March 01, 2013 - Rachel Miller
There has been a surge in the number of businesses seeking approval to raise money through the Enterprise Investment Scheme (EIS), according to the private equity investment firm Rockpool Investments.
The number of applications seeking EIS pre-approval from HM Revenue & Customs (HMRC) increased 47% in the last tax year, from 1,457 in 2010/11 to 2,147 in 2011/12.
The EIS is designed to stimulate investment in smaller companies by offering a range of tax reliefs to investors. The tax benefits include 30% initial income tax relief (on up to £1 million per annum for an investor), the ability to roll-over unlimited capital gains into qualifying investments and the opportunity to realise any profits on an investment free of capital gains tax.
Private companies can ask HMRC to indicate whether prospective investors are likely to qualify for tax reliefs under EIS. While positive responses from HMRC to these applications for "advance assurance" are no guarantee of qualification, it is a strong indicator of eligibility.
Rockpool says the number of applications is likely to show a further dramatic increase in the current tax year, thanks to changes to the scheme that mean that a broader range of businesses can now qualify.
These changes make the Enterprise Investment Scheme more favourable to investors by allowing them to shelter more money in the scheme and by radically expanding the size of company that can be invested in.
Gary Robins, partner at Rockpool, said: "EIS is one of the most successful schemes for attracting equity investment into growing businesses, and it is especially valuable in the current economic climate as banks are less willing to lend to smaller businesses. EIS has been crucial in generating equity for these loan-starved businesses, whilst benefiting investors through very generous tax incentives."