Industry Insights

Is Brexit likely to affect EIS and SEIS tax reliefs?

When the Enterprise Investment Scheme (EIS) was first launched, social media did not exist, CDs reigned supreme and only 67 people in a thousand had a mobile phone.

So much has changed in the years since 1994, but the attractive tax breaks offered through the EIS have remained largely the same. 

With John Major at Number 10, the EIS was founded as part of the Business Expansion Scheme. It was designed – as it still is today – to encourage investment into smaller, unquoted businesses; helping them to grow and generate wealth and jobs.  

It not only delivers an important function in encouraging new enterprise in the UK, but is also hugely attractive to investors.

That it has survived the tenures of five Chancellors and their tax tinkering cohorts says a lot about the strength of EIS.

At a glance, EIS offers investors income tax relief worth 30% of the value of their investment in businesses that are intent on growing and have no more than 250 staff. Its younger relative, the Seed Enterprise Investment Scheme, rewards investors with a 50% income tax break if they back early stage firms which have traded for less than two years and have no more than 25 staff. 

While SEIS was launched in 2012, EIS has been seemingly unshaken throughout 25 years of politics. During that time, we’ve seen a banking crisis, the rise and fall of New Labour and a coalition government in power. 

But will the changes afoot via Brexit be too great for EIS and its early stage-focused offshoot SEIS to withstand? 

In the current stasis, the UK enterprise community and the investors that help to keep it flourishing is mired in uncertainty. 

The prospect of a ‘No Deal’ is still a possibility, and the government has issued an online guide for businesses on preparing for the worst-case scenario. At the other end of the spectrum of possible outcomes is the second referendum that some Remainers are pushing for.  

As things stand, the UK is scheduled to leave the EU at 11pm on the 29 March, unless an extension can be agreed by all 28 EU states.

The Financial Conduct Authority advises that "firms should make their contingency plans and think about how their customers may be affected by the UK leaving the EU”. 

Which ever way Brexit plays out in the coming months, some degree of certainty will at least help businesses to plan adequately; something many export-focused ones are unable to do currently until the terms of exit are confirmed. 

Any EIS-qualifying businesses in a state of pre-Brexit inertia may be able to put growth plans back on track, and seek investment to support them. 

Business angels that might have been cautiously holding back on EIS involvement until the clouds of uncertainty dispersed, could be ready to invest once more.

As with many aspects of Brexit, there is no cast-iron guarantee that the EIS scheme will be unaffected by the UK leaving the EU.

At the same time, however, there is absolutely no reason why it must change. In fact, as the UK seeks to strengthen its economy as an entirely independent, globally-trading nation, the EIS could become increasing important to the Treasury. 

The reduction in funds flowing into HMRC caused by the generous tax breaks offered by EIS, are far eclipsed by the wider economic benefits of helping enterprises to fulfil their potential. 

Inward investment, job creation and increased supply chain opportunities are a few of the potential headline rewards of EIS. 

EIS investment also helps to shape the UK’s private sector, futureproofing it by tuning into the market needs of tomorrow.

For example, EIS rewards investors who support “knowledge-intensive” businesses, which are predicted to become evermore important economically. 

The annual investment cap under EIS is £1m – unless you back knowledge-intensive firms, in which case you receive an additional £1m allowance.

Outside the EU, Britain could be heavily reliant on such businesses with a bright future working in blossoming sectors. 

Another facet of EIS and SEIS that could give them extra relevance after Brexit is their ability to focus investment on growth opportunities. 

EIS rules were adjusted last year to make sure that the scheme was only being used to drive investment into young, ambitious businesses seeking capital to grow; and not as a means to preserve capital in sluggish and/or mid-sized firms with flat growth. Various trades on a wide-ranging list no longer qualify for EIS, including legal and financial services, steel production and property development. 

While these changes are favourable in a national economic sense, further changes may enhance the appeal of EIS after Brexit from an investor’s point of view. 

Some analysts believe certain restrictions around investment may be relaxed when European rules no longer apply to some UK practices. 

The EIS must comply with EU state aid rules and, as such, some changes to it must be approved by Europe.

Outside the EU, the UK government may be able to relax some investment restrictions and more nimbly tweak the scheme in line with wider conditions or investor demand.

Of course, there are many rules that investors would like to keep. EIS investors benefit from inheritance tax exemption on any shares being transferred after at least three years of ownership.

Investments are also exempt from Capital Gains Tax (CGT), while CGT can be deferred by investing capital into EIS-qualifying firms. There is also a carry-back facility that enables tax breaks to be applied to a previous tax year, and loss relief, which mitigates the impact of business failure. 

And there are no significant signs that the number of potential EIS and SEIS opportunities is dwindling, despite the current Brexit limbo. 

Figures from Companies House show that there were 11,864 software development and programming businesses incorporated in 2018, up from 10,394 companies the year before.

Accountancy firm RSM, which compiled the data, said: “The numbers show that entrepreneurs are continuing to innovate and venture capital, private equity and traditional funders are still lining up to commit funds to the right projects.”

Regardless of the machinations of Brexit, the UK will always need thriving startups and they, in turn, need willing investors.

Given the role of EIS at the centre of this equation, it seems highly unlikely that it would cease to exist after Britain leaves the EU. I hope I am not proved wrong. 


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