Stirling investment firm switches planned £25m tech fund to capitalise on new tax breaks

Steven Morris, founder of Stirling-based investment syndicate ESM, has announced that his firm will switch its £25 million technology fund from a venture capital trust to an Enterprise Investment Scheme (EIS) in order to benefit from new tax breaks unveiled in last month’s Westminster budget.

Chancellor Philip Hammond’s decision to double the EIS limit for “knowledge-intensive” companies, combined with a crackdown on investors using EISs for low-risk assets, is anticipated to spark a rise the funds being pumped into Scotland’s fledgling technology and life sciences sectors.

The new rules come with the condition that in order to gain the tax breaks on offer, investors will have to take greater capital risks by investing in high-risk businesses.

The changes come in response to criticism that EISs have been used by a large number of wealthy investors to claim tax breaks on projects that are largely seen as low risk.

While a number of tech sector investors have asked the Treasury for more details about the changes because of concerns about what will ultimately define “knowledge-intensive” and “low risk”, Mr Morris said the new rules suit ESM, given the firm’s track record in the sector.

Mr Morris said: “The companies we invest in are absolutely not for everyone, so we’re confident they will fit the EIS higher-risk criteria, even though we believe they have every chance of success. The chancellor’s changes help investors who are prepared to take some risk to support Scottish start-ups, and that’s really good news for Scotland.”

The new measures also include the annual EIS allowance doubling to £2m for individual investors when investing in “knowledge-intensive companies” such as university spinouts, life science and technology companies.

The amount such firms can receive in EIS funding in one year has also doubled to up to £10 million.

EISs are a critical component of the tech start-up ecosystem and it is estimated that up £20m was invested in Scottish tech firms through EIS schemes last year, accounting for about 11 per cent of Scotland’s total digital investment by venture capital and private equity groups.

ESM’S new fund will invest in scale-up businesses at the “pre-series A” stage. Series A comprises a company’s first significant round of financing for outside investors.