Call to extend tax reliefs for investors to encourage more funding for small businesses
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Posted: Fri 3rd Mar 2023
The government should use the Budget to extend schemes which give tax breaks to investors backing start-ups and small businesses, a group of MPs has said.
The report by the All-Party Parliamentary Group for Entrepreneurship said the UK's investment tax relief schemes have "a pivotal value" to Britain's start-up ecosystem and they should be enhanced.
The Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS), and Venture Capital Trusts (VCTs) provide investors with incentives to fund small businesses.
EIS and VCTs currently have a Sunset Clause which is due to expire in April 2025, and the report said recent inflation has eroded the value of SEIS.
Former chancellor Kwasi Kwarteng announced changes to SEIS in his mini-Budget last September. He said that from April 2023 companies will be able to raise up to £250,000 of SEIS investment, an increase on the current £150,000.
He also said the gross asset limit will be increased to £350,000, the age limit from two to three years and the annual investor limit doubled to £200,000.
Those changes have not been confirmed although current chancellor Jeremy Hunt said during last year's Autumn Statement that he was committed to "increasing the generosity and availability of [SEIS]", and that he "sees the value of extending [EIS and VCTs]".
The MPs warned that the schemes' futures are uncertain so the Budget on 15 March should be used to confirm the SEIS increases and steps to ensure EIS and VCT don't lapse after the Sunset Clause.
The report also said HM Revenue & Customs should be more communicative with start-ups and investors if it is unable to accept applications from companies without investors "to make sure that good companies do not fall through the cracks".
In addition, financial health rules should be updated, the MPs recommended. The report said:
"The new financial health rules require a company to have more assets than liabilities and, if it is raising funds outside of its initial investment period, to still have more than half of its invested capital.
"As the rationale behind growth investment is to give money to currently unprofitable companies based on the prediction that they would become profitable in the future, these financial health tests make little sense."
The report follows the publication of an open letter organised by the Entrepreneurs Network and signed by more than 300 British entrepreneurs. It calls on the government to act on challenges facing EIS, SEIS and VCTs.
Catherine Bedford, CEO of Dashel Helmets signed the letter. She said:
"My company, which manufactures solely in the UK in areas of economic deprivation, has only managed to raise funding due to the SEIS and EIS schemes. The schemes are crucial to the survival of viable start-ups."
Another signatory, Deirdre McGettrick, founder and CEO of ufurnish.com, said:
"I have found EIS to be particularly valuable as a female entrepreneur where institutional funds are less readily deploying capital to female founders in the early stages of business."
Peter Roberts, chairman of Gymfinity Kids, said:
"Pre EIS and VCT it was almost impossible to raise funds for early stage investments. Since their introduction it has completely changed the economics of making investments into young ambitious companies and as a result I see probably 5x the opportunities than I did pre these incentives.
"It allows them the chance to raise equity and not having to go for debt which is so risky and expensive as we have seen in the last nine months."
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