Chancellor George Osborne has strongly backed the Enterprise Investment Scheme (EIS) in today’s Budget, making ‘sweeping changes’ to the initiative to improve business access to finance.

Chancellor George Osborne has strongly backed the Enterprise Investment Scheme (EIS) in today’s Budget, making ‘sweeping changes’ to the initiative to improve business access to finance.

Osborne says small businesses have been ‘the innocent victims’ of the credit crunch, while the lack of start-up capital has been a ‘long-standing problem’ in the British economy that he aims to remedy.

In his Budget speech to the House of Commons, Osborne announced from April this year income tax relief will increase from 20 per cent to 30 per cent for investors who commit to businesses through the EIS. The rate will match the current tax relief for Venture Capital Trust (VCT) investment.

Ahead of Budget 2011 there had been widespread speculation that VCTs could be scrapped, with some industry commentators hoping for clarification on the future of the venture industry. While the Chancellor failed to mention VCTs in his speech, the full Budget announces improvements to the scheme in conjunction with those made to the EIS.

From April 2012, for both the EIS and VCTs, the size limit on companies eligible for investment will be increased, from 50 to 250 employees and from £7 million to £15 million in gross assets. The amount an individual can invest through the EIS will be doubled to £1 million, and the limit on the amount that can be invested in a company in one year will be raised by 400 per cent to £10 million. Feed-In Tariffs businesses will be added to the excluded activities list.

The Budget papers also state, ‘The government will consult on options to provide further support for seed investment, simplification of the EIS rules … and refocusing both EIS and VCTs to ensure they are targeted at genuine risk capital investments.’

In keeping with a Budget that aimed to make Britain ‘the best place in Europe to start, finance and grow a business’, the Chancellor announced the launching of “Start-Up Britain”, a new campaign that will feature well-known entrepreneurs to help people start and grow businesses. Also, from 6 April this year, entrepreneurs’ relief will be doubled to £10 million.

Simon Rogerson, chief executive at fund manager Octopus, which manages several VCTs, welcomes the reforms. He says, ‘The biggest surprise has been that the government has listened and done something on both the qualifying limit and the investment restriction of up to £10 million, which I think is a massive deal.

‘It will make the schemes way more attractive to investors, way more flexible for managers and it will address that the massive equity gap in the UK, and I think it will do it successfully.’

Patrick Reeve from Albion Ventures said says pre-Budget concerns that VCTs may be axed in favour of the EIS have been proven to be incorrect.

He comments, ‘In particular, VCTs provide an evergreen resource for long-term SME finance at a time when banks are no longer prepared to lend. The VCT industry has long called for changes like the increase in qualifying company limits and annual investment limits, which broaden the universe of companies VCTs are able to invest in, and it was nice to see that the Government listened and responded so positively.’

The Association of Investment Companies (AIC) backed the Government’s VCT plans and new rules to ‘modernise’ the investment trust tax regime.

Ian Sayers, director general at AIC, comments, ‘We are delighted that the Chancellor recognises the role that VCTs have to play in delivering increased economic growth and employment. Changing the rules to expand the range of companies that VCTs can invest in is a welcome boost to the sector and businesses desperately seeking finance.’

‘The withdrawal of bank finance and current challenging market conditions have increased the difficulties facing smaller companies seeking capital.  Unfortunately the ability of VCTs to channel funds to these businesses has been limited by European rules. The Chancellor’s decision to roll back these rules so that VCTs can deliver finance to more companies who need it will be warmly welcomed by the VCT sector and those SMEs which rely on its support.’