Tougher rules on venture capital investing have seen a £200m fall in the amount companies have raised via the enterprise investment scheme (EIS), and may affect companies looking to recapitalise following coronavirus, according to analysis by Price Bailey
The firm said £1.8bn was invested into 3,905 companies in the 2018-19 tax year down from £2bn the previous year, according to figures released by HMRC.
Investment via the seed investment enterprise scheme (SEIS) has also declined. In 2018-19, 1,985 companies raised a total of £163m of funds, down from £195m raised by 2,430 companies in 2017-18.
According to Price Bailey, the ‘risk to capital’ rules, introduced on 1 December 2017, mean that entrepreneurs must demonstrate to HMRC that there is a ‘significant risk’ of a capital loss on their shares exceeding the ‘net investment return’. This is leading to nearly 1 in 10 EIS applications for being rejected or withdrawn.
Chand Chudasama, Partner at Price Bailey, said: ‘The new risk to capital rules are having a significant chilling effect on the market and are pushing up the cost of raising venture capital via EIS/SEIS by well over a half in order to access meaningful levels of investment for growth.’
The figures also show a 54% reduction in deals worth £4m or more, which Chudasama said was an important barometer, as this funding typically flows to true scale up businesses who are then able to make some real inroads into a marketplace.
‘We are expecting to see an increase in rights issues as a consequence of the economic fallout from Covid-19, many of which could qualify for EIS relief.
‘Businesses are likely to assume that because their initial share offers qualified, secondary offers will too. HMRC could decide that the new shares do not qualify for EIS relief under the new rules, or if business plans have significantly changed since the initial share issue.
‘Businesses should allow themselves plenty of time for the approval process or risk missing out on investment, ‘he warned.
Price Bailey says that the recent rule changes have marked a clear shift towards growth, and away from capital preservation strategies. This means that in many cases businesses using EIS/SEIS to raise money represent higher risk investments.
Chudasama said: ‘Investors will need to consider how much they are prepared to lose. One way to manage the increased risk is by investing across a number of different businesses or EIS funds’.