The Enterprise Investment Scheme (EIS) was created in 1994 to incentivise investment into fledgling British companies through a suite of generous tax benefits. Almost 30 years later, how much good has it done the economy?
When a British investor speaks to US or European investors about the EIS, they often notice that their listeners’ interest rapidly turns to envy. There is little doubt that this scheme – available only to UK taxpayers – which connects investors looking for tax-efficient opportunities to the latest wave of entrepreneurs, and offsets the risk with a suite of generous tax benefits, is a great thing to have access to. But what about the bigger picture, the UK economy itself?
Since the scheme was launched, it has seen 32,965 individual companies raise more than £24bn. But the cost to the UK government in tax relief between 2009 and 2019 alone, according to an estimate by City A.M, was approximately £3bn.
Not an insignificant sum, and yet, if the scheme has been running this long, it only goes to show that the benefits far outweigh the cost. So what are they?
The most obvious is of course, jobs. As more companies are launched through EIS investment, more and more jobs are created. How many jobs need to be created for the government to make a profit? Not many! According to an estimate by City A.M, it would only take nine employees, paid £35k over three years, to more than cover the cost of tax breaks on an investment of £1m. Of course, many of the jobs created pay far more, and continue for much longer, so regardless of tax breaks, investing in companies via EIS stands to see a considerable return for the UK economy.
The numbers look good, but there is an additional benefit to the economy in the form of workforce quality. As more jobs are created, more employees gain experience, often making a step up in seniority because startups look for cost-effective talent. This means that even if those companies do not perform as expected, or fail entirely, there is a net gain for the British economy in its access to a more experienced and skilled workforce, particularly after Brexit, when the ease of relocating and working elsewhere in Europe has diminished.
This brings us to our next point, which is the effect EIS has had on the startup ecosystem in the UK.
In the decade up to 2016 (investment into EIS reached its peak in the 2015-16 tax year at £1.98bn, before declining slightly the following year) the number of businesses created in the UK rose by 62 percent, while the number in the US, considered the poster child of the entrepreneurial dream, fell by 22 percent. As more capital has been made available to new businesses through EIS, more entrepreneurs decide to take their first step, and find more and more experienced and skilled talent as they build their businesses. In turn, this magnifies the UK’s appeal to global businesses, who can easily point to a thriving ecosystem and ever-developing expertise in cutting edge technologies and specialist sectors.
The final, and perhaps the most important point, is the work many of the companies are doing. In many cases, their ideas and innovations represent a genuine step forward across the full range of sectors, from healthcare to life sciences, drug discovery systems, sustainable technology and clean energy creation, distribution, and storage. Progress made in these areas stands to benefit both the UK economy, and global quality of life more generally.
The more we consider the question, the clearer it is why EIS is still going strong, both from investors and the Treasury’s point of view. For many investors, the broader benefits of their investments are a deciding factor in how they choose to invest.
According to financial experts, investing in companies that qualify for the UK’s EIS funds can offer investors the potential for high growth, tax reliefs to compensate for some risks, and the opportunity to support new, forward-thinking enterprises (Source: EMV).
EIS-qualifying companies are typically early-stage businesses with high growth potential. By investing in them, investors can benefit from their success and potential appreciation in value over time. They also help such innovators bring their ideas to market and positively impact industries and society as a whole.
It’s important to note that investing in EIS-qualifying companies also carries risks, as early-stage businesses can be inherently volatile and face challenges in their growth journey. Investors should carefully assess investment opportunities, conduct due diligence, and seek professional advice before making investment decisions.
Fortunately, the UK government offers various tax reliefs to incentivize investment in EIS-qualifying companies. As mentioned, these help offset some of the risks. Examples include income tax relief, capital gains tax deferral, and exemption from inheritance tax after a certain holding period.
Overall, investing in companies that qualify for the UK’s EIS funds is a high-risk venture that pays off in significant ways, but only if you play it smart. Weigh your options first before going all in for the best results.
If you would like to know more about the practicalities of EIS investing in the UK, you can learn more on the Government website.