Venture capitalists and angel investors have been given greater incentive to back Britain’s small business community as a result of UK Chancellor of Exchequer George Osborne’s budget announcement Wednesday. The greater UK private equity universe too may find delight (and some frustration) in new tax measures and policies designed to reenergize economic growth.
To encourage start-ups, the coalition government will give more serial entrepreneurs access to a lower capital gains tax rate when selling a small business. Entrepreneurs can now claim over their lifetime £10 million in total tax breaks, double the current £5 million cap.
Two government schemes which provide tax breaks for investors in small UK companies, the Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT), will also undergo significant changes.
Investors in EIS can now offset 30 percent of their income tax when taking stakes in small businesses, up notably from the prior 20 percent cap and in line with the relief rates offered by VCTs.
Moreover, investors under EIS will be able to offset their income tax with up to £1 million in total investments, double the prior £500,000 limit. The £200,000 investment cap for VCTs will remain unchanged.
Under both the VCT and EIS, the criteria for qualifying companies will be relaxed. Investors taking stakes in companies with up to 250 employees and gross assets of no more than £15 million can now claim tax relief, up from the prior 50 employee and £7 million in assets thresholds. Furthermore, the annual investment limit the two vehicles are allowed to invest in per company will increase to £10 million from £2 million.
The more encompassing EIS and VCT revisions likely comes as a relief to venture investors who had cause for concern when Osborne expressed doubt over the merit of VCTs in stimulating business creation earlier this month.
However, the Tory Chancellor has indicated rules will surface that “re-focus both EIS and VCTs to ensure they are targeted at genuine risk capital investments, which means the VCTs and EIS that have not invested in British-based innovation are likely to cease to exist”, cautioned in a statement Julian Hickman, a partner at Longbow Capital, a venture capital firm.
In a statement released shortly after Osborne’s speech, the British Venture Capital Association said they “warmly welcome what is a budget for enterprise in our year of venture. The changes set out to EIS, allied to those affecting VCTs, are genuinely bold and should serve to kick-start innovation in this country”.
The BVCA lobbied heavily for a number of changes, many of which went into effect. But as part of its annual budget wish list submitted last month, the trade group failed to convince the government to lower the capital gains tax rate for angel investors and employees with only small stakes in start up companies. A call for a “government champion” of venture capital to help drive investment in the asset class also went unheard.
THE MACRO LOOK
In response to how the budget might impact opportunities for investment, one London-based fund manager said smart firms will continue to back businesses based on fundamentals and not on the UK’s macro-economic policy.
It’s welcoming to see a budget focused on growth, but it remains important to target domestic companies based on their fundamentals
“It’s welcoming to see a budget focused on growth, but it remains important to target domestic companies based on their fundamentals and to some extent capable of growth outside the UK economy in overseas markets” said James Stewart, a director at ECI Partners, in a sit-down interview earlier this week.
The UK’s economy stalled in last year’s final quarter, dropping -.60 in real GDP after four consecutive quarters of growth. The budget will aim to jumpstart the UK’s economy and lure international businesses by slashing the corporate tax rate from 28 percent to 23 percent over four years, among other measures.
However, not all in the budget will be welcome by the private equity industry. A new tax hike could prompt mobile private equity professionals to leave London for more tax-friendly jurisdictions. The government is increasing its annual levy on people registered as non-domiciled workers – foreigners living and working in the country – to £50,000 from £30,000 if they have lived in the UK for 12 years. The tax is expected to raise an extra £200 million in tax revenue for state coffers.