This year marks the 30th anniversary of the Enterprise Investment Scheme, offering an opportune moment to reflect on the significant and ranging contribution that the scheme has made to the development of a swathe of UK start-ups.
Since launch, the EIS initiative has provided more than £23bn of investment, in the process supporting 33,000 companies to seed and scale.
The EIS is designed to funnel vital capital into entrepreneurs looking to scale and grow, as well as enabling investors to get in early on potential winners while benefiting from considerable tax relief. In 2022, EIS funding surged and reached record highs, but with the macroeconomic challenges in 2023, it is likely to have fallen since then.
However, with the much-welcomed news in November 2023 of the extension to the EIS sunset clause to 2035, and with the UK tax burden now at its highest level since the second world war, the scheme has definite allure for investors looking to make use of the available tax benefits just before the tax year ends.
Venture capital trusts and EISs have become increasingly popular over the past few years, with rising personal tax burdens and investors looking for growth investment outside the main markets.
There has also been an increase in the quality and variety of products available to investors, especially with the knowledge-intensive EIS fund structure now a mainstream EIS product, and newer entrants to the VCT market, which has traditionally been monopolised by larger fund managers.
In the Spring Budget, the government was keen to reiterate its support for the UK’s most innovative businesses, delivering several great steps forward. The EIS initiative offers a mechanism for supporting and rewarding innovation, and the greater adoption of novel technologies throughout the economy and our public institutions.
Investing in early-stage businesses
There are several core trends driving EIS investment in the UK.
Market recovery and increased activity: the recent stabilisation of interest rates has helped the market begin to recover, with activity levels increasing once more. This trend signifies growing investor confidence and a fertile ground for early-stage investments.
Better value opportunities in deep tech sectors: across various deep technology sectors, there is a noticeable emergence of better value opportunities. Founders, management teams and stakeholders are displaying a more realistic approach towards valuations. This shift not only reduces initial investment risks but also positions investors for potentially higher returns as the economic cycle rebounds.
Mitigating risks through EIS: early-stage investing inherently carries risks, underscoring the importance of mechanisms like the EIS in the UK tech sector. By providing tax incentives and risk-mitigation strategies, the EIS encourages investment in innovative ventures, thereby fostering growth and competitiveness in the sector.
Economic rebalancing and growth: supporting early-stage businesses is crucial for the UK's economic rebalancing efforts and fostering sustainable growth. This investment avenue represents a vital means of diversifying the economy and generating prosperity. The broad-based support across political parties is proof of its significance as a key driver of economic vitality.
