Loadsamoney for enterprise in the Budget but how much you see of it may depend on the size of your business.

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 6^th April, but it has to be said we won’t be seeing some of the other benefits until 2012.

It will be interesting to see what's in Wednesday's Budget for entrepreneurs and business angels.

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.

Could changes to EIS tax breaks would see more fledgling businesses cut off from business angel funding.

The Office of Tax Simplification will be reviewing all tax reliefs and allowances ahead of this year’s budget. The Enterprise Investment Scheme will be one of those tax reliefs under the microscope – but as investment through the scheme has slumped, the real question is, will it be missed?

The UK government may be going against public opinion by going easy on bankers bonuses but it still has to find the money from somewhere. The latest issue concerning entrepreneurs and business angel investors alike will be some potential changes to tax relief on schemes such as the EIS.

The EIS and perhaps even Venture Capital Trusts could be abolished if it is decided the government is being a bit too generous with investors.

Last year’s changes to capital gains tax was supposed to have pushed more of those who could afford it towards angel investing and the EIS. They would consider it worth the risk putting some of their money into these schemes whilst helping entrepreneurs get their fledgling businesses off the ground at the same time.

Private Investor Syndicate Hotbed has stepped out and called on the coalition to increase rather than limit (as it does at present) the tax relief for investors in SMEs and certainly not scrap it as part of their review. They feel this would encourage more investment from business angels and other investors into SMEs who will be attracted by the tax breaks on offer.

But increasing the tax breaks is not necessarily the answer if we look at the statistics.

EIS has been around since 1994 but in recent years the number of subscriptions has shown a marked decline.  Although it has to be said that data is only available up to 2008 -09, investment dropped by 29% in this period and it is doubtful if 2009-10 will show any increase. The last time we saw a fall of 29% was during the Dotcom crash. In the previous year (2007-08) £692 million was invested via the EIS so a 29% fall is significant.

The financial crisis certainly had its impact and investor confidence will take time to return. This will be of little help to start-ups seeking capital through EIS. VCTs meanwhile where the tax breaks are less are proving more popular.

Why is this the case? To begin with the rules surrounding investment via the EIS are complex.  It also carries a higher risk than going down the VCT route. One of the main differences between the EIS and VCT  is the requirement for the EIS to raise money for genuinely trading companies with fewer than 50 full-time staff. the size of these companies mean investment is much more risky.

Despite the risk, the tax breaks are generous making it one of the most generous tax advantaged investments out there. But going back to the earlier point the appetite for risk simply hasn’t been there, the EIS is certainly not for the faint-hearted. This means further tax breaks are probably unlikely to attract more investors.

The VCT meanwhile provides a steady stream of income with dividends free of income tax. This steady stream of income is one good reason why VCTs are proving so popular. The EIS needs this kind of clear income stream to attract more investors rather than more tax breaks per se.

If we are to have the private sector driven recovery the coalition is hoping for, then it is clear that they need to find a more effective way to attract investment in SMEs. All the indications are at the moment that the EIS will not survive in its present form and the pressure to reduce tax breaks may be too great to resist. Assuming it survives, this would making the EIS even less appealing in the future.

This would be shame as especially for those businesses hoping to raise funds this way. If it is to be simplified, there needs to be the right balance struck between risk and rewards. Many will be waiting anxiously to see what happens come the next Budget.

This compares with 15 transactions and £474m of funding in the previous quarter (April to June) when activity spiked in the run up to the government’s emergency Budget and the anticipated capital gains tax increase.

The reports authors say the figures provide further evidence that business owners and entrepreneurs, many of whom are thought to have mothballed plans during the downturn, were returning to the market to realise value or secure capital for growth expansion.

This indicates positive news for SMEs and measurable growth in funding from private investors including business angels. The news contrasts sharply with bank lending to SMEs which continues to fall.

CGT rise will put the squeeze on business angels

It’s the day after one of the most eagerly anticipated, or should that be dreaded? Budgets of recent times. Budgets are becoming like buses, normally you wait ages for one and suddenly two come along in just a few months.

There was little in the last one to encourage business angels or entrepreneurs in the UK, but in this latest emergency Budget the Chancellor has gone out of his way to show that Britain may be weighed down by a mammoth budget deficit to reduce, but it is still open for business. Or is it?

Business groups on the whole have welcomed some of the measures introduced to help entrepreneurs and owners of SMEs. The 1 per cent cut to companies’ tax the new £5 million threshold for entrepreneurs’ relief on CGT have been applauded as have measures to reduce National Insurance liabilities.

This all sounds too good to be true, is Mr Osborne really giving a leg up to entrepreneurs so that they can get Britain back on the road to recovery and avoid the possibility of a double dip recession in the UK?

Perhaps, but as with all Budgets, it depends how you look at it. Sure all the headline grabbing measures will show that enterprise is being encouraged. It is also worth noting that entrepreneurs can now claim Capital Gains Tax relief on up to £5m worth of business sales in a lifetime – this is up from £2m in March.

To help fast growing SMEs starved of growth funding the government plans to introduce a new Enterprise Capital Growth Fund to provide a £37.5 million boost of equity finance to SMEs. The Enterprise Finance Guarantee is also being increased by £200 million to support additional lending of up to £700 million to for small businesses until the end of March 2011.

All this funding is great if you are a growing business and able to gain access to it, but as we have seen in the past 12-months start-ups are struggling to secure funding from banks. But the banks have been holding onto their purse strings, which means start-ups have had to turn to business angels for help. The problem is that again there is little in the budget to encourage business angels.

The sharp rise in Capital Gains Tax from 18% to 28% is likely to discourage rather than encourage investment in the UK. Despite the headline ‘good news’ the entrepreneurs relief doesn’t cover all of those involved in the investment chain. Those business angels who are affected by this hike in CGT are likely to decide that the risks outweigh the rewards when it comes to investing at seed stage. This would cut off the vital supply of capital needed by those start-up businesses who can’t secure funding elsewhere, stifling innovation in the process.

Britain had the lower CGT rate (18%) than most other countries, until last night just behind Brazil (15%) and the US (15%). According to a table compiled by Ernst and Young, Britain has now dropped from 7th to 15th with a higher CGT rate than China’s 22%.

Britain’s slide down the scale of competitiveness with these other countries is a concern, and could make it more attractive to invest abroad where the rates are more attractive.

It could have been worse. The worse case scenario of a rise to 40% and without the measures introduced in the Budget to help entrepreneurs would have dealt a heavy blow to hopes of recovery. Everyone in the UK knows that payback time has come, but time will tell if business angels will still be willing to take a risk on early stage growth businesses. The incentives should have been spread more evenly between entrepreneurs and those other links in the investment chain.

A budget that would please Alan Sugar?

Capital Gains Tax will rise less than expected from 18% to 28%, which is what makes the Entrepreneurs relief of just 10% is so attractive.

In addition, to help fast growing SMEs starved of growth funding the government plans to introduce a new Enterprise Capital Growth Fund which will provide more than £37.5 million of equity finance to SMEs. the Enterprise Finance Guarantee is also being increased by £200 million to support additional lending of up to £700 million to for small businesses until the end of March 2011.

And, businesses outside of London and South and East can benefit from no employers national insurance on upto 10 employers.

Tax doesn't have to be taxing for angel investors

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.