UK Tax Breaks for Start-Up Investors Welcomed - Wall Street Journal (blog)

By Ben Rooney

There is broad approval of the changes the U.K. government has made to its investment vehicles in Tuesday's Autumn statement, although some have raised concerns about making investment too easy.

The Chancellor of the Exchequer, George Osborne, signaled changes to the Venture Capital Trusts (VCT), the Enterprise Investment Scheme (EIS), and introduced a new scheme aimed at stimulating seed investment, called the Seed Enterprise Investment Scheme (SEIS).

SEIS will provide income tax relief of 50% for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000 and cumulative investment limit for companies of £150,000. In addition there is relief from capital gains, as well as tax provision for losses.

Alex Macpherson, head of the ventures division at Octopus, the U.K.'s largest provider EIS funding, said the SEIS system would do a lot to help grow the ecosystem.

"It is an incredibly tax efficient way of investing," he said. He was confident that it would help people with disposable income to become active participants and so feed the ecosystem.

A very attractive way of investing in other upcoming companies

"If you are a serial entrepreneur and have sold your company, a scheme like this would certainly be a very attractive way of investing in other upcoming companies. If you can bring skills and knowledge into a company alongside the funding, that is how you grow companies," Mr. Macpherson said.

Sherry Coutu, a successful angel investor and the driving force behind Silicon Valley Comes to the U.K., welcomed the announcement. "The introduction of the SEIS is a hugely significant step. It's a practical and useful measure that will encourage investment and benefit the next generation of British tech companies," she said.

She suggested that new angels who want to support up-and-coming businesses "invest with others or as part of a syndicate of angels rather than on their own. This will help them learn the best techniques for success and avoid some obvious mistakes."

A high risk asset class and the tax tail shouldn't wag the dog

However there was some concern that making the system too attractive could flood the market with too much cash, resulting in the wrong sort of companies getting funding.

Simon Harris, investment director for Envestors Limited, an investor network, sounded a word of caution. "We welcome the government initiative to encourage investment in young companies but enthusiasm should perhaps be tempered by remembering that this is still a high risk asset class and the tax tail shouldn't wag the dog," he said. "Seed investments currently represent a minority of the companies we represent but are the highest risk investment category. It's possible that SEIS might distort the market at the expense of higher quality later stage investments."

Brent Hoberman, investment partner at Profounders, was not that troubled by the risk of too much money. "It would be a nice problem to have," he said. "The main issue I have is the £150,000 cap. Most companies need more than that and I would worry that that would be a problem." A spokeswoman for the Treasury confirmed that qualifying companies were free to raise other money outside the scheme.

Makes it easier for people to become entrepreneurs

Mr. Hoberman said that the moves added more evidence of the change in attitude of the U.K. government, and the showed that it was small-business friendly. "What this does is to make it easier for people to become entrepreneurs."

In addition to introducing the SEIS scheme, the government announced changes to VCTs. VCTs are companies listed on the London Stock Exchange, and are similar to investment trusts. They are run by fund managers who are usually members of larger investment groups. Investors can subscribe for, or buy, shares in a VCT, which invests in trading companies, providing them with funds to help them develop and grow.

In his statement, Mr. Osborne abolished the cap of a £1 million limit on investing into a single company in 12 months, as long as a company qualified for the scheme — no more than £7 million in assets before the investment.

Guy Rainbird, public affairs director for the Association of Investment Companies, welcomed the move, saying it would increase the flexibility of the system and improve returns. But he was uncertain that it would increase the amount of money in the system.

Seriously deregulatory

"This is seriously deregulatory for VCTs. It has the potential to change the structure by which deals are done. It will have a massive impact on the ability of VCTs to extend their reach," he said.

According to Mr. Rainbird, the £1million cap had meant that a company seeking £2.5 million in funds would have to approach three companies, with three sets of due diligence, and three separate deals. "That is very inefficient," he said.

Although Mr. Rainbird said he was not sure if the moves would expand the total funds available, he did think that reducing the arbitrary cap would make the industry more efficient.

"It means better returns for investors, and it means more money goes for investment."