By Claire West

95% of amsll and medium sized enterprises (SMEs) looking to raise funds through the Enterprise Investment Scheme (EIS) got the go-ahead from HMRC last year, opening up a vital source of capital to more businesses, says Rockpool Investments, the tax-efficient private equity investment firm headed by Nicola Horlick.

Rockpool points out that this is a significant jump on the previous year, when 91% of applications completed by HMRC were approved for generous EIS tax breaks*. This continues an upward trend in the proportion of approvals granted in the past few years (see graph below).

In addition, 96% of companies applying for pre-approval under the new Seed Enterprise Investment Scheme (SEIS) were successful in 2012/13.

Says Nicola Horlick, Chairman of Rockpool, “With bank lending in short supply, it’s vital that small businesses can access funding from other sources — it’s their lifeblood after all. This high hit-rate for EIS pre-approvals is really encouraging, as we are now seeing not just more applications, but more passing in higher numbers.”

“It’s good to see HMRC recognising the importance of enterprise investment to the small business sector by giving the green light to the vast majority, amid a surge in the numbers registering their interest.”

In total 4,075 businesses applied for pre-approval to raise funds through EIS and SEIS in 2012/13 — a 90% jump on the numbers applying to HMRC raise enterprise investment funds the previous year.

The EIS rules were widened in April 2012 to make more businesses eligible for investment, for example larger companies seeking greater amounts of investment across a broader range of industry sectors. SEIS was also launched last year to boost investment in seed businesses.

Continues Horlick,“The revamped rules are achieving what UK plc so desperately requires, by getting much needed funding to as many smaller and medium sized companies with sound business models as possible. This is really important as so many small businesses have been suffering badly from the contraction in bank lending.”

“It means that successful businesses now have much greater access to the capital they need not just to stay in the game but to fund their investment plans and deliver future growth.”

Expansion of EIS opening up attractive investment opportunities in SMEs

Adds Nicola Horlick, “It’s also great news for investors, bringing them a broader range of appealing investment opportunities in ambitious businesses with generous tax breaks attached.”

She explains that under the new EIS rules, investee companies can have up to 250 employees and gross assets of up to £15million.

“Opening up the EIS rules to include businesses which employ greater staff numbers means that a much wider range of operations can now participate — for example consumer sales businesses that rely on high numbers of personnel that would have been excluded before,” says Horlick.

“For private investors, that means they now have the opportunity to cherry-pick the opportunities they like the look of from pretty much the whole spectrum of business types, industry sectors and risk profiles.”

* Under the EIS scheme, investors can now invest up to £1million per annum, reclaim 30% of the cost of each investment against their income tax bill, and pay no Capital Gains Tax after 3 years.