Could extending tax efficient investment schemes catalyse SME growth during COVID crisis?

The past two weeks have seen unprecedented announcements and policies from the Chancellor, designed to support the UK’s businesses and workers during the coronavirus lockdown. The £330 billion raft of incentives and loans revealed last week made debt funding available at a record scale – especially for the UK’s SMEs.

So far, however, equity funding routes have been largely forgotten about – despite the fact that they are normally one of the main ways to access to finance for start-ups and SMEs – alongside debt. One such equity finance scheme that has been crucial in the past is the Enterprise Investment Scheme (EIS). The scheme facilitates investment for small businesses in the UK from private investors by offering Government-backed tax efficiencies on their investment. The EIS currently provides around £2 billion of funding a year to growing firms and has provided over £20 billion in its 25 year history.

Mologic Ltd was awarded c. £1 million as part of the UK government’s £46 million international COVID-19 prevention and research funding package, and previously received EIS funding to help facilitate its growth. The EIS has also helped to fund a range of other business success stories in the UK, such as BrewDog, Gousto and OddBox.

Luke Davis – CEO of IW Capital, a specialist in EIS investment – discusses the scheme:

“The EIS is one of the UK Government’s most successful initiatives in terms of driving investment into high-growth early-stage companies. It has helped produce some incredible business successes that otherwise may not have got off the ground due to the reluctance of banks to lend to these firms. While confidence in investing has undoubtedly reduced, there are still some fantastic opportunities to invest and support the growth of British firms that are expanding and hiring – especially in the MedTech and Pharma arenas.

When the EIS income tax relief was extended from 20% to 30% in 2011, the amount invested in small companies through the scheme saw a tremendous jump. If the Government were to extend the scope or tax efficiencies of the scheme again, it could really help catalyse private investment – a crucial source of growth finance. While any increase in tax reliefs would impact the revenue of the treasury, this would very likely be more than balanced by increased taxes on business revenues and those on new employees – as we have seen previously with the scheme.

The EIS has also funded some hugely innovative companies which are now tackling this crisis – Mologic being a prime example. We have to be sensible in times such as these but that does not mean that business and investment has to come to a complete halt.”