The scheme, which was intended as a replacement for the Business Expansion Scheme, was announced in last year's Budget. The EIS offers investors 20 per cent tax relief on investments up to pounds 100,000 in certain types of unquoted companies.
Investors do not pay any capital gains tax if their investments are held for more than five years. The aim of the scheme is to boost investment in small businesses and provide a tax-efficient route for 'business angels'.
The tax breaks offered under the EIS are considerably less than those offered under BES, which offered top-rate taxpayers 40 per cent tax relief on their investment, as well as capital gains tax relief. They were also allowed to invest in BES assured tenancy schemes, which could provide a guaranteed return.
Capital Exchange, a Hereford-based company that provides investors with lists of companies looking for investment, is warning that the EIS initiative will fail if the Government does not do more to promote it.
David Rose, Capital Exchange partner, said: 'The Government cannot leave the promotion of the EIS to the venture fund managers as they did with the BES. Because of its one-to-one investment nature, managed EIS investment funds will be very few and far between. Kenneth Clarke expected around pounds 200m of EIS investment in any one year. On current performance, we doubt that it will achieve even 10 per cent of that.'
An Inland Revenue spokesman commented: 'It is very early days. We are waiting for the Budget before we make any announcement on how the scheme is going.'
One company running under the EIS is a tie-dyeing company from Exeter called ICBM (Inter County Brighter Marketing). It also provides the merchandising for rock groups.
One 'business angel' who has invested pounds 25,000 in the company is Simon Milner-Barry, who used to run his own design and marketing agency. After selling up, he was looking round for a new venture to invest in.
He said: 'When the EIS was announced in November's financial statement, I thought that was probably the best thing for me.'
Mr Milner-Barry used the services of Capital Exchange to find the right company. ' ICBM's turnover has grown from pounds 60,000 to pounds 450,000 in just a few years.'
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