Equity funding from government-backed tax schemes has dropped by a fifth due to tinkering with the rules by the European Union.
The EU demanded former Chancellor George Osborne should change the rules for the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) to match state-aid regulations across the Channel.
The measures led to money available to cash-starved companies from angel investors to drop by £200 million.
The changes were instigated by the EU to make tax incentives in Britain more in line with those available in other member states. They came into force from November 18, 2015.
The statistics came from HM Revenue & Customs, which manages the tax schemes.
Rule changes from EU
“We are seeing the changes at the Summer Budget 2015 take effect. The alterations themselves weren’t too hard hitting but the constant tinkering of these government backed tax schemes is causing uncertainty for small businesses and investors alike,” said Ray Abercromby, a business tax partner accountants Smith & Williamson.
“Businesses and investors now have to pay close attention to the structure of their company. The changes have forced individuals, who just want to get on and grow their business, to focus on the structure of the business in case they accidentally fall foul of the rules. At first glance the changes appeared to discourage investment in the UK’s small and scale-up businesses, the lifeblood of our economy, and these statistics indicate that to the case.”
EIS offers investors income tax relief at 30% on annual investments up to £1 million.
Other tax breaks include carry-back relief, a capital gains tax exemption on sale of EIS shares after three years and loss relief should the business fail.
SEIS provides similar tax incentives as EIS but on a smaller scale – with 50% income tax relief on annual investments of £100,000, plus the same reliefs and exemptions as EIS.
Brexit may bring a silver-lining for company directors considering a EIS or SEIS share issue to raise capital.
“Post-Brexit, the government may choose to look at the relief associated with EIS/SEIS and return to pre-2015 levels. It has proved to be very popular, and beneficial to the economy as a whole, and would be a way of encouraging UK small business growth,” said Abercromby.