'Enterprise Investment Schemes' will become more popular

Enterprise Investment Schemes (EIS) will become more popular in 2012, company founders Ian Grundy and Gavin Drew have predicted.

Speaking at last month's MA250 conference, they reported that new rules coming into force in 2012 will allow companies to raise £10m instead of the current £2m, encouraging greater interest in the scheme.

EIS is a tax-efficient scheme, which encourages investment in 'higher risk', smaller start-up ventures. Investors like to invest in EIS because there is income tax relief of 30% and any capital losses can be off set against income tax liability.

And companies are attracted to EIS because it is a relatively cheap source of finance.

Foundation Inns was set up in 2007 through an EIS.

Drew argued that the EIS route offers a lot of benefits for a new start-up operator, compared to other sources of finance.

"There is less pressure on cash flow; there is no pressure to pay dividends or bank interest. The investor is really looking for capital growth and a tax-efficient solution," he said.

He added: "There is no market to trade your shares so, although we are a PLC, you get left alone for a few years."

Grundy agreed, but also issued a note of caution: "EIS is not the most flexible once you are set up — so you have to have a very clear picture of what you are going to do.

"There are time limits to spend the money so it is really important to have a clear idea of what you want to do.

"And shareholders will want their money back at some stage."

For investors to receive the tax break the company was required to spend 80% to 90% of the money in the first 12 months.

Grundy said: "We had a pot of money we had to spend just as the credit crunch happened — but property prices lagged so we were forced to spend at the top of the market.

"EIS is not without its problems and it is not the right solution for every business."