By Daniel Hunter
UK entrepreneurs have little awareness of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) and many are shunning them as a means of raising funding.
These are the main conclusions of a survey of E2Exchange’s 1,000-strong entrepreneur community to assess the impact of both EIS and SEIS. Given the feedback, E2Exchange is proposing a package of measure to reform the schemes and ensure that they are far more effective in helping entrepreneurs raise the capital they need for growth.
- Over 25% said they had never heard of EIS
- Close to 35% said they were not aware of the EIS tax relief benefit available to investors
- Over 60% have not used EIS to raise funds for their business or as an investor
- Over 40% said they had never heard of the SEIS scheme
- Close to 50% said they were not aware of the SEIS tax relief benefits available to investors
- Almost 90% had not used SEIS to raise funds for their business or as an investor
- Close to 60% did not know the difference between EIS and SEIS
Despite the best efforts of Government and business associations and support groups there appears to be a significant lack of awareness of both schemes among UK entrepreneurs. Many cited the fact that neither their banks nor their financial advisers had mentioned the schemes and that more should be done to promote EIS and SEIS.
A range of factors was also put forward by entrepreneurs to explain why, even when they had heard of the schemes, many still did not use them to raise investment.
A number said that they thought that the schemes are only available to passive investors when in fact an owner manager can qualify for the scheme, providing that they are a director of the company and certain other conditions are satisfied.
Another significant factor cited by entrepreneurs as contributing to the lack of up-take of EIS and SEIS SEIS, was that many of the investors they approached were not happy with taking a minority stake and felt that the 30% holding ceiling was too low.
Also, according to entrepreneurs, many investors were unhappy that it is largely only ordinary shares that qualify for the schemes, and that though some limited form of preference shares are allowed, the restrictions are too onerous for them to be attractive.
A number of entrepreneurs said that the sectors to which EIS and SEIS apply was too narrow and that it should be extended, particularly with regard to asset-backed businesses such as hotels and residential care comes.
In addition entrepreneurs also said that the limit of £150,000, which can be raised through SEIS over three years was too low and did not allow them to raise the funds necessary to start their business.
Based on the feedback from the survey, E2Exchange proposes four clear measures to increase the attractiveness of EIS and SEIS and boost their popularity and effectiveness in helping entrepreneurs:
- Provide relief on debt as well as equity - splitting the current tax reliefs of EIS and SEIS between the two would offer a more attractive incentive for investors;
- Improve the preferential rights in EIS and SEIS — allow preference share holders normal cumulative rights to dividends if they are not paid in early years and preference in liquidations;
- Widen sector eligibility — end anomalies such as pubs qualifying while hotels/residential care homes do not, and extend to more asset-backed sectors;
- Double the maximum that a company can raise under SEIS - the current total of £150,000 is too small for many entrepreneurs looking to raise funding.
“The significant lack of awareness of EIS and SEIS and the fact that a large number of entrepreneurs had not used them to raise investment suggests that both schemes are not working as well as they could to help young businesses raise the funding they need to expand and grow," Shalini Khemka, CEO of E2Exchange, commented.
"We are proposing a package of measures that we believe will improve the schemes and ensure they are far more effective in delivering the necessary investment to ensure UK entrepreneurs can play a strong a role as possible in the country’s economic recovery.”
Adrian Walton, tax partner at Smith & Williamson, accountants, commented: “The relative lack of awareness of EIS and SEIS evidenced from the survey results is concerning, although not totally unsurprising in the case of SEIS as the scheme only started in April 2012.
"For those individuals and businesses that do use the schemes, a recurring comment is that the rules are too restrictive both in terms of the types of trading activities that qualify, and the nature of the securities that can be issued to investors under the schemes. The proposals for changing the rules put forward by E2Exchange help to address these issues”.
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