April 24th, 2017 / Insight posted in Blog

Will we see a more accessible Enterprise Investment Scheme post-Brexit?

The Enterprise Investment Scheme (EIS) is an important part of the eco-system occupied by growing companies. It allows them to encourage individuals to make equity investments as they will receive 30% of their investment back as tax relief, as well as a capital gains tax exemption, if they sell their investment and make a profit. A further capital gains tax deferral relief is also available where the investor has gains on other unrelated assets. However, although this scheme is intended to help growing companies, it is mind-bogglingly complex to operate as it has been tinkered with over the years to ensure that it satisfies EU State Aid rules.

The European Commission’s Guidelines on State Aid to promote risk finance investment were amended in 2014; member states updated their State Aid risk finance measures to ensure they were aligned. The output of the amendments made by the UK government found its way into the second 2015 Finance Act and started to make the scheme unfit for purpose – the risk of getting something wrong and upsetting investors started to put the target market of small companies for this scheme off using it.

In particular, changes were made around the age of companies which could use the scheme; the maximum amount a company could raise in its lifetime; some existing shareholders are prevented from benefitting from the scheme; and a whole new concept of “knowledge intensive” companies was introduced with its own definition which covered nearly three pages of small print legislation.

It is hoped that the Enterprise Investment Scheme and related risk capital schemes will be re-written following our departure from the EU, with a focus on helping the businesses that really need the investment rather than walking a fine line through complex State Aid rules. The intention behind EIS is still sound – individuals making risky investments should be compensated for taking this risk through the tax system. However, the scheme needs to be simple to operate so that the companies raising the capital do not have to employ an army of lawyers and accountants to keep them within the rules.