Investment tax breaks like the Seed Enterprise Investment Scheme (SEIS) have boosted the number of companies seeking private investors by 90% in the past 12 months.
SEIS is just one investment program promising investors tax relief in exchange for backing for businesses.
Others include the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT).
According to figures from financial firm Rockpool Investments, 4,075 companies applied for SEIS or EIS status from HM Revenue and Customs in the tax year ending April 5, 2013.
The figures show that EIS pre-approvals jumped 9% to 2,346 in the tax year – up from 2,147 in the previous year.
SEIS pre-approval applications hit 1,729
Massive boost for companies
In the previous tax year, HMRC had 2,147 for EIS investments – no figures for SEIS are included as the program did not start until April 6, 2012.
The firm claims measures in the Finance Act 2012 triggered a rush for private investors to sink money into private companies.
“Companies have had a massive financial boost by private investors stepping into cover the capital companies need to grow that was pulled by the banks,” said Rockpool chairman Nicola Horlick.
“At the same time investors have picked up some terrific tax breaks.
“SEIS and EIS are both popular with investors. The soaring numbers of companies now taking part shows what an important financial incentive they both area for businesses and investors. The government has given small and medium sized businesses a funding tonic just when it looked as if they had nowhere to go for much need investment.”
SEIS, EIS and VCTs all have different tax reliefs and investment rules.
SEIS set to grow
SEIS caps investments at £100,000 in a tax year, but offers a 50% income tax refund and capital gains tax reliefs in special circumstances.
EIS investment caps are much higher, and come with different tax reliefs from SEIS.
However, both minimise investment risk for investors by having options to defer or set off losses.
VCTs operate under a different set of rules.
“SEIS has proved an attractive option for many investors who want to fund start-up businesses with larger risk to reward ratios, while the other programs offer a little lower risk by investing in more established businesses,” said Horlick.
She predicts that because SEIS and EIS tax breaks provide a better option for investors, the number of applications will continue to rise, while VCT investment is likely to fall away.