UK Edition
Expansion to startup loan scheme under discussion
The amendment would make the loans available to huge number of small firms that have investors benefiting from EIS tax relief
The startups bailout package could be revamped to offer tax relief to tempt private investors into taking stakes alongside the Government, amid fears innovative firms will be starved of funding.
Officials are in talks over allowing backers that use the Enterprise Investment Scheme (EIS) to provide match funding through the Treasury’s £500m Future Fund, according to sources.
The Government will co-invest in start-ups alongside private backers through convertible loans, but the scheme will not offer investors the tax relief typically available. Many early-stage firms are heavily reliant on investors using the EIS.
The scheme offers tax relief to individual investors that buy new equity in startups. Under the EIS, investors can claim up to 30pc income tax relief on the money they invest to encourage them to sink their funds into early-stage firms.
Individual investors make up more than half of funding for startups, but many risk being sidelined by the terms of the Future Fund. “It could fall one way or the other, but that is a discussion that is very live,” said a source close to the talks. The industry “is pushing very hard” on allowing the relief, they added.
Tech industry insiders expect the £500m pot split between Government and private investors to be increased given the high demand for relief, as capital investment dries up.
The details of the fund are still being ironed out and the scheme could see the Government take stakes in hundreds of loss-making firms. While the loans provided by the investment fund can be paid back, a 100pc redemption premium means the bulk are expected to be converted into equity.
Philip Salter, founder of the Entrepreneurs Network, urged the Treasury to tweak the scheme. He said: “To open it up to more entrepreneurs, the amount an entrepreneur needs to have previously raised should be reduced from £250,000 to £100,000 and investments through the EIS should qualify so angel investors are incentivised to get involved.”
Bruce Macfarlane, the head of venture capital firm MMC Ventures which has backed start-ups including Gousto and Unmade, called the Government’s bailout strategy “very short sighted”.
He urged the Government to allow EIS investors to match convertible loans made to technology start-ups from the Future Fund, reducing the amount of debt start-ups would need to take on in return for emergency funding.
“One of the reasons why so few startups are not in a desperate state is so few of them have any debt,” he said. “Surely this is no time to be encouraging companies to take more debt.”
Technology investors have also called for a temporary increase in the tax relief of EIS funds, which could give them more capital to invest in struggling start-ups. Several investors including the heads of Vala Capital and Wealth Club wrote to the Government in March requesting the tax relief for EIS investors is raised from 30pc to 80pc.
Mr Macfarlane said an 80pc tax relief would be “excessive”. He said: “If they increased it from 30pc to 50pc, that would be favourable.
“One of the reasons why the UK tech scene is so vibrant is the amount of money that’s available through EIS.”