The document says the party is considering further incentives under the ‘world-leading’ (hear hear!) schemes, though, tantalisingly, does not hint much at their nature, beyond suggesting that they may be targeted at ‘innovators’ and start-ups in the digital sector (Conservative General Election Manifesto, page 78, The Best Place for Digital Business).
We have been campaigning for improvements to EIS and SEIS for some time and, broadly speaking (and in lieu of more details), we welcome any changes to the EIS and SEIS regimes that result in more smaller companies getting access to the funding they need to grow.
But if new incentives are targeted only at digital ‘innovators’ and start-ups, then it could be a huge missed opportunity. We certainly don’t begrudge digital companies additional EIS and SEIS incentives. In principle, we support them getting them. The UK is producing some fantastic businesses in the digital arena, which is an increasingly important part of the economy.
However, it is still a relatively small one, and so wouldn’t such incentives be more effective if entrepreneurs and businesses from across a broad spectrum of sectors benefited from them, not just from a niche segment?
While we would all like to see the UK produce the next Amazon, Google or Facebook, might it be that we have been somewhat seduced by the idea of creating our own Silicon Valley (though, in an unmistakably British way, our version is part-centered on a London roundabout), and so are focusing too much on tech start-ups, when one of the real challenges is helping small businesses in general, wherever they are in the country and regardless of their sector, to successfully reach the ‘scale-up’ stage?
The OECD ranks the UK as third in the world for start-ups, but only 13th for scale-ups. Being third for start-ups is an achievement of which we should be proud, yet, as the gap between the two rankings implies, we should not forget that most start-ups fail and many never go on to employ more than a handful of people.
Scale-ups, on the other hand, are undeniable engines of growth. According to UK’s ScaleUp Institute, which defines scale-ups as employing at least 10 people with employee or turnover growth of more than 20% for at least three years, growing our number of scale-ups by 1% could result in some 238,000 jobs and add £38bn to our gross value added. Big, meaningful numbers and an objective worthy of targeted policies; perhaps more so than a narrow focus on digital start-ups.
It is not that the government doesn’t recognise that we need to create more scale-ups. Parliament’s Business, Energy and Industrial Strategy Committee is currently undertaking an inquiry aimed at producing findings and recommendations that will help businesses make the transition from start-up to scale-up. That challenge is also likely to feature prominently in the outcome of the government’s Patient Capital review.
So, while it is encouraging – and even exciting for the EIS Association and the wider EIS/SEIS industry – to read about the Conservative’s plans for new EIS and SEIS incentives, the apparent intention to target them only at digital start-ups would do little to address the much wider issue of businesses of all kinds struggling to scale-up.
It is at the scale-up stage that the provision of tax reliefs through schemes like EIS and SEIS begin to pay real dividends through the increased employment, productivity and tax revenues that businesses generate.
Any government that can claim the success for getting a return on that investment will have a great deal of political capital in the bank when the next election comes around.
P.S - In the context of helping scale-ups, the EIS Association has been vocal in calling for the removal of changes to EIS and SEIS (and VCT) rules, introduced in 2015, that placed restrictions on funding eligibility for slightly larger and more mature SMEs. We firmly believe it would be good for the UK economy if any future changes to EIS and SEIS include the scrapping of these rules so that more of our most promising businesses – many of them at the scale-up stage - can once again have access to the schemes.
Sapphire Capital Partners would like to thank Mark Brownridge for allowing the repost of his article on the Sapphire Capital Partners LLP website. This post was originally an email written by Mark for circulation to the EISA Members in order to keep the members up to date with the SEIS and EIS scheme developments and clearly demonstrates the value of becoming an EISA member. To find out more about membership benefits please visit the EISA website by clicking here.
Sapphire Capital Partners LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business.