Changes to EIS could ‘magnify, not mitigate’ problems faced by small companies seeking funding

Mark Brownridge, Director General of the EIS Association, says changes to EIS could ‘magnify, not mitigate’ problems faced by small companies seeking funding by damaging start-ups sector:

“We are engaged in constructive dialogue with HM Treasury over the Patient Capital Review consultation. There is a clear message coming from them, which is that EIS and similar tax incentivised venture capital schemes need to focus on delivering funding for high-growth, innovative companies.

“This is very much in line with the direction of travel in which the EIS sector has been moving and we are collating evidence to present to HMT to demonstrate this. For example, in the tax year after investment into solar and renewable energy was restricted, EIS enjoyed its biggest ever fundraising year. So already we have seen that more money is flowing to the target, higher risk areas. And because of changes introduced in 2015 that placed further focus on smaller, younger, higher growth potential companies, an even greater proportion of EIS funds raised since then has been flowing to these target areas. So, in terms of policy goals, the effectiveness of EIS has increased substantially over the past 18 months, and continues to do so. This is a win all round – the rules have better focused EIS into target areas, and the investment flow has simultaneously increased.

“EIS and VCT funds are vital to our nation’s start-up and scale-up companies and to the overall prosperity of our future economy. We are already facing an extremely uncertain outlook for the economy as the UK leaves the European Union, so it is essential that EIS and VCT funding is maintained in order to help support the vitally-important contribution that venture capital makes. Now is not the time to experiment with whether our economy might prosper without these tax relief schemes. We need the innovation that comes from EIS-funded companies, which by their nature are risk-taking ventures and rely on the tax reliefs to encourage investment into their businesses from private individuals, without which they may not have the risk appetite.

“We recognise that the Patient Capital Review consultation is largely focused on the relatively new concept of ‘patient capital’, but it is our argument that EIS has been instrumental over its long history in helping small companies to start, grow and build their businesses and has long been an implementer of patient capital.

“Since 1994, EIS has raised over £15.9bn for over 26,000 small companies through angels, funds and direct investment. EIS investors in growth companies are investors in risk equity and are prepared to invest for the long term and they achieve their returns only when the company is successful. It should also not be forgotten that the most acute market failure currently is in the area that EIS is not particularly active – later stage growth funding. If EIS was removed or aggressively restricted then the early stage funding gap would open up again and there would be many fewer start-ups to then scale-up, and the patient capital challenge would have been magnified, not mitigated.”

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