Autumn Statement 2011: Start-ups boosted by tax reliefs for backers

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George Osborne announces ‘tax relief for dragons’ to encourage investments in
start-up companies.

The Chancellor said backers of start-ups will be able to qualify for 50pc
income tax relief on investments of up to £100,000 in a move which experts
called "an invitation to invest in innovation".

The Government will launch the Seed Enterprise Investment Scheme (SEIS, an
extension of the existing EIS (SNP: ^EISY – news tax efficient investment regime, in April
2012. The scheme will also offer backers of early stage companies a one-off
capital gains tax "holiday" if they reinvest gains made during the 2012-13
financial year through SEIS.

The Federation of Small Businesses said the move "will give start-ups and
fledgling businesses the chance to bypass the high street banks and find
alternative sources of finance".

Lisa Macpherson, national tax director at accountants PKF, said: "With income
tax relief at 50pc and capital gains tax relief at up to 28pc, [angels]
looking to invest in a start up in 2012/13 could get £100,000 worth of
shares for just £22,000. Although the capital gains tax relief will not be
available in later years, a 50pc subsidy on such high risk and possibly