Venture Capital – BVCA criticises government tinkering’

The UK’s entrepreneurs and venture capitalists – and indeed the wider business community – gave chancellor Gordon Brown’s pre-budget statement a somewhat lukewarm reception. Although initiatives to lower capital gains tax and create further tax provisions for equity incentives were welcomed, the general reaction from the venture sector was along the lines of could do better’.

The chancellor announced that the ten-year taper on capital gains tax (CGT) will be reduced to five years. “I will say to Britain’s prospective and actual investors and entrepreneurs: invest for three years and the CGT rate will not be 40 per cent but 22 per cent. Invest for five years, and the tax rate will not be 40 per cent or 22 per cent – it will be ten per cent.”

All well and good, as far as it goes,’ came the response from the British Venture Capital Association (BVCA), which judges that the pre-budget statement did not go anywhere near far enough. Having marshalled statistical evidence from the US to suggest that the introduction of a 20 per cent flat rate of CGT was one of the major spurs for entrepreneurialism and economic growth, the BVCA would have liked to have seen similar measures adopted here. Jonathan Clarke, head of the BVCA’s tax committee commented: “Once again, Mr Brown is only tinkering with the tax system. The answer is simple one transparent tax regime, applying to all gains, as it is in the US, would give the much-needed boost to the enterprise sector in the UK.”

The new CGT taper only applies to holders of business assets – ie, investors in private companies. Other critics point out that the measures do nothing to help smaller quoted companies and would deter small companies from seeking listings. Market observers have also suggested that a five-year taper horizon is unrealistically long in view of the rate at which e-commerce companies develop.

Young companies will also be able to grant ten employees stock options worth up to GBP100,000 ($162,000) without incurring income tax liabilities a measure intended to enhance the ability of cash-strapped young firms to attract and retain high-calibre experienced managers. Again, the BVCA responded that the move was not bold enough, arguing that options to the value of GBP250,000 tax free would have made a much greater difference to developing businesses attracting experien-ced managers’. However, for a Labour government even a new Labour government concessions on that scale clearly proved a step too far. And, given a tabloid press that delights in fat cat’ storylines, Brown probably acted wisely regarding share options.

The BVCA extended a welcome albeit low-key to other budget proposals including moves to promote the development of technology clusters’ and a joint Department of Trade and Industry/Treasury review of the corporate insolvency regime.

The chancellor’s statement also contained tax incentives to encourage corporate venturing and news of a GBP350 million ($565 million) network of regional public/private venture capital funds to be set up though the regional development agencies and the devolved Scottish, Welsh and Northern Irish administrations. These regional funds, which will be primed with around GBP50 million ($81 million) of government money, will focus on the equity gap’ ie, companies seeking investment of GBP500,000 ($815,000) or less.

One venture industry group has undoubtedly welcomed the Chancellor’s initiatives to promote venture investment. Westport Private Equity has been mandated to raise a GBP125 million ($202 million) venture capital fund-of-funds to siphon additional private sector capital into growing enterprises (story, page 13).