How boosting the Enterprise Investment Scheme can lift start-ups and small businesses

In the second of a series of blogs, James King, founder of venture capital firm Find Invest Grow (FIG), discusses how extending the Enterprise Investment Scheme would incentivise investors to put more money into start-ups and kickstart the beleaguered British economy.

In a country where investment managers and financial advisors shy away from risky investments and favour lower-risk but lower-yield returns, investors sometimes need a little nudge in the right direction to help new companies.

That’s where the Enterprise Investment Scheme (EIS) comes in. The government scheme (that offers significant downside protection) has been hugely successful at getting equity investment into small businesses and has, in fact, more than paid for itself by the extra income tax revenue it has generated through increased employment. But, extending the reach of the scheme would further help both the investor and start-up and encourage a much-needed and steadier flow of investment throughout the tax year.

I would like to see the following:

Tax relief to be passed on to the start-up

Any EIS relief on income tax not claimed by an investor to be passed on to the start-up receiving investment, to be claimed against their choice of National Insurance Contribution (NIC), VAT payments or corporation tax over two years. By fundamentally changing the relationship between EIS and income tax liabilities, investors on lower incomes, such as the retired or those receiving dividends, would be more incentivised to invest. This would result in a steadier flow of investment into start-ups throughout the tax year rather than the peaks and troughs currently witnessed around April 4.

Tax relief made available on convertible loan note investments

Secondly, I would like to see tax relief made available on convertible loan note investments, specifically the first offered by individual investors. Investing via this method has proved very successful in the US. It has the benefit of making larger sums of fundraising easier to come by at an earlier stage of development. Incentivising convertible loan notes through EIS would be hugely advantageous to start-ups requiring significant cash injections, as exchanging high levels of investment for equity is often not an option for early stage, non-revenue generating businesses given their low enterprise value.

In addition, reducing NICs for start-ups would also have a huge impact. The chancellor’s recent announcement of a £2,000 cut in employers’ NIC for all businesses and charities is a welcome relief but should not stop there. For many start-ups, NIC often influences the decision to hire: it can stop them from taking on further staff or reduce the wages on offer. If for example, NIC on the nine lowest paid members of staff at SMEs was removed, it would effectively allow the 11th member of staff to be brought on board for free. This would be hugely significant for SMEs.

See also: 5 reasons why SEIS/EIS is the best funding route for tech startups

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Small Business Funding

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