The Enterprise Investment Scheme was accelerating. But now the brakes are on

Amid the noise about the difficulties experienced by growing companies when trying to raise money, it is sometimes forgotten that a panoply of long-established schemes offer generous tax relief to investors prepared to back these firms – particularly with equity capital. New research suggests one such initiative, the Enterprise Investment Scheme, is now raising record sums for businesses seeking to scale up.

The EIS, launched two decades ago, provides upfront relief and tax-free income and gains for investors who buy shares in qualifying small businesses. Radius Equity, a specialist provider of tax-efficient investment schemes, says businesses using the EIS picked up £1.53bn of funding during the 2013-14 tax year. Figures for 2014-15 have yet to be published, but Treasury estimates suggest the fundraising went even higher.

“The EIS is becoming an increasingly valuable source of capital, especially as bank lending can still be difficult to secure,” says Gary Robins, a Radius Equity director. “Investment on this scale is helping to drive growth in small and medium-sized enterprises across the UK economy.”

All of which is true, but this is a success story that may be about to stall. Reforms announced in the Chancellor’s Budget in July may have pushed the EIS further away from mainstream investors – potentially limiting the supply of funds to businesses seeking to raise money through the scheme.

Under these reforms, the EIS will not now be available to companies that are more than seven years old. And EIS investors will not be allowed to put more than £12m in any one company – down from the £15m cap that the Government had previously proposed.

The rules for “knowledge intensive” firms – those with high research and devlopment costs – are a little more relaxed but in general the EIS must now be used to put money into earlier-stage, smaller businesses. By definition that will expose investors to greater risk – and is likely to put some off.

While the full impact of the reforms won’t be known for some time, research by the investment firm Tilney Bestinvest inicates that the venture capital trust industry, to which the changes will also apply, will raise a third less new money this tax year compared with 2014-15.

This is not to attack the Government for these changes; the Chancellor had little choice but to amend the rules of the EIS and similar schemes for fear of falling foul of the European Union’s rules on state aid. Nevertheless, the Budget reforms do threaten a sector on which, as Radius Equity points out, companies have come to rely.

The timing couldn’t be worse. In April, the Government is planning to cut the tax reliefs available to private pension savers; wealthy people, in particular, will no longer be able to put so much money into tax-efficient pension schemes. Alternatives such as the EIS are an obvious home for the money of these savers, but not if the risk is too extreme.

Similarly, equity crowdfunding has been a boon for the EIS sector. Many of the companies raising money on platforms such as Seedrs and Crowdcube, which are booming, qualify for EIS status. But investors on these platforms are already wary of risk.

None of which is to suggest that the EIS is about to disappear. But the buoyant fund-raising figures of the past couple of years may represent the peak of the scheme’s popularity with investors. As a more high-risk proposition, it is bound to appeal to a narrower cross-section.

That’s unfortunate. Growing businesses need all the help they can get raising money – and the EIS provides an incentive for long-term capital investment in companies that are seeking to scale up.

Cable company Virgin Media is stepping into the breach following the closure last month of the Government’s popular Super Connected Cities scheme, which offered broadband installation grants of up to £3,000 to small businesses in 50 cities across the UK.

Now Virgin Media says it will cover installation costs of up to £1,000. The company says 86 per cent of the installations completed under Super Connected Cities cost less than this.

Mike Smith at Virgin Media Business called on the Government to reconsider the withdrawal of its own scheme. “[It] was a huge success in helping businesses get online,” he said. “Given the extraordinary take-up among businesses... we strongly encourage the Government to reintroduce the scheme.”

Can small firms afford to pay the Living Wage – that is, the rate of pay set by the independent Living Wage Foundation, rather than the Government’s forthcoming souped- up minimum wage? The British Chambers of Commerce thinks that many can – and is putting its money where its mouth is.

With Living Wage Week 2015 starting today, the BCC is promising to pay all its employees and third-party contractors at least £9.15 an hour, the Living Wage rate for London. That compares with the £7.20 that all businesses will have to pay staff over the age of 25 from next year, under the Chancellor’s national living wage.

But John Longworth at the BCC called on ministers to set minimum wage levels more scientifically. “Businesses want reassurance that in future they will follow an evidence-based approach, in consultation with the Low Pay Commission, when setting wage rates. This would be better than setting an arbitrary figure, which does not account for the huge cost impacts on some firms that could put tens of thousands of jobs at risk.”