There was a record amount invested into UK small businesses via the enterprise investment scheme (EIS) in the 2021/22 tax year, government figures have revealed, with the Seed Enterprise Investment Scheme (SEIS) for startups also reaching its highest level in a single year.
The £2.3bn raised under the scheme increased by 39% year-on-year with almost 4,500 companies taking part in the scheme
EIS offers a chance for smaller companies to grow by raising up to £5mln a year, incentivising individual investors with tax-relieved shares in firms that enrol in the scheme.
However, advisers said the fundraising climate was much harder in 2022/23 so it is unlikely these figures will be matched until at least the year after.
The SEIS, which offers funding for smaller start-ups, reached record levels in the 21/22 financial year, increasing 16% annually to £205mln, with 2,270 companies benefiting, compared to £176mln for 2,105 businesses the year prior.
The information and communication sector was the most popular industry in both schemes, accounting for 34%, £785mln, of all EIS investment and 40%, £83mln, of total SEIS funding.
EIS was launched in 1994 and since its inception has raised almost £28bln for over 36,000 individual companies, while SEIS was added 20 years after and has brought in £1.7bln for over 17,000 organisations.
Change needed?
Alex Davies, CEO of advisory firm Wealth Club, noted that the figures are one year behind, “and the fundraising climate was much harder in 2022/23 so it’s unlikely these figures will be matched next year.
He said the record year indicated that investing in early-stage businesses “is becoming increasingly mainstream for wealthier and more sophisticated investors, attracted by generous tax incentives and the potential to invest in the next big thing".
Davies said the schemes “make Britain one of the best places to set up a business. This government and future governments need to refrain from tinkering. The main reason people are funding all these start-ups is tax relief. Mess with it, reduce it and they won’t.”
But David Brooks, tax partner at accountancy firm BDO, said changes were needed.
While the schemes help boost growth in areas such as the tech industry, concerns are growing about the number of applications being rejected.
“There is a growing sense that officials are being a little over-zealous in their interpretation of the rules which is hindering spinouts and follow-on funding for older companies,” Brooks stated.
He argued that the government should be looking to reform these schemes.
Brooks believes that the threshold for what qualifying EIS companies receive should be increased to consider inflation.
Currently, companies can obtain a maximum of £15mln in funding from the scheme during its lifetime, the same figure from when it was first launched 25 years ago.