Source: HMRC, 10 year average excluding 2018-19