David Gee, a corporate solicitor at City law firm Fletcher Day, explores the potential benefits of companies obtaining Enterprise Investment Scheme (EIS) status to drive their growth.
Are you missing out on potential financing opportunities? Companies which obtain qualifying Enterprise Investment Scheme (EIS) status are far more likely to attract private equity investment which could open up greater opportunities for growth.
Financing any small or medium sized business with a view to growth is always challenging as the risks are invariably high. Debt finance can prove difficult to come by with lenders increasingly risk averse (particularly as the Brexit debacle rumbles on) and pressure is also then placed on the company which is saddled with liabilities.
Directors must also be mindful of their statutory duties and ensure that the company does not take on any debts that it cannot service – something often very difficult to predict in the early stages of a business.
Whilst shareholders are seldom keen to dilute their interests, equity finance can provide a viable alternative method of funding and, hopefully, growth. Although it is often difficult to attract investment in the private equity market, the EIS can provide businesses with an upper-hand by incentivising investment through various tax benefits.
Since the scheme’s introduction in 1994, over 27,500 companies have received investment with over £9.7bn of private equity funding having been raised. According to HMRC’s latest figures (released in May 2018), in 2015-16, 3,545 companies raised a total of £1.954bn in funds through the EIS scheme.
There were similar figures in 2016-17, when 3,470 companies raised a total of £1.797 billion. What’s more, the 2016-17 figures are only estimates and are expected to rise further still when updated later this year.
The 2016-17 figures equate to an average in excess of £500,000 raised per company – certainly more than a useful sum for any burgeoning business. Further good news also comes in the fact that the success rate for companies applying to HMRC for advanced assurance of EIS qualifying status is hovering between 85-90%. So if EIS has not yet been considered, it is certainly worth serious thought.
In order to qualify, the company itself (along with other conditions) must have been trading for less than seven years, have less than 250 employees, have gross assets that do not exceed £15m before (or £16 million after) the investment, be unquoted and must not be controlled by another company. There are also restrictions on the type of business that the company carries out (for example, property development, legal and accountancy services, banking, finance or insurance will not qualify).
Should the company qualify, an investor could stand to benefit from lucrative income and capital gains tax reliefs. Investors may claim income tax relief at 30% of the sums invested up to a potential maximum of £2m per year.
Moreover, investors may have the possibility to claim hold-over relief and be exempt from capital gains tax in respect of any gains made on the investment. They may also be entitled to claim a deferral if the proceeds of any disposal are used to make a further qualifying investment.
Therefore, if a company obtains EIS qualifying status, the potential benefits for investors make the company a far more attractive investment proposition. As such, the company can seek to attract investment from private equity investors who may otherwise consider the business too risky – or not even consider the business at all.
Couple this with a keen focus on other areas which can contribute to the attractiveness of a business as an investment proposition (such as protection of intellectual property, contracts and employees) and this will likely result in greater options to fund the growth of the business.
Further still, an additional benefit for the company of sourcing funding through private equity investment is that it will not be taking on debts which require servicing and will command interest. The company will also not be burdened by what can often be unwelcome restrictions on its activities under the terms of a loan.
With fresh EIS statistics for 2017/18 anticipated to be released by HMRC in May 2019, it will be interesting to see if the EIS scheme remains popular amongst companies and investors alike. The statistics to date certainly suggest that there are little signs of participation slowing and the scheme has proven to help provide businesses with access to finance that may not otherwise be available.
With an estimated 500,000 high net worth individuals in the UK there is certainly scope for businesses to source equity finance and qualifying EIS status may just be the leg-up that they need. Given the benefits, EIS should certainly be at the forefront of the minds of finance directors.
