The government has introduced a raft of incentives and grants to stimulate start-ups and encourage entrepreneurship in the UK. We examine reactions to the schemes on offer.

The government has introduced a raft of incentives and grants to stimulate start-ups and encourage entrepreneurship in the UK. We examine reactions to the schemes on offer. 

‘There is a relationship between entrepreneurialism and the emergence [of an economy] out of recession. Quite simply there is usually an increase in start-up businesses’ – so says David Mellor, head of national corporate business at accountancy firm Crowe Clark Whitehill.

And judging by the various enterprising initiatives and amendments introduced by George Osborne in his brief time at Number 11, he most decidedly concurs with Mellor’s sentiments.

In the first 15 months of the coalition government there have been a raft of changes to Venture Capital Trust (VCT) legislation, amendments to the Enterprise Investment Scheme (EIS), regional rejuvenation plans, research and development inducements and other business measures.

VCTS REVISITED

Chilton Taylor, Baker Tilly’s head of capital markets, observes that businesses have largely welcomed the budget changes to VCTs (for details, see below).

He argues that the previous restrictions on employee numbers and assets meant that only very small companies could utilise VCTs and acknowledges that, ‘At the moment, VCTs are a vital source of funds for [smaller] companies on the market.’

However, Taylor recognises that this has caused problems for other smaller fish in the SME pond. ‘With VCTs becoming one of the few active players in the market, and with no- one else investing, they’re able to invest in less risky opportunities. This leaves early-stage companies finding it difficult to raise funds’.

ATTRACTING INVESTMENT

March saw the government also re-invigorate EIS. The changes announced in the Budget have seen the rate of income tax relief given under EIS increase from 20 per cent to 30 per cent, matching the current tax relief for VCT investment. 

John Cheney is founder of Workbooks, a company that provides online customer relationship management and business applications to small and medium-sized enterprises (SMEs). He says, ‘When the government raised the rate of income tax relief in March, it made it even more attractive for people to invest in businesses like ours.

‘We’d never qualify for a bank loan and so any way you can fund high-growth, capital intensive businesses needs these routes because the venture capital market has been a lot quieter over the last few years.’

To date, Workbooks has raised £5.4 million in two funding rounds. Some £1.4 million of that was secured in July this year but Cheney acknowledges that investors become more risk-averse in a recession, despite the government’s efforts to stimulate investment in small, often high-risk, start-ups.

He adds, ‘We are lucky in the sense that we have run businesses in the past and have a network of people that we can turn to for investment. But if you were starting out without that network today, it would be very hard to find people willing to invest.’

MOTIVATIONAL MEASURES

PneumaCare co-founder and CEO Ward Hills agrees that EIS is a ‘huge motivation’ for angel investors. The business, which has created and developed a medical device that uses 3D imaging to measure lung function, has so far secured £2.5 million of financing, of which £400,000 was raised through EIS.

‘The first two investments were primarily for technology demonstration and prototype development. The most recent investment is to build our commercial team,’ he explains.

Hills says that having access to the right resources and funding has accelerated the company’s growth significantly in just over two years, given that medical devices generally take longer to get to market. However, Hills also believes there is a funding gap when it comes to raising seed finance in the UK.

‘There is an unknown where the capital required is larger than individual investors can easily provide but too small for an institutional investor,’ he adds.

SEEDS OF GROWTH

Mellor points out that a new stand-alone scheme, called the Business Angel Seed Investment Scheme (BASIS), aims to plug the equity gap between £250,000 and £2 million. Published in July as a consultation document, the consultation period comes to a close on 28 September.

Information published by HM Treasury regarding BASIS warns that it could bring ‘additional complexity’ to the tax system.

But ‘provided the administration is not too onerous’, Mellor believes the scheme would work for start-up businesses. ‘The complaint that’s often been levelled at EIS is that while it’s welcome, it places a lot of bureaucracy on the small business that has to comply with the record-keeping,’ he continues.

