Press release

Government consults on proposals to encourage small business investment

The government is today publishing a consultation on proposals to encourage investment in small and start-up businesses.

The government is today publishing a consultation on proposals to encourage investment in small and start-up businesses with high growth potential, through the reform and simplification of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).  It is also seeking views on new proposals to support seed investment through the tax system.

The smallest companies, entrepreneurs and start-ups can find it particularly difficult to attract equity finance because the small size of the investment required can deter investors who prefer to invest larger sums in big companies.  The government therefore announced at Budget 2011 that it would consult on ways of encouraging seed investment through tax reliefs.  Proposals for a new stand-alone scheme designed to target seed investment by ‘business angels’ are set out in the consultation published today.  The scheme will be called the Business Angel Seed Investment Scheme (BASIS).

The reforms being consulted upon follow changes to  the EIS and VCTs, which were announced at Budget 2011, subject to State aid approval including:

  • raising the rate of EIS income tax relief to 30% from April 2011
  • increasing the annual EIS investment limit for individuals to £1m from April 2012
  • increasing the qualifying company limits to 250 employees and gross assets of £15m for both EIS and VCTs from April 2012
  • increasing the annual investment limit for qualifying companies to £10m for EIS and VCTs from April 2012
  • consulting on options to provide further support for early-stage (“seed”) investment

David Gauke, Exchequer Secretary to the Treasury, said:

The government wants to make the UK the best place in Europe to start, finance and grow a business and we know that a vital part of this is ensuring access to a wide range of sources of finance. Today we are proposing a new, targeted scheme to encourage greater investment by business angels in start-ups and entrepreneurs’ businesses. This, alongside our reform of the EIS and VCTs, is part of our plan to increase the competitiveness of the UK tax system, demonstrating that Britain is open for business.

The consultation period runs to 28 September 2011. Following this, legislation to implement any proposals to be taken forward in Finance Bill 2012 will be published in draft in the autumn and there will be scope then for further comment on the draft legislation.

  1. The consultation document can be found in our consultation section, under Tax-advantaged venture capital schemes: a consultation.

  2. The proposals set out in the consultation are at various stages of the government’s framework for tax consultation.  Most are at Stage 1, (setting out objectives and identifying options) or Stage 2, (determining the best option and developing a framework for implementation, including detailed policy design).  The changes affecting feed-in tariff businesses are at stage 3, (draft legislation).

  3. Evidence suggests that SMEs and start-ups encounter difficulties in accessing equity finance up to £10 million. Those difficulties may be particularly acute for seed stage companies.

  4. Since their introduction in the 1990s, the EIS and VCTs have supported over £11.5bn of equity investment into UK businesses.  The schemes incentivise investment in smaller, qualifying companies by offering a range of income and capital gains tax reliefs to individual investors who subscribe for new shares in a VCT or in a company qualifying under the EIS rules.

  5. Both VCTs and EIS are State aids because they provide government support that favours one class of enterprise over others.  This means that any further reforms to the schemes need to be agreed by the European Commission.

  6. Under a new seed investment scheme, the government would need an agreed definition of ‘Business Angel’ that was effective in practice and included all those investors who could provide benefit to start-up companies. 

    The EC Commission defines Business Angels as wealthy private individuals who invest directly in young, new and growing unquoted businesses and provide them with advice, usually in return for an equity stake in the business, but may also provide other long-term finance.

  7. The government’s Plan for Growth, published alongside the Budget in March 2011, set out measures to achieve four overarching ambitions for the British economy, including making the UK the best place in Europe to start, finance and grow a business. A vital part of this is ensuring that smaller businesses in particular have access to a wide range of sources of finance.

  8. In February 2011, the government agreed with the major UK banks that they will provide £76 billion of gross bank lending to SMEs in 2011, an increase of 15% on 2010.  The government has also committed to extend the Enterprise Finance Guarantee for the rest of this Parliament, supporting up to £2 billion of lending to businesses.

  9. In addition, the government has taken a number of steps to ensure the availability of equity finance.  Government support for Enterprise Capital Funds will continue with a further £200 million over the next four years.  At Budget 2011 the government also announced proposals to encourage investment in businesses with high growth potential by reforming the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). 

Non-media enquiries should be addressed to the Treasury Correspondence and Enquiry Unit on 020 7270 4558 or by e-mail to public.enquiries@hm-treasury.gov.uk

Media enquiries should be addressed to the Treasury Press Office on 020 7270 5238.

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