Tax breaks are enticing more investors to stake money in businesses as entrepreneurs are still finding cash hard to raise from mainstream lenders.
The latest official investment figures for the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) from HM Revenue & Customs (HMRC) show more money than ever is pouring into the schemes.
Last year, EIS investment topped every year since the scheme started in 1993, with £1.4 billion going to 2,614 growing companies.
The figure was 26% up on around £1 billion invested into EIS firms in the previous year.
SEIS has also seen around £88 million go to 1,120 startups during the same period.
Not only has the amount of money raised from EIS hit a peak, but the average investment per company is also up to £535,615.
Tax incentives
Industry experts argue this is the result of banks closing the doors on businesses looking for finance since 2007.
“Small businesses have trouble persuading the banks that they are good risks for borrowing,” said a spokesman for investment specialists Radius Equity.
“But EIS and SEIS are increasing in popularity with investors due to the competitive tax breaks that they offer.”
The firm also explained that many regional businesses look to EIS for ‘roll out’ funding to give their businesses a national profile.
“We reckon around half of all EIS funding is secondary funding to raise capital for this roll out,” he said.
EIS and SEIS are equity investments, which are advantageous to cash flow are preferred to debt funding offered by banks by growing and startup companies.
Investment scrutiny
The investments often come with business angel expertise from investors who can add valuable experience and insight to a new business.
However, closer scrutiny of how tax relieved capital is spent may be on the way.
Parliament’s public accounts committee has criticised HMRC for not auditing tax reliefs to make sure the money claimed is spent correctly.
The committee of MPs was concerned that so many tax reliefs, including EIS and SEIS, are available and that the number can lead to confusion and makes identify fraud or misuse of funds difficult to identify.
Research and development reliefs were given as an example by the committee. Tax relief for research climbed from £100 million in 2001 to £1 billion in 2011, but the money spent on R&D stayed at around the same level across the decade.
