Raise tax reliefs to give start-up businesses a £2bn lifeline – government told
A group of start-up industry leaders is urging the government to make immediate changes to existing start-up investment schemes to provide a lifeline to UK small businesses during the coronavirus crisis.
The group has written to the Prime Minister and the Chancellor calling on the government to temporarily increase the tax relief available to private investors from 30 per cent to 80 per cent for six months.
The group believes incentivising private investor support and taking pressure off the public purse could deliver up to £2bn to the companies that drive innovation and future growth of the UK’s economy.
Jasper Smith, founder of Vala Capital, who is heading the group, says that many start-ups and SMEs will not continue to exist without urgent help.
He says: “The future success of early-stage businesses is crucial for the UK economy and private investor support is the lifeline for many. Banks are not equipped to be able to make lending decisions to many early-stage companies. It is vital that we allow investment to flow alongside debt. The current Coronavirus Business Interruption Loans proposals mean that many innovative start-ups could hit the wall within weeks because many won’t meet the criteria*. All of the norms are out of the window. It's time to save the companies that will create the foundation for recovery.”
A significant amount of these funds could be made available within in days – before 5 April 2020 – by using Enterprise Investment Schemes (EIS), which already provide a valuable framework for investing in high-growth companies. Since the EIS was launched in 1994 more than £20bn has been invested in almost 30,000 qualifying businesses across the UK.
In addition to the temporary increase in tax relief, the group recommends the government:
- extend tax reliefs to founders and directors of the businesses so that they are further encouraged to save the businesses they represent
- temporarily set aside any EU State aid restrictions, particularly those related to investing in companies that are in financial difficulty
- use existing EIS managers to allocate capital, to stand in place of the banks where equity is more appropriate than debt
This group says that such incentives approach would in effect be “free borrowing” for the Treasury by the public and would ensure that the lifeblood of innovation in the UK – crucial for the foundation of a future economic recovery from coronavirus – is protected. By harnessing existing EIS managers to rapidly deploy capital, this initiative would also come at minimal additional administration cost to government.
Mark Brownridge, Director General of the EISA, says: “We need to do everything possible to preserve the very businesses that represent the future wealth of the country. There is growing evidence of investors withdrawing from commitments due to close in this tax year. The knock-on effect will be catastrophic as businesses will be forced to take difficult and agonising financial decisions through no fault of their own.”
Additional quotes:
Wealth Club
Alex Davies, Founder and CEO of Wealth Club, the UKs largest investment platform for VCTs and EIS says: “Today all over the country, young innovative businesses are contemplating a bleak future. Without urgent help the very companies that can spearhead recovery after the virus has passed will fail, leading to a significant downturn in innovation and future economic growth. Providing temporary increased tax incentives for investors could be an extremely simple, fast and cost-effective way of helping these businesses survive.”
Kuber
James Ramsay, CEO of Kuber, a leading tax efficient investment platform says: “Venture capital scheme qualifying companies have been driving growth in the UK economy alongside other start-up businesses for years now. These companies need equity immediately to continue doing their good work of creating value for investors and UK plc through the job creation they are almost uniquely positioned to provide. We normally see c50% of the full year’s fundraising come in during March and the first few days of April. We have seen that drop by c60 per cent this March so far. It means there are businesses expecting funding that will have to shut up shop and lay off all their staff down to nothing more than bad luck and the structure of the proposed government support. Start-ups need equity to grow, not debt to saddle them into the future.”
Sapphire Capital
Boyd Carson, managing partner of Sapphire Capital Partners says: “SMEs are the lifeblood of the economy. Many of the most innovative of those companies rely on equity to fund growth. These companies will fail quickly and in large numbers unless they can rapidly access capital. The time to act is now.”
Par Equity
Paul Munn, managing partner of Par Equity says: “The early-stage growth companies Par Equity invest in are key to the future as well as the shorter-term recovery we will need. Losing the job creators in the tech sector would be a terrible wasted opportunity”.
Kin Capital
Richard Hoskins, Director, says: “As in 2004/5 and in 2005/6, temporarily enhancing the EIS & VCT schemes in response to a downturn has previously been shown to be very effective. However, the government needs to act NOW, if it is to achieve real impact on the real economy."
Independent Financial Solutions
David Stamp, Founder and CEO of Independent Financial Solutions says: “I cannot see how the government is going to get sufficient funding into SMEs based on the proposals I have seen. Something needs to happen very quickly. We have seen hundreds of employees laid off in the last few days and it is not clear how they will be helped.”
ENDS
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Henrietta Harwood-Smith, Henrietta@maisoncomms.co.uk 07866 529 159
NOTES TO EDITORS:
The Enterprise Investment Scheme
The Enterprise Investment Scheme (“EIS”) is a government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies. There are five current EIS tax reliefs available to investors in companies qualifying under the EIS, including income tax relief where an individual with no more than a 30% interest in the company can reduce their income tax liability by up to 30% of the amount invested. For more information go to eisa.org.uk
*Coronavirus Business Interruption Loans
Excludes companies that have received State aid beyond €200,000 over the last two fiscal years and or companies that do not have ‘sound’ borrowing proposals.