EIS funding rule changes to boost SMEs

Clock money 620 x 430The government’s move to introduce increased flexibility for replacement capital within EIS and VCT schemes, as revealed in the Autumn Statement, has been welcomed by the industry as boosting small business funding.

Replacement capital is finance that has previously been provided to a business but has been returned to that funder. Until now EIS funding has not been allowed to replace that capital.

The news that replacement capital may be allowed within EIS and VCT regulations, subject to state aid approval, was welcomed by the EIS Association, which has lobbied for the change, as it brings it in line with the EU.

EISA director general Sarah Wadham says: “Replacement capital was not allowed under the original UK scheme regulations but is allowed under the overarching Global Block Exemption Regulations that govern tax advantaged venture capital schemes in the EU.

“It’s an anomaly that needed sorting and it looks like it will be, though it’s likely to be next year when the details are finalised. This will put us on a level playing field with the rest of the EU and is beneficial for the economy, strengthening the finance available to successful businesses.”

The move is likely to allow 50 per cent of any investment to be in the form of replacement capital up to a maximum of £5m, limited to half of this figure in any rolling 12 month period.

John Glencross, chief executive of EIS fund manager Calculus Capital, who was part of discussions with the Treasury on behalf of EISA, says: “Shareholder equity arrangements that were suitable in the early days may no longer be appropriate and may even be holding firms back.

“There is often a need to sort out a company’s shareholder structure to allow a larger funding to take place. It will enhance access to finance for these businesses and give them greater flexibility.”

Gary Robins, director of Radius Equity, a provider of EIS and SEIS investments, says the move could open up new sources of capital for small businesses.

“By potentially making replacement capital eligible for EIS tax reliefs, it could open up a massive new source of funding for SMEs as well as giving private investors greater flexibility over companies they invest in,” he says.

“EIS is already doing what so many other initiatives have failed to do – get increased funding to SME businesses, but this could take it to the next level, giving additional businesses funding so they can progress to the next stage of development.”