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The Future of Enterprise Investment Schemes (EIS)

At the time of writing my last article there were concerns in the industry about what the future might hold for EIS, but depending on who you are, the Budget announcement provided some good news.

The Chancellor has doubled the amount that Enterprise Investment Schemes (EIS) can invest in "knowledge-based investment firms", as part of the government's patient capital review. The critical term is ‘knowledge-based’, because it is not yet clear what activities will be defined in this category. What we do know, because the Chancellor said so is that "ensuring that EIS is not used as a shelter for low-risk capital preservation schemes" was the driving force behind the change.

I believe that if you are a tech company developing IP you are likely to benefit from this scheme because EIS should help to bridge the funding gap from Series A through to £25m+ funding rounds. However, there is more ambiguity for some firms in which generating 'knowledge' isn't critical to the business. The new condition introduces a principles-based test to determine if, at the time of the investment, a company is a genuine entrepreneurial company. In effect there needs to be 'significant risk of loss of capital'. This should be positive to all truly trading businesses, although it could be problematic for any businesses backed by property, such as pubs.

The announcement was part of the government's 'Action Plan to unlock over £20 billion of new investment in UK scale-up businesses'. This also includes £2.5bn commitment to the British Business Bank and pension fund access to long-term investments, which should help provide more capital for Venture Capital firms to invest.

EISA director-general Mark Brownridge says the budget is a “huge vote of confidence from the government” and that the government had recognised the power of the tax-advantageous scheme to help company’s start-up and grow.

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