How the Enterprise Investment Scheme could create more UK jobs
The Enterprise Investment Scheme (EIS) is a tax relief scheme backed by the UK government to help new businesses, startups, and early-stage businesses secure funding.
EIS makes investing in new or higher-risk companies more attractive by offering tax relief to investors.
As a business, this often means you are able to secure funding that you wouldn’t otherwise be able to. Or, it may mean you’re able to secure more funding at a lower cost to the business and a lower cost to the investor.
How does the Enterprise Investment Scheme currently work?
Currently, when a business meets all the criteria to be eligible for EIS funding, they are able to make this known to prospective investors.
Investors are then aware they are able to claim back up to 30% of the value they invest into the company. This is handled in the form of income tax relief.
For example, this means, if an investor was to invest £20,000 in an EIS eligible company, they would be able to save £6,000 in income tax.
There are some individual rules in regards to how long you hold the shares for and the types of relief, but this is the general overview of the scheme and how it’s designed to benefit both investors and small businesses.
Why the Enterprise Investment Scheme is good for businesses
EIS Investments were created to help new and smaller businesses find funding to grow quicker. Some 90+% of startups and early-stage businesses fail in their first year, and most of these are due to lack of funding.
Traditional lending through bank funding is often not an option for a new business. Private equity investors present a much more flexible option, and of course, the tax relief makes it a much more attractive option.
It’s also estimated that 85% of businesses that received EIS-backed funding created jobs as a result. Meaning there is a positive impact on the overall economy as a result of EIS funding.
The problems EIS is facing at the moment
The issue in question at the moment is that due to the pandemic and the economic uncertainty that has followed, the number of businesses receiving EIS funding has been dropping 30% year on year.
This is having an obvious impact on the growth of individual businesses, and the economy as a whole. One issue that has had a noticeable ripple effect is the lack of new jobs being created.
With the number of EIS companies receiving investments dropping so significantly, so has the number of jobs being created as a result.
Employment is one of the driving forces behind economic growth, as is the impact new and innovative companies make in their markets. Understandably this is an area being looked at by economists as a way to stimulate some economic growth during these uncertain times.
Why are changes needed?
If the EIS is to be used to create more jobs and give the UK economy a boost, there need to be added incentives for investors to invest.
The easiest answer is to relax or change the eligibility requirements so more businesses are eligible for EIS.
Two of the proposed changes are to the Seed investment stage, which is currently limited to £150,000. As well as changing some of the eligibility requirements, such as changing the requirements around the age of a business to the size of a business.