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.

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.

Big cuts are on the horizon for regional business development

Chancellor George Osborne’s announcement that the Business Department will bear the brunt of £6 billion cuts, could well signal difficult times to come for those businesses seeking regional development aid…

But help could be at hand if business angel numbers expand. As Labour’s ‘big government’ philosophy is unravelled by new kids on the block George Osborne and David Laws, this could affect new business enterprises who rely on development agencies and associated bodies to get them on the first rung of the ladder.

The aim of RDAs is to help create businesses through the fostering of entrepreneurship and growth in their respective regions. However,  according to a report by the Tapayers’ Alliance  success has been limited and, if figures between 1992 and 1996 are anything to go by,  over the course of 14 years the rate of business creation has fallen overall.

This is hardly surprising. Most businesses in the start-up phase will require support which includes money and advice. The former is often in short supply and only given out according to strict criteria and whether the sector is fashionable. Money is one thing, there will be other sources of funding available to the entrepreneur, but with businesses in for example emerging creative industries, access to expert advice  and money may well be in short supply in some areas.

It is understandable then that with this kind of limited success and with £6 billion of spending cuts to find, that the business development department is high on the list of the government’s targets for cuts ─ £836 million worth to be exact.

With cutbacks to a public sector service that was already struggling to deliver, The input of people like business angels will become vital in the years to come as those who are starting up businesses exhaust the goodwill of friends and family and search for support elsewhere. With cutbacks in development funding, and business lending from the UK’s banks still in short supply, business angels will be increasingly called upon to play the role of advisors as well as investors, which many do already.

The growth in the number of organised regional business angel networks in the UK in recent years goes some way towards plugging the gap in advice and funding while help from elsewhere is in short supply. However, with many appealing for more members there is clearly a shortfall in the number of business angels.

Without the valuable support angel investors can provide in terms of expertise those starting up businesses or those looking to take them to the next level may find themselves starved of advice and cash in some cases and forced to explore innovative ways to grow their business. Alternatively they could well be left to feel their way in the dark or, worse still, a promising idea may not be developed into a profitable business.

Enterprise and business is among the key drivers of growth in the UK economy. While government departments have lacked the required agility to support new ideas in rapidly developing sectors in recent years, such drastic cuts in funding could still see those businesses who would have benefited from some kind of government support left high and dry. It is clear that the new UK government’s strategy is to strike some kind of balance which won’t upset all of the people, but a possible imbalance in support for new business will need to be addressed.

Most entrepreneurs will have the instinct to succeed in what they do regardless of changes in government policy, but it would be unrealistic to expect business angels to suddenly ride to the rescue if the axe falls on government help. Firstly, there is an even greater burden of risk to carry, particularly in the current economic climate and there will be less chance of an early profitable exit than in recent years. A big consideration when most angel investors will be looking for a profit inside 3 years.

The number of business angels in the UK is tiny in comparison to the USA where we have just heard that new business creation hit a 14-year peak in 2009 according to The Kauffman Index of Entrepreneurial Activity. This was despite the worst recession in living memory and goes a long way towards revealing US appetite for enterprise.

We may well see a growth in the number of business angels in the UK who are passionate about supporting business creation. We might also see opposition to the decision to put the business development department on the chopping block, but as statistics in the US have proved, even in the worst of times there are more than enough people ready to take a risk.