The smaller end of the VC market is set to benefit from UK chancellor Gordon Brown’s 2003 Budget. The government has proposed the creation of British Small Business Investment Companies (SBICs)- private sector vehicles to inject new capital into small and medium sized enterprises (SMEs). In his speech Brown stated: “For small firms looking for capital of between £250,000 and £1 million, there is evidence of an equity gap that prevents them from realising their full growth potential.”
The Chancellor has issued a consultation document entitled Bridging the finance gap: a consultation on improving access to growth capital for small businesses. It is aimed at companies trying to raise amounts of between £250,000 and £1 million and looks at, among other things, the possible introduction of SBICs into the UK, use of VCTs and the EIS, and availability of the Small Firms Loan Guarantee Scheme.
An important benefit mentioned relevant to venture capital is the expansion of the definition of an SME. This will include any business with fewer than 250 occupied persons and which has either an annual turnover not exceeding £34,448,956 or an annual balance sheet total not exceeding £29,626,102. This means more businesses will be able to benefit from tax reliefs specifically aimed at SMEs. And by raising the qualifying threshold for SMEs to the maximum possible under EU law a total of 3.7 million businesses will become eligible for 40 per cent investment allowances.
But the British Venture Capital Association is disappointed the Chancellor did not take this opportunity to improve and simplify the capital gains tax regime nor to enhance the attractiveness of venture capital trusts which are a vital source of funding for early stage companies. BVCA chief executive John Mackie said the association would be taking a full and active part in the promised consultation process announced by the government.
The abolition of capital gains tax taper relief to be replaced by an immediate flat rate of CGT of 10 per cent on business assets and 20 per cent on non-business assets was high on the list of priorities in the BVCA’s pre-budget submission.
Senior tax partner, Mike Warburton of accountancy firm Grant Thornton hailed Brown’s budget as a genuine boost for small and medium sized enterprises (SMEs) but expressed disappointment that more companies would not benefit from the measures. He said: “While Brown has clearly made efforts to improve the lot of the SME, the expansion of the definition of a SME may prove to be a bit of a red herring. If Brown had really wanted to help business he would have adopted a definition that included companies with more than 250 employees.”
Additional measures which will benefit SMEs include:
– First year allowances for expenditure on plant and machinery – businesses which previously did not fall into the SME category will now benefit from an additional 15 per cent tax relief on plant and machinery expenditure.
– Research and development tax credits – a more favourable rate of tax credit is available for expenditure on R&D – 50 per cent rather than 25 per cent.
Brown has also reduced the minimum spend required to qualify for the R&D tax credit from £25,000 to £10,000. Smaller high-tech companies look set to benefit from this change.
David Cartwright, venture capital leader UK, PricewaterhouseCoopers and also a member of the British Venture Capital Association tax committee and secretary of the VCT managers meeting said: “This year’s budget is a refocus on the equity gap. The government is clearly trying to bring financing to smaller growth companies. It hasn’t dealt with the issues the BVCA would have liked it to, but is focusing on this equity gap, which is defined as the sub £1 million category.”
But Cartwright considers this gap to be more in the £1 million to £10 million range following the migration of many private equity and venture capital firms into the £10 million plus bracket. In the past VCTs had been filling that gap, having raised around £1.5 billion over the last seven years, but with only £50 million raised in the year to April 5 2003 that money is tailing off, says Cartwright.