There were some joyous early reactions to today’s budget particularly on the lunchtime news when Dragon’s Den’s Deborah Meadon among others got excited by the Chancellor’s tax windfall for VCs and how she could now take more risks with early stage companies… but exactly how much risk will business angels and VCs now take?
On the face of it this Budget wasn’t just good for Deborah Meadon, it was pretty good for everyone, given the current state of the UK economy.
George Osborne said in his speech “ In the last decade, other nations have reduced their business tax rates, removed barriers to enterprise, improved education systems, reformed welfare and increased exports.
Sadly the reverse has happened in Britain.”
So was the Chancellor about to remove all these barriers and break the shackles holding UK enterprise back? Were we really getting a pro-growth budget?
Well, yes and no. Mr Osborne has gone and surprised everyone by raising the tax relief for angel investors and venture capitalists – the rate of income tax relief on the Enterprise Investment Scheme will increase from 20 to 30 percent and the amount of investment per company in any one tax year eligible for upfront tax relief will double from £500,000 now to £1 million in 2012.
Business angels and VCs are certainly rubbing their hands when they can offset some of their tax liabilities and hopefully generate a good return on their investment in growth businesses. No wonder the panel of guests on ITV News were so excited.
But let’s look a little more closely, not everyone will be pleased and certainly not those entrepreneurs who are struggling to get funding while they are being overlooked due to their size. This is because when it comes to the risky game of angel investing, size matters and if you can get some good tax relief on investment in a larger more established business, then why take a bigger risk at an embryonic stage?
Sally Goodsell, CEO of Finance South East said, “Sadly this is a Budget that will primarily aid big business rather than the SMEs that are supposed to be crucial to our economic recovery.
EIS tax relief increasing from 20 to 30 per cent is welcome but it doesn’t go far enough. Early-stage, high-risk businesses will still find it nearly impossible to access funding. It’s also concerning that VCTs will now be able to invest in much bigger businesses. The worry is that they will neglect start-up enterprises in favour of more mature, lower risk businesses which will only exacerbate the funding gap. George Osborne cannot expect angel investors to meet the entirety of this gap on their own.
I don’t think that this is a Budget that will really get the economy going. Confidence is still very low which will inevitably delay investment decisions and continue to slow growth.”
While this is a rather downbeat view, it is nonetheless likely that smaller businesses will continue to suffer while the risk of investing in them is comparatively greater. The funding gap will almost certainly remain as a result of more tax relief being made available for investors in larger companies.
For business angels and VCs on the other hand, the Chancellor has got it spot on. Why wouldn’t you put your money into a less risky venture and feel confident of a good return? And let’s remember the banks aren’t lending so larger businesses need growth funding too!
Time will tell if this Budget does indeed prove to be pro-growth, but on balance it’s a pretty good start, we will see a doubling of Entrepreneurs Relief to £10 million on the 6th April, but it has to be said we won’t be seeing some of the other benefits until 2012.
Tags: Budget, business angels, Chancellor, Dragon’s Den’s Deborah Meadon, Early-stage high-risk businesses, EIS, enterprise investment schemes, entrepreneurs, Entrepreneurs Relief, funding gap, George Osborne, pro-growth, upfront tax relief, VCT