The government are hoping to close up any loopholes that allow wealthy investors to take advantage of tax breaks while also launching the most pro-growth Budget for a generation – can they pull it off?
If you look at reports in the press about what Wednesday’s Budget means for investors you will need to navigate your way round some confusing contradictions. Nobody really knows what will be done with Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) because it looks like nothing has been decided – even by the UK Chancellor.
So we are all left to speculate; will he or won’t he cut the tax allowance for VCTs and raise it for EIS? How will this effect those businesses who currently rely on VCTs to fund their growth ambitions? This month the Chancellor has expressed doubts that VCTs are providing genuine venture capital for investment for risky growth businesses. Instead he thinks that those investors who put their money into these trusts are doing it to exploit a tax loophole.
This is not the first time tax breaks for VCTs have been tinkered with. Relief on VCTs was cut from 40 percent back in 2006 and there are suggestions that the current 30% rate may well be reduced further on Wednesday to pay for greater tax relief on the EIS.
Whatever the decision, it is difficult to see how tinkering with the tax relief on funds that help many early stage growth businesses is “pro-growth”.
Depending on which report you read, reducing the tax breaks for VCTs has had little effect on their popularity. Some reports say it has reduced their appeal in the past while others say investors prefer them as they offer a steady stream of income with dividends free of income tax. Even the FT has published conflicting articles, with one this month saying ‘VCT schemes have become relatively unpopular in recent years’ while another writer in February said ‘VCT groups believe the current tax year could prove to be one of the best since they were first created’
It is, therefore, open to question whether taking the tax breaks away from VCTs to help make the EIS more popular will actually work. Will this simply drive some investors away? The rules surrounding EIS have proved complicated enough in recent years which has made them less appealing despite the hefty tax breaks on offer. Changes that may include increasing the threshold of investment from its present £500,000 level will do no harm to the appeal of the EIS, but wouldn’t that mean closing one tax loophole and opening up another?
An increase in tax breaks for EIS may also tempt business angels previously put off by the risky nature of the present scheme but don’t bet on it. Worryingly for those entrepreneurs seeking growth capital for their start-ups, it might also tempt business angels away from smaller, more risky enterprises towards the larger less risky ones which might cut the supply of capital to start-ups.
On top of this a cautionary note from the US. Assuming that David Cameron is hoping to create jobs by boosting the enterprise culture, it might well take a few years to kick in if a recent lesson from the state of Minnesota is anything to go by, $7 million of business angel tax breaks has created just 47 jobs in its first year.
Time will tell if this week’s Budget will prove to be genuinely pro-growth but the early signs are, it is angel investors who will be happier on Wednesday.
Tags: Angel investors, Budget, business angel tax breaks, business angels, Chancellor, David Cameron, early stage growth businesses, Enterprise Investment Scheme, FT, pro-growth Budget, tax breaks, tax breaks for EIS, VCTs, Venture Capital Trusts