The Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) have been instrumental in charging economic growth, supporting innovation, and providing critical financial support to ambitious early-stage businesses.
The UK government has renewed them for 10 years, promising they’ll remain open until April 5, 2035.
This extension creates opportunities for entrepreneurs, while creating a more predictable framework for the UK to become a leading global destination for start-up investment.
While the UK currently lacks the same kind of entrepreneurial support available in the US, the EIS and VCT provide benefits for UK start-ups and investors.
Encouraging investment in high-growth businesses
VCTs and the EIS have been essential to bridge a funding gap for early-stage businesses.
VCTs can provide longer-term capital to help companies scale up, drive innovation, and create jobs, and are currently supporting more than 1,000 growing businesses.
Chris Lewis, chair of the VCT Association, has emphasised how the extension of this type of scheme can strengthen the UK’s investment landscape.
The EIS has also proven to be a valuable tool in supporting the development of high-tech, knowledge-based businesses.
It has supported more than 56,000 companies since 1994, many of which have developed into unicorns or market leaders.
The extension of this successful arrangement ensures more businesses can access critical early-stage funding, ensuring their resilience and supporting job creation.
Tax efficiency and incentives for investors
A primary advantage of the EIS and VCT offer is their tax-efficient structure.
This makes investing in start-ups more attractive to investors, with the potential for significant returns over time.
Investors can benefit from:
- Up to 30 per cent income tax relief
Investors in VCTs or EIS-qualifying companies receive tax relief on their investments, reducing their tax liabilities.
- Capital Gains Tax (CGT) exemption
CGT is not liable on any profits generated from EIS or VCT investments, making them more attractive to investors.
- Inheritance Tax (IHT) benefits
Despite the new 20 per cent inheritance tax on AIM shares, EIS and VCTs can provide viable tax-efficient options for wealth management.
- Loss relief protection
Investing in early-stage businesses can carry extra risks for investors due to the high failure rate.
EIS provides loss relief to investors, mitigating some of the risk.
The government’s commitment to both schemes for the next decade has provided extra clarity and stability for investors, and they can now invest with confidence over the medium to long term.
The impact on investment
The long-term, predictable extension of EIS and VCTs gives greater stability to the investment landscape.
Since both were introduced, they’ve raised more than £41 billion, demonstrating their effectiveness in mobilising private capital to support entrepreneurship and innovation.
In 2022-23, the EIS and VCT initiatives raised £2.9 billion, with 1,280 companies accessing the EIS for the first time during that period.
Backing entrepreneurship
The extension of these schemes is part of an overall strategy to nurture entrepreneurship and innovation.
The government is keen to foster a dynamic and thriving entrepreneurial ecosystem as part of its overall growth strategy.
By maintaining incentives for investment, start-ups and growing businesses can access much needed capital at a vital stage.
Cash injections allow start-ups to develop new products, expand operations, and hire new talent.
Growing start-ups can contribute significantly to job creation and overall economic resilience.
By providing stability for investors, start-ups can enjoy a more predictable funding environment.
This can allow start-ups to take calculated risks, while focusing on long-term growth.
While this extension is a positive step for entrepreneurs and investors, broader tax policies will also play a pivotal role in shaping the entrepreneurial landscape. A balanced approach supporting start-ups and investors looking for a stable investment environment will be critical in ensuring sustained growth and competitiveness in the UK SME sector.