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UK Reforms Rules To Boost SME Investment

July 2011 - Tax & Private Client. Legal Developments by Hassans.

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UK Reforms Rules To Boost SME Investment In an effort to encourage more equity financing of small and start-up businesses in the UK, the government has launched a consultation on proposals for reforms to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).

At the March Budget, Chancellor George Osborne announced what he called "sweeping changes to improve the generosity, the simplicity and the reach of the EIS". From April, the tax relief available under the scheme increased from 20% to 30%, and next year, the annual limit for individual investors is to double to GBP1m (USD1.6m).

In addition, the limit for qualifying companies will rise by 40%, with a new cap of GBP10m to be set on both the EIS and VCTs. Qualifying companies will also be able to employ up to 250 employees, and maintain assets of up to GBP15m.

These changes have now been detailed in the consultation document, "Tax-advantaged venture capital schemes", launched on July 6. The consultation also includes proposals for the simplification of existing schemes, designed to improve their effectiveness, and plans to "refocus" them, in order to ensure that they remain appropriately targeted. The government will also add feed-in tariffs to the excluded activities list from April 2012.

The current level limits were introduced in 2006 and 2007 and were intended to address an equity gap between GBP250,000 and GBP2m, with small and medium-sized enterprises in particular finding it difficult to acquire access to equity investments. However, a recent review has shown that, in addition to this original problem, there is now an estimated equity gap between GBP2m and GBP10m. The government's proposals are, therefore, part of its attempt to address this issue.

The proposals are, as a result, designed to encourage investment in small and start-up businesses with high growth potential, as the government recognizes the particular need for seed investment. According to the Treasury, the small size of the investment required under the existing rules can deter investors who prefer to invest large sums in bigger companies.

In spite of this, Treasury figures show that, since their introduction in the 1990s, the EIS and VCTs have supported over GBP11.5bn of equity investment into UK businesses. They incentivize investment in smaller, qualifying companies by offering a range of income and capital gains tax reliefs to individual investors who subscribe for new shares in them.

Additionally, the government is canvassing ideas on a new scheme for seed investment, called the Business Angel Seed Investment Scheme (BASIS). The European Commission defines Business Angels as wealthy private individuals who invest directly in young, new and growing unquoted businesses, and provide them with advice or finance, usually in return for an equity stake.

David Gauke, Exchequer Secretary to the Treasury, said: The government wants to make the UK the best place in Europe to start, finance and grow a business and we know that a vital part of this is ensuring access to a wide range of sources of finance. Today we are proposing a new, targeted scheme to encourage greater investment by business angels in start-ups and entrepreneurs businesses. This, alongside our reform of the EIS and VCTs, is part of our plan to increase the competitiveness of the UK tax system, demonstrating that Britain is open for business.

The consultation opened on July 6 and will remain so until September 28. The government will then put legislation forward in the autumn and allow for further comment on the draft legislation. Any reforms would need to be agreed by the European Commission.

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