The recent Budget could well have helped create the conditions for the growth of business angel investing
It’s been nearly a week since what could turn out to be the current UK government’s final Budget. On reflection there was little in it to make those on higher incomes start popping their champagne corks. Hardly surprising though, given that there is the small matter of a General Election around the corner. The Chancellor Alastair Darling continued his vote winning assault on the big earners with the banks and those earning over £150,000 shouldering a larger portion of the state debt burden as a result.
Hard to swallow for some, but further attacks on income and wealth are not out of the question whichever government takes power in May. We could well see another Budget within 50 days of the election should the Conservatives claw their way back to number 10.
Politics aside, with stealth tax avoidance now even more of a concern for those on high incomes, has the Budget, despite its shortcomings, unwittingly opened the door to those considering angel investing as an alternative to losing yet more cash to higher rates of tax?
Taken at face value, the Budget appeared to be aimed at nurturing economic growth and more about helping small fledgling businesses than those hoping to invest in them.
The banks were once again targeted with those who run state-subsidised RBS and Lloyds having their arms twisted once again to lend £94bn to small businesses as part of new targets set by the Chancellor. This was greeted with a chorus of approval by those in the embattled small business sector, starved of funding for most of the last two years. Whether or not the banks will keep this promise remains to be seen however – particularly in the light of recent failures to meet lending targets set in 2009. The banks missed their target by more than 50% in one case.
As a result those involved in angel investing in recent years have enjoyed the pick of the promising start-ups as banks have become more conservative with their lending.
Despite this only 44% of those investors (according to NESTA) made substantial gains, which suggests that either the quality of seed stage businesses they decided to invest in were dubious or it may have been a case of the quality being diluted by the quantity of those applying for funding which affected outcomes.
The same NESTA report recommended that angel investors receive higher levels of Enterprise Investment Scheme (EIS) tax relief. This, as the report suggested, would help mitigate the risk of investing in high risk enterprises. Perhaps, not surprisingly then the call for the current EIS 20% tax relief to be raised to 30% fell on deaf ears even though it was responsible for more than half (57% ) of the investments made through investors in the NESTA survey.
In the event the Chancellor chose not to provide UK business angels with further tax incentives to waste on underperforming investments.
Assuming that the banks do meet their lending target to small business, this could well mean a reduction in businesses seeking funding from business angels. This is happening at the same time as business angel investing is being heavily promoted not just as a way of boosting economic growth through investment in start-up enterprises but also as a way to avoid stealth taxes.
As a result, 2010 could well turn out to be a year where there are less businesses seeking funding from business angels and more high net worth individuals becoming business angels as a way of avoiding the imminent rise in the top rate of income tax as well as capitalise on the EIS.
This should create an environment where deal flow is reduced and the more promising businesses more visible.
Whether this will lead to a larger proportion of successful angel exits in the next three to four years depends on two things – the quality of fledgling businesses seeking funding and the ability of angel investors both new and existing to spot the winners.
Angel investing remains risky even for the most experienced, but the environment we find ourselves in now means that those businesses that have survived the worst the recession could throw at them could well be in a position to make better use of the help they receive from angel investors.
Tags: £94bn, Budget, business angel investing, economic growth, EIS, EIS 20% tax relief, fledgling businesses, General Election, lending targets, NESTA, RBS and Lloyds, rise in the top rate of income tax, stealth tax, stealth tax avoidance, The Chancellor