When the Enterprise Investment Scheme (EIS) was first launched during the 1993/94 period, the UK remained part of the EU. It needed to include a ‘sunset clause’ within the legislation to comply with European Union requirements.
A sunset clause means that there is a defined end date or cut-off date for new transactions. It is used as a benchmark for authorities and administrators to evaluate whether a scheme has been effective and typically indicates that the project will not continue indefinitely.
Sunset clauses elsewhere in the investment world are often used as a guarantee that offers a fixed period of protection when a treaty or other arrangement ends. For the EIS, the new sunset clause is set for 6th April 2035.
Does the Sunset Clause Mean the EIS Will End in 2035?
Theoretically, yes, the sunset clause remains part of the scheme legislation. If the scheme is not renewed or extended before we reach April 2035, it could potentially come to an end. Investments made up to the cut-off point would remain valid and eligible for the full array of tax reliefs and benefits, but no further applications could be made by either businesses or investors.
In November 2023, it was announced the scheme would be extended from April 2025 to 2035.
Christiana Stewart-Lockhart, Director General of the EISA, said:
“The extension of the EIS is excellent news for early stage business growth in the UK. Entrepreneurs are now able to seek much needed investment with the confidence that the EIS will still be available to support their future growth beyond April 2025. The current economic climate has definitely been a challenge for many entrepreneurs and this announcement about the EIS will provide some much needed reassurance for entrepreneurs and investors across the UK.
This announcement is welcome news throughout the investment community, and although we have not received any formal publications or amendments to the scheme literature, it seems all but certain that the sunset clause will either be extended or cease to exist in the near future.
Why Does the EIS Have a Sunset Clause?
As we’ve touched on, sunset clauses are a fairly standard inclusion in scheme or initiative frameworks. The idea is to introduce a structure or method by which the successes (or failures) of a scheme are evaluated rather than introducing a new treaty that has no specific end date or monitoring process.
Many Bills that are passed into law contain a sunset clause to mandate the appraisal of the legislation at a certain point – which means parliament debates the merits and drawbacks of the scheme in question and decides how to move forward from there.
The demonstrable success of the scheme, alongside other venture capital initiatives, and the level of interest it has generated are widely seen as having already proven the case for the EIS.
Just under 4,500 British businesses benefited in the 2021/22 tax year, raising £2,305 million in capital financing. Between 2020 and 2021, the number of companies raising capital through the EIS grew 39%.
How Successful Has the EIS Been?
Irrespective of whether there are major political changes following the next general election, it seems highly unlikely that any government will choose to leave the original sunset clause in place – partly because the UK government now has autonomy about how it manages such decisions and partly because the EIS has been extraordinarily successful in the ten years since it was launched.
As a catalyst for greater innovation, faster growth of early-stage companies and more investment interest in dynamic business concepts, the scheme has generated:
- Capital investment for over 37,000 separate businesses.
- Investment financing of more than £26 billion – with 33% of qualifying companies working within the information and communication sectors during 2019/20.
Another positive outcome has been the significant levels of growth enabled by higher venture capital investments made into growing and emerging sectors. Rather than being concentrated solely within London and the southeast, investment has contributed to faster and more notable growth in industries nationwide, with the UK tech sector reporting record-high growth rates in 2021.
Changes such as the higher annual EIS investment threshold have helped to boost awareness of and participation in the scheme. Further information about the most recent changes is available in our earlier guide to Changes to EIS in 2023-24.
Ultimately, the EIS has made a profound impact on the venture capital investment environment within the UK, with benefits for investors, businesses and the economy as a whole, where more investment generates more jobs, more growth and more tax revenues.