An extension to the Enterprise Investment Scheme (EIS) could help bookkeeping service users boost their businesses, according to an industry expert.
Developing a firm in the current economic climate is extremely challenging. After years of reduced returns and a double-dip recession, many companies have struggled to stay afloat, let alone grow.
James King, founder of Find Invest Grow (FIG), a venture capital firm, told smallbusiness.co.uk that an extension to the current EIS could be one way to tackle the stagnant market.
The EIS offers a range of tax reliefs to investors who put money into smaller, high-risk trading companies.
Those putting their capital into the scheme receive a 30 per cent tax offset on the cost of shares in the business.
Mr King said the scheme is an excellent way to “nudge” investment in new businesses. Not only that, but the cost to government of the benefits provided is “more than paid for” by the extra income generated by increased levels of employment.
Despite its successes to date, Mr King suggested changes could be made to improve the scheme for both the investor and the company, to “encourage a much-needed and steadier flow of investment throughout the tax year”.
Firstly, the business professional called for tax relief to be passed on to the start-up, as well as the investor.
Mr King said that any EIS income tax relief that is not claimed by the investor should be made available to the business that has received the investment. He added that it should come in the form of either national insurance contributions (NICs), VAT payments or corporate tax breaks over two years.
At the moment, investors tend to pump money into the scheme at periods in the year that work within their own tax arrangements.
Mr King explained: “By fundamentally changing the relationship between EIS and income tax liabilities, investors on lower incomes, such as the retired or those receiving dividends, would be more incentivised to invest.
“This would result in a steadier flow of investment into start-ups throughout the tax year rather than the peaks and troughs currently witnessed around April 4th.”
Secondly, Mr King argued that tax relief should be made available on convertible loan note investments, particularly for individual investors.
These are a form of debt investment that will, either in part or in whole, convert to an equity investment during its term.
Mr King highlighted the popularity of this type of product in the US market.
He said: “It has the benefit of making larger sums of fundraising easier to come by at an earlier stage of development.
“Incentivising convertible loan notes through EIS would be hugely advantageous to start-ups requiring significant cash injections, as exchanging high levels of investment for equity is often not an option for early stage, non-revenue generating businesses given their low enterprise value.”
Other ways in which bookkeeping customers could be given a helping hand by the UK government include reducing NICs for start-ups.
In March, Chancellor George Osborne announced the creation of an employment allowance that will see a number of small businesses be exempt from NICs.