WEALTHY private investors' willingness to back fledgling Scottish companies "dipped significantly" last year, law firm Pinsent Masons has concluded from an analysis of Enterprise Investment Scheme take-up.

Pinsent Masons highlights a "disappointing" 18% drop in the number of Enterprise Investment Scheme authorisation forms issued by HM Revenue & Customs' Small Company Enterprise Centre to Scottish businesses, from 290 in 2010 to 237 in 2011. The number issued in 2009 had, as in 2010, been 290.

Chancellor George Osborne has been at pains to boost interest in Enterprise Investment Schemes, which offer private individuals significant tax breaks in return for providing direct financial backing for small companies.

Pinsent Masons noted Mr Osborne had extended the schemes in each of the last two Budgets to try to "stimulate further investor appetite".

It pointed out applications by companies to qualify as eligible for Enterprise Investment Schemes were "typically done immediately prior to investment by a wealthy backer".

Karen Davidson, an expert in start-up funding and Enterprise Investment Schemes at Pinsent Masons, said: "When an individual wishes to invest directly into a small company and claim EIS tax relief, the target company needs to apply for qualifying status. Our research shows that the number of Scottish com-panies applying for that status dropped by almost 20% in 2011, suggesting a decline in investment levels."

She added: "These figures have to be looked at in the context of a generally challenging market, but there is no doubt they are disappointing. It is also unexpected, given the tax relief available for investors rose from 20% of the investment made to 30% in April last year. The question will be asked as to whether that is sufficient to stimulate greater investor appetite."

Pinsent Masons said the "hiatus in investment" may be down to further changes to the EIS scheme which came into force in April 2012. Where previously only small firms with fewer than 50 employees and less than £7 million in pre-money gross assets were eligible, businesses with up to 250 employees and £15m of gross assets are now within the scope of the rules.

Ms Davidson said: "While the changes were welcome, it's possible that investors held back on putting money into the real fledgling companies in order to invest in slightly more established businesses once the changes came into force. Though understandable, that could be an unintended consequence which will be a problem for Scotland's entrepreneurs in future."

David Grahame, executive director of business angel investor association LINC Scotland, noted Enterprise Investment Schemes were not always the best vehicle for individuals putting money into firms.

He noted angels had to hold less than 30% of a company to qualify for relief. Mr Grahame also pointed out that angel investors might prefer to take convertible stock in a company to protect their position, rather than the Ordinary shares which qualified under the Enterprise Investment Scheme, if a venture capitalist was likely to come on board at a later stage.

He said the number of deals done in the first half of 2012 by LINC Scotland's members, estimated to account for about one-third of Scottish business angel investment, was the same as that in the same period of 2011.

Entrepreneurial Exchange chief executive John Anderson also noted Enterprise Investment Schemes were not always suitable vehicles, for instance in situations where companies were likely to have several funding rounds.