Venture Capital Scheme (EIS, VCT) Evaluation (2022) - executive summary
Published 22 November 2023
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Venture Capital Scheme (EIS, VCT) Evaluation - Executive summary.
HM Revenue and Customs (HMRC) research report number: 737.
Research conducted by Kantar Public in 2022.
Disclaimer: The views in this report are the author’s own and do not necessarily reflect those of HMRC.
The Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) scheme are policy interventions that aim to support the growth of newer small and medium-sized enterprises (SMEs). The interventions address a market failure, where both investors and SMEs lack sufficient information to make optimal investment decisions in early-stage businesses. The schemes provide various tax reliefs to individuals who invest directly or indirectly in these companies.
The aim of this work was to evaluate the EIS and VCT venture capital schemes (VCS), insofar as they incentivise investment in early-stage businesses. This evaluation comprised quantitative and qualitative data collection of investors and investees, and econometric analysis of administrative data.
Overall, the findings from this evaluation suggested that the EIS supports companies likely to suffer market failures. For example, almost all investees (95%) that received investment through the EIS were new, independent start-ups. This was higher than among the comparison group (87%), which was constructed to measure counterfactual outcomes in the absence of VCS.
The EIS also successfully targeted innovative companies at a rate higher than among the comparison group. Based on survey data, approximately half of EIS investees met the statutory definition of a knowledge intensive company (48% compared with 17% of comparison group investees). This was further supported through examination of innovation inputs and outputs. Two-thirds of EIS investees (67%) had claimed at least one type of R&D tax relief (compared with 12% of comparison group investees) and 29% of EIS investees had applied for at least one patent since 2014 (compared with 4% of comparison group investees).
Evidence from the evaluation suggested the EIS had a positive impact on companies it supported. Three quarters of EIS investees (75%) strongly agreed that the finance led their company to grow. This was supported by econometric analysis where, compared to the control group, use of EIS was associated with higher levels of turnover, assets and employment. Around half (53%) of EIS investees thought it unlikely they would still be in business without the scheme. However, the econometric evidence on the impact of EIS on business survival was inconclusive.
VCS was successful in attracting investment from high net worth individuals. VCS investors had high incomes (three-quarters earned at least £50,000 a year). Though subjective, investors typically described their risk appetite as medium to medium-high. Most agreed that they ‘like investing in higher risk markets to potentially gain higher returns’.
There was evidence that VCS incentivised additional investment. In the absence of VCS, most investors would still have made investments, but two-thirds would have done so in less risky ways. Just over a quarter said they would have invested in the same or similar companies, even without VCS.
The tax relief incentives, in particular income tax relief, were found to be a considerable motivator to investor involvement in the schemes. Evidence from the evaluation suggested that the scheme incentives are set at the right levels. The number of VCS investors would likely decrease if the tax incentives were to reduce, which was primarily associated with a change to income tax relief rather than Capital Gains Tax (CGT) or loss relief.
There was also evidence from the evaluation to suggest that VCS was an appropriate mechanism with which to deliver the policy objectives. Most EIS investees thought it very or fairly easy to meet scheme conditions and comply with investor requirements. They typically felt that the administrative burden on them was acceptable. The ‘government backed’ status of the schemes, and of any potential alternative, was viewed favourably by investees, as it added to their legitimacy. The evaluation did not identify any better alternatives to VCS.