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Fears of EIS clampdown in Budget

30 October 2017

Enterprise Investment Schemes are vital to the nation’s young, growing businesses and the prosperity of the future economy, says the Enterprise Investment Scheme Association (EISA) amid concerns the government will seek to clamp down on them. 

The Treasury, which launched its Patient Capital Review earlier this year to identify how growing firms can access long-term finance, has indicated that it is considering new rules which would severely restrict the use of EIS.

Mark Brownridge, director general of the EISA, said: “We believe that EIS and VCTs are vital to our nation’s scale-up companies and to the overall prosperity of our future economy. America is twice as good as we are at turning start-ups to mid-sized companies-  6% make the leap there compared with only 3% in the UK. Choking off venture capital will not help. As the UK leaves the EU it is essential that EIS and VCT funding is maintained.”

EIS have been the subject of criticism, amid fears that its tax breaks are being exploited. Brownridge said that while the industry recognises that abuse needs to be stamped out, the government must think carefully about the “unintended consequences” of its restrictions before action is taken.

In response to the Patient Capital Review, EISA has suggested excluding property and leasehold as well as investments in film and TV schemes that are secured by pre-agreed income.

Brownridge added: “We believe the market has begun to understand and accept the message that EIS funding should be targeted on growth and innovation only and is moving sharply in this direction and away from capital preservation marketed structures. A few years ago 60%-70% of schemes had a significant capital preservation element to them, but now that has fallen to 26% and we expect this trend will continue.

“We’re working with the Treasury to try to steer funding in the direction it wants, but it could also do more to help the industry. HMRC is proving slow to approve many schemes and restrictions on companies which are older than seven years old receiving EIS funding are overly constraining too. The government needs to think carefully before adding further restrictions.”

Brownridge’s comments follow an open letter published by leading figures including Lord Michael Grade, Lord David Blunkett, Lord Peter Hain and Lord Howard Flight, as well as experts from the EIS field, in which they expressed “deep concern” for the government’s proposals.

They said: “Since its creation in 1993-1994, EIS has delivered almost £16bn of funding, helping more than 26,000 mostly early-stage and pre-profit businesses take root. Our fear is that excessive restrictions risk seriously undermining our future success in nurturing these companies, creating a problem for the economy where previously one did not exist.

“We support attempts to ensure greater targeting of EIS capital to genuine growth-focused young businesses, particularly in economically important sectors like technology, life sciences and the creative industries. But recent restrictions to EIS are already adversely affecting their funding supply. The Patient Capital Review should be mitigating problems, not magnifying them.

“We will not develop world-beating innovative companies by strangling the EIS model that incubates them. You can’t scale up if you don’t start up. We urge restraint.”

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