Hammond pledges £400m to VC

The UK government is putting its money where its mouth is to support fledgling British businesses trying to scale up.

In the first post-Brexit Autumn Statement yesterday, UK Chancellor Philip Hammond said the government-owned British Business Bank will invest £400 million ($498 million; €472 million) in venture capital funds “to unlock up to £1 billion of new investment in innovative firms planning to scale up”.

Hammond reiterated the Treasury’s plan to lead a review to “identify barriers to access to long-term finance for growing firms”.

The Patient Capital Review, first announced by Prime Minister Theresa May in a speech at the annual CBI Conference on Monday, will be supported by a panel of experts chaired by private equity veteran Damon Buffini, former managing partner and chairman at global buyout house Permira.

“I want us to turn our bright start-ups into successful scale-ups by backing them for the long-term. To do this we need to better understand where the barriers are,” May told conference-goers.

But it wasn’t all good news for the private equity industry yesterday. The chancellor announced changes to the tax deductibility of debt, which are expected to adversely affect portfolio companies.

From April 2017, there will be limits on deductions which companies can claim for corporation tax purposes where a group has net interest expenses of more than £2 million, net interest expenses in excess of 30 percent of UK taxable earnings, and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group.

“It had been widely hoped that the Government might delay the changes which will come into effect in April 2017 to give businesses more time to plan,” Squire Patton Boggs partner Peter Morley said in a note following the Statement.

“This is inevitably going to involve some reflection on how transactions are structured to ensure traditional debt based structures are still appropriate in the new world.”
Some portfolio companies could also be hit by an increase in the National Living Wage next April, which is rising 4.2 percent to £7.50.

The government is also abolishing tax advantages linked to Employee Shareholder Status (ESS) as of 1 December 2016. Introduced by Hammond’s predecessor George Osborne, the ESS scheme is an employment status that allowed “employee shareholders” to receive up to £50,000 of capital gains tax-exempt shares.

“The status itself will be closed to new arrangements at the next legislative opportunity,” Hammond said. “This is in response to evidence suggesting that the status is primarily being used for tax planning instead of supporting a more flexible workforce.”

“This was a muted Autumn Statement for the tax world and many in the private equity industry will breathe a sigh of relief and return to working out the practical application of the many and varied changes to fund-related taxation that have been brought in over the past two years,” said Ceinwen Rees, an associate at Debevoise & Plimpton.

“Non-doms are still holding their breath awaiting the detail of the new deemed domicile regime and future management teams will certainly regret the loss of employee shareholder status.”