What the Government needs to do to save British start-ups

Government must acknowledge the failures of the Future Fund and pursue longer-term solutions, argues Michael Buckworth.

It’s been nearly four months since Boris Johnson ordered the country into lockdown and yet the Government is still chasing its tail about the best way to protect the economy.

Since March, the Government has enacted a swathe of COVID-19 economic relief schemes – stretching from the deft, such as the furlough scheme, to the ill-thought-out. The Future Fund belongs in the latter category.

What’s wrong with the Future Fund?

Launched in May, the Future Fund aimed to match private sector investment with public money to save British start-ups impacted by the pandemic. Since inception, it has faced criticism due to the requirement that, to be eligible, SMEs must have raised £250,000 from investors within the last five years. This effectively shut out many SMEs – including restaurants, leisure and hospitality businesses, and smaller tech start-ups – which have grown organically or relied on debt to fund growth.

Matched funding by private investors in a Future Fund round is not qualifying for EIS relief because the structure chosen by the Government for the scheme is a convertible loan. Most UK angels are reliant on EIS to reduce their risk and reward them for high-risk investments in early-stage businesses. These investors will likely not invest as part of the Future Fund – limiting the number of SMEs who benefit even further.

‘We may be about to lose a generation of SMEs across the country’

It’s unsurprising that our recent research, which surveyed 500 SME owners, found that over a quarter of UK SMEs don’t think the Government’s support schemes are enough to help them stave off insolvency. This figure rose to 29 per cent in Wales, 31 per cent in Scotland, 32 per cent in the North West, and 33 per cent in the East Midlands – suggesting that we may be about to lose a generation of SMEs across the country.

>See also: City grandees call for small business Covid debt to be turned into tax owing

Why the Summer Statement didn’t help

The Government must urgently consider alternative schemes to help support SMEs and prevent widespread unemployment at an unprecedented scale. Last week, the chancellor outlined the Government’s next set of economic relief schemes. One of the policies that may catch the eye of an SME owner is the £1,000 bonus any employer will receive for bringing back a furloughed member of staff.

Gestures such as this may create fantastic headlines, but how much it will help SMEs is up for debate.

The bonus doesn’t change the underlying situation that many of the jobs of furloughed employees no longer exist and that employers may no longer be able to afford the wages of furloughed staff. A one-off £1,000 bonus isn’t enough to persuade employers to bring back staff they don’t need.

What about the VAT cut to 5%?

Another intriguing policy is the cut in VAT from 20 per cent to 5 per cent for the next six months on food, accommodation, and attractions. Further financial assistance for the struggling hospitality sector, which has effectively been locked out of the Future Fund, is long overdue. Our research project found that nearly one third of SMEs in the retail, catering and leisure space are no longer optimistic about the future of their business. While the VAT cut announced by the chancellor this week is welcome, the Government must look for longer-term solutions to support SMEs and encourage investment from the private sector.

>See also: Government should triple equity to invest in businesses to £30bn

Loosen state aid rules

One option available to the Government is to significantly loosen state aid rules or potentially revert to WTO rules post-Brexit. Currently, many venture-backed technology start-ups are classified as being in “financial difficulty” under EU state aid rules because their accumulated losses exceed 50 per cent of their paid up share capital.

Although these rules are intended to stop countries propping up failing national companies, they have the indirect impact of preventing start-ups from accessing the swathe of state support which has been widely available in response to COVID-19. In the UK, this resulted in some start-ups being locked out of CBILS and the Bounce Back Loan scheme, until the state aid rules were relaxed in June.

While the relaxation of state aid rules by the European Commission last month is welcome and offers a lifeline to save many struggling start-ups, a more permanent solution is needed. State aid rules remain overly restrictive and prevent the Government from properly tailoring support schemes to the businesses that need them most. State aid should be a key focus of the Government when it comes to negotiating the terms of our future relationship with the EU. Any deal that ties us in law or practice to EU state aid rules would constitute a significant failure by the Government, and may limit the amount of financial support the Government can give innovative high-growth start-ups should there be a second or third spike of COVID-19.

Offer temporary tax relief akin to SEIS and EIS

Another less complicated option available to the Government is to create a temporary tax relief scheme that is similar to the Seed Enterprise Investment Scheme and Enterprise Investment Scheme. As the country continues to relax lockdown measures, the Government must revisit the reliefs it has put in place and switch the mindset from keeping business alive during lockdown to keeping businesses profitable in the post-COVID-19 landscape.

But it is not feasible for the Government to continue ploughing money into the economy to support businesses. An alternative approach which shifts the onus from the Government to private investors should be pursued. A temporary tax relief scheme similar to SEIS and EIS could achieve this, as both measures offer individual investors substantial tax relief of up to 50 per cent of their investments, thereby encouraging them to invest in start-ups. Yet, many SMEs in need of investment will not be eligible for SEIS and EIS in its current form.

Therefore, creating a temporary scheme which is akin to the SEIS or EIS but tailored to start-ups unable to access the Future Fund may encourage investors to save British start-ups and also save the Government from taking on yet more debt.

Save British start-ups

If the status quo continues, then the victims of the COVID-19 recession will likely be the same as the 2008 economic crash – SMEs. These are the businesses that make up the backbone of the UK economy and are our first line of defence as we face a period of economic downturn that is unlike anything in modern times. The Government must urgently shift away from short-term fixes, such as the Future Fund, and look for longer-term solutions such as removing state aid rules and creating a tax relief scheme like EIS or SEIS. If they don’t move to save British start-ups, then we could be entering a period of mass SME insolvencies across the UK that will take years to recover from.

Michael Buckworth is managing director of Buckworths

Further reading

How to get your business out from under the COVID-19 debt mountain


Michael Buckworth

Michael Buckworth is managing director of Buckworths.

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