‘Bureaucracy is a challenge but I think it’s a fair challenge – if you want a tax break to stimulate a particular part of the economy, the more focused it has to be.’

However, Simon Loopuit, CEO of VoxGen, which develops self-service automation technology for phones, says complex schemes deter private sector support.

Loopuit has been on both sides of the funding fence, having been an investment banker prior to founding VoxGen. He admits that his years of experience in investment banking gave him a perspective not afforded to many business owners. ‘It helped me enormously to understand what the drivers are for investors and to be able to look at my business through the eyes of an external investor, which is extremely important.

‘Before you raise money, you have to invest quite a lot to put in place the right structure.The worst thing you can do is start a business back.

Along with EIS, R&D tax credits are revival of the economy. It would certainly be with the wrong structure. To my knowledge, the support that exists at that critical juncture is limited – I would like to see more,’ he adds.

R&D CREDITS

Loopuit recognises the benefits to businesses of the R&D tax credit scheme, which allows a company, if it’s loss-making, ‘to convert some of those tax losses into tax credits – cash that you can bring back into the business’.

Cheney’s business qualifies for the government-run R&D tax credit scheme. He says that although it is a ‘fundamentally good’ scheme, like EIS, it could be simplified.

‘There are a lot of hoops to jump through in order to qualify and paperwork to fill in,’ he points out. ‘We apply for it because we get a good amount of money an effective vehicle for SMEs to launch and be successful.’

IN THE ZONE

In July, the government announced the locations of four new enterprise zones in Birmingham, Bristol, Leeds and Sheffield, which it hopes will help create over 24,000 new jobs. Altogether, there are plans for around 22 zones that will benefit from discounts on business rates, superior broadband speeds, lower levels of planning control and the potential to use enhanced capital allowances.

Mellor believes that the re-introduction of enterprise zones, last seen in the 1980s, completes a whole raft of measures encouraging start-ups in the UK.

‘I could see a certain type of business doing well in the high-tech, quite niche and involve some form of R&D,’ he observes.

‘I can understand why the government wants to encourage growth and innovation in certain communities,’ says Cheney. ‘I think the zones will work for certain industries but it’s difficult to see how start-ups can create skills in a given region if those skills don’t already exist.’

He acknowledges that SMEs are the backbone of UK business and that supporting them is key to emerging from the downturn in ‘good shape’.

‘I don’t think you can build a successful business on the back of tax credits and government schemes alone. But I think being cognisant of the investment and tax benefits that exist can give a company a better chance of success.’

GOVERNMENT INCENTIVES FOR UK BUSINESSES

 VENTURE CAPITAL TRUSTS (VCTS)
 • Listed on the London Stock Exchange
• VCTs allow high-net-worth individuals to invest in small but high-risk unlisted trading companies
 • From April 2012, businesses with up to 250 employees and gross assets up to £15 million will qualify, and the annual investment limit for qualifying companies will increase to £10 million (also applies to EIS)
• Exempt from corporation tax on any gains arising from a disposal

ENTERPRISE INVESTMENT SCHEME (EIS)
 • Helps small, high-risk companies to raise finance by offering tax reliefs to investors who purchase new shares
• Since the 2011 Budget, the rate of income tax relief under EIS is 30 per cent, up from 20 per cent
• Companies can raise no more than £2 million in a 12-month period to be eligible for EIS or VCTs

R&D TAX CREDIT
 • A corporation tax relief that may reduce an organisation’s tax bill by more than its expenditure on research and development (R&D) costs
 • For R&D projects that seek to achieve an advance in overall knowledge or capability in a field of science or technology
 • The relief is only available to companies that spend £10,000 or more a year on R&D (the limit will be removed from 1 April 2012)

ENTERPRISE ZONES
 • Plans for 22 new enterprise zones, creating over 30,000 new jobs by 2015, with 11 locations already announced • 100 per cent business rate discount worth up to £275,000 over five years within the zones
 • Enhanced capital allowances for investment in plant and machinery
• Superior broadband speeds backed by government funding