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Oh Chancellor, where art thou?

February 8, 2008

OVER THE LAST 20 years or so, the UK Government has built up an enviable reputation for the development of a strong enterprise culture in Britain.

 

Most entrepreneurs would agree that the best thing that a government can do for business is to 'get out of the way', but even the most independent of them will accept that a supportive fiscal environment can help considerably in ensuring that risky new companies can get the funding that they require.

 

I attended at a meeting in Brussels a few weeks ago to discuss early-stage financing policy with representatives of 15 or so other European countries, and there was no doubt that the UK is looked on enviously, particularly for our ability to draw on large quantities of risk capital from venture capitalists and business angels, both of which are acknowledged to be way ahead of any other European country.

 

In particular the large number of business angels in the UK is seen as a huge strength. Business angels provide not only early-stage money for start-ups, but also often provide key skills, which help the emerging businesses.

 

These have become particularly valuable, as venture capitalists have moved up the scale in their willingness to provide risk capital. Business angels are happy to provide financing in the sub-£1m range, which is often exactly what is needed for a business to get started.

 

Scotland has several successful groups of business angels, including Edinburgh-based Archangels, the largest in Europe.

 

So far, so good. But can we be confident that Alistair Darling, our very own Edinburgh based MP, and the UK Chancellor of the Exchequer, is a safe pair of hands in looking after this situation? Well, his track record is not good.

 

For Darling, in his autumn statement to the House of Commons, blew a huge hole in the UK's reputation for being entrepreneur friendly.

 

He suddenly announced the end of 'taper-relief' and set the new rate of capital gains tax at 18 per cent for all gains, however made.

 

This was envisaged as a way of catching out the private equity players, who had been using taper relief to pay only 10 per cent on their often very substantial gains, but in the process he created havoc among small business owners throughout the UK, who were suddenly facing an 80 per cent rise in their tax bill on the eventual sale of their business.

 

There has been a long-established understanding that for many small business owners, what is effectively their pension is built up in the value of their business. This used to be recognised in a tax break which was called 'retirement relief', and which had been abolished when taper relief was introduced.

 

So, quite why the alarm bells didn't ring in the Treasury when taper relief was suddenly wiped out is a complete mystery. Surely there is some kind of corporate memory that remembers what happened when a new tax system is brought in, which could be replayed when the tax is abolished, to ensure that new disincentives are not accidently created? Clearly not.

 

The outrage was so loud that an unprecedented coordinated campaign was mounted by the IoD, the CBI, the Chambers of Commerce, and the Federation of Small Business.

The Chancellor was lambasted by business angels, and attacked by the press. Something had to be done, and it was.

 

A quick U-turn was developed and announced - the first £1m of gains made by a small business owner will now be taxed at 10 per cent, introducing a complicated new variant to his new simplified capital gains system.

 

This seems to have mollified the entrepreneurs a bit, but in the process it has destroyed the UK Treasury's reputation for being enterprise - friendly.

 

But, it is not all over yet. The budget is looming, and there has been an eerie silence from the Chancellor on the future status of the Enterprise Investment Scheme (EIS). It is the EIS scheme, originally introduced by Ken Clarke, which has been responsible for the dramatic growth in business angels in the UK.

 

Angels investing under EIS take a substantial risk with their own money and in exchange for this they get a range of tax breaks - tax relief from income tax on their investment, and complete relief of any tax on any capital gains made by the business, or any dividends paid by the business.

 

These benefits are very important to the health of the business angel sector, but they are not popular with HM Revenue and Customs, which in the past has attacked various EIS shareholders under a variety of 'exceptional situations' which they claim negate their EIS status.

 

A friend of mine, an individual who is close to government thinking in these matters, is very concerned at the moment that we haven't had any confirmation from Alistair Darling that he values the EIS.

 

What we need from Alistair Darling now is a clear confirmation that the EIS is here to stay, and that he will strongly defend it against the Treasury hawks and Revenue hard men.

 

And we need it soon.

 

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