The majority of tax legislation in the UK is confusing, and support for SMEs is often ineffective, so why is S/EIS any different?
There are over 5.5 million small and medium sized businesses in the UK and it is, of course, where every entrepreneurial journey starts. These 5.5 million businesses are also the most vulnerable to downturns in the economy or other external shocks. Between them, these businesses employ nearly 17 million people, which represents 61 per cent of the entire workforce and, as such, they deserve to be encouraged and assisted in every way possible.
Any government, whatever their political leaning, are guilty of two unquestionable traits. The first is that they constantly tinker with existing legislation which, over time, makes that legislation ever more complex and more difficult to follow. The second is that they are always very good at saying the right words, but ever increasingly very poor at actually turning those words into reality. It seems that the government in the UK in recent decades has got ever worse in these two respects.
Promises made in manifestos are not kept or are watered down, or even if the words are followed through any actions taken are then amended or reversed at some point soon thereafter. Even when legislation is brought in there are often ‘unforeseen’ ramifications that any practicing business owner or director could have easily predicted.
These traits, and the ever changing and uncertain business environment that it creates, makes it extremely difficult for many businesses to operate and this is especially true for micro and small businesses. There is, however, one piece of legislation that stands as a shining beacon as an example of everything that can be achieved.
The Enterprise Investment Scheme was first introduced in 2007 and was expanded in 2012 to include the Seed Enterprise Investment Scheme. Like all tax legislation it has been subject to many revisions over the years, ranging from more minor ones to those that are more fundamental. The changes seen in 2023 have been more significant as they have increased the investment ceiling and eligibility from the start of trading for the SEIS scheme. Of even more significance is the changing of the date of the ‘sunset clause’ from April 2025 to April 2035, thereby confirming the existence of the S/EIS legislation by 10 years, thus removing uncertainty surrounding the continuance of the scheme.
The S/EIS legislation is designed to encourage private investors to invest in start-ups and early-stage businesses and it has been extremely successful in this. According to recent statistics from HMRC some two thirds of private investors will only invest in early-stage businesses where they receive the S/EIS tax relief.
In its existing form, a company can raise the first £250,000 of investment from private investors under the SEIS scheme, and up to £12 million under the EIS scheme. The tax incentives to the investors are 50 per cent with SEIS and 30 per cent with EIS. SEIS is available to businesses within their first three years of trading and EIS within seven years.
There are many lessons that the government can learn from the S/EIS tax legislation. Firstly, don’t say all the fine words unless there is the full intention and ability to carry them through and all the ramifications are fully understood. Secondly, make sure that the legislation will do what it is intended to do and that any future amendments actually improve its efficiency and reduce any administrative burden. Thirdly, because of its importance to the whole economy, the SME sector is deeply deserving of any government help to support businesses and the people that they employ. Finally, if legislation is working well then resist the temptation to tinker with it, and make sure that it is extended into the future.
The S/EIS tax legislation is one piece of legislation that achieves exactly what it was set out to do and each amendment has actually made the legislation more effective and yet retained its relative simplicity. Why can’t every piece of legislation be like this? Ask a Chancellor near you sometime soon.