In the much anticipated Autumn Statement, delivered by Chancellor Hunt, the UK government confirmed that it would extend the Enterprise Investment Scheme (EIS) by ten years. This extension to the original ‘sunset clause’ means that the initiative will remain available to British investors, venture capital funds and businesses until 2035.
The announcement has been well received and offers certainty and assurances for companies currently preparing for an EIS raise and the investment sector as a whole.
Since its inception in the 1993/94 tax year, the EIS scheme has been a resounding success, helping over 37,000 businesses raise much-needed capital investment and generating investment into early-stage organisations with strong growth potential of over £26 billion.
Autumn Statement Updates on the EIS
The EIS originally had a sunset clause of 6th April 2025. If the government had not taken action, that would have meant that the scheme ceased to operate at that point – although pre-existing investments made would continue to qualify for tax reliefs.
Sunset clauses are widely used in business legislation and contractual agreements. They form a baseline date at which a contract or scheme must be revised and evaluated to establish whether it should be extended or closed.
Part of the demand for the EIS relates to the need for direct capital investments into sectors that are harnessing innovation, creating new solutions to long-standing problems, and developing ideas that address new and emerging markets.
Whereas conventional capital raises through the stock markets are available to established, larger corporations that are suited to a public listing, this method of raising financing is inaccessible to smaller, younger businesses – irrespective of the opportunity for investors or the likelihood that the organisation will achieve superb success with the right financial support.
Why has the EIS Sunset Clause Been Extended Rather Than Removed?
The government had previously indicated that it would lift or extend the EIS sunset clause. Still, this formal confirmation is good news and solidifies the position of venture capital investors and businesses while providing a framework that will continue to incentivise investors with a range of beneficial tax reliefs.
However, some may be disappointed that this has not been removed altogether. When the scheme was originally launched, a sunset clause was mandated as the UK was, at that time, an EU member and bound by EC requirements for legislation of this nature.
The EU considered the EIS and other venture capital schemes as a form of state aid, hence the requirement for a sunset clause to be written into the terms.
The Chancellor did not offer any comment or clarity about the reason for the extension, but the news that the EIS – alongside the Venture Capital Trust (VCT) initiative – will continue for at least the next ten years remains positive.
With a general election planned at some point next year, there is little likelihood that a new government, should a new party be elected, would make any further changes. Labour has previously stated that it intends to maintain and expand incentives offered through the EIS as well as the Seed Enterprise Investment Scheme (SEIS) and the tax credit system for research and development projects.
These initiatives are widely seen as being key to encouraging investment and growth in important markets and generating sustainable scalability that contributes to employment and economic stability.
How Does the EIS Benefit the UK Economy?
One piece of the puzzle is that reforms to income and corporation taxes, alongside other tax categories over the last few years, have increased the tax burden within the UK. Higher and additional rate taxpayers and investment professionals may be more likely to invest in schemes that offer significant tax benefits.
Against this backdrop, it is important to clarify why the EIS is so attractive. Investors engaging in early-stage, unlisted businesses take an inevitably higher risk than if they were to invest the same capital in a listed organisation – a known entity with a longer trading history.
Tax reliefs include an upfront 30% income tax relief, with a maximum relief of £600,000 per investor per tax year – should they invest the upper limit of £2 million into EIS-qualifying knowledge-intensive companies (KICs) or KIC funds.
Additional tax reliefs, such as loss relief, further enhance the advantages, offsetting the potential loss if an EIS company fails or does not provide the anticipated returns.
Investors can also reinvest gains that would otherwise be subject to capital gains tax into EIS-eligible funds or companies to defer the tax payable indefinitely. With the capital gains allowance reduced from £12,300 to £6,000 in 2023/24 and due to be reduced further to £3,000 in 2024/25, this tax treatment may offer considerable efficiencies.
During 2022/23, the EIS attracted over £2.5 billion of investment, accompanied by over £1 billion of investment into VCT businesses. Cumulatively, these schemes have raised billions for UK businesses and created thousands of secure jobs.
Extending the sunset clause removes the ‘catch’ previously inherent within these schemes, ensuring that innovation and dynamic business growth remain possible, encouraging and supporting entrepreneurship while offering tax advantages to investors.
How Will the Extension of the Sunset Clause Impact EIS Investment Opportunities?
The announcements within the wider Autumn Statement will be seen as reassurance for entrepreneurs, business owners and investors intending to access the EIS as a way to raise investment and support long-term growth.
While the scheme has been extended rather than given indefinite status, the previous sunset clause, due to end in 2025, may have stalled uptake due to concerns that the scheme had limitations or that tax reliefs or capital raises for companies would cease at that point.
Now that the government has clarified its position, there is likely to be continued and stronger demand for venture capital investment, far surpassing previous capital raises and ensuring that prospective new entrants on either side will have the confidence to proceed with the knowledge that the EIS will continue for at least the next 12 years and, hopefully, long into the future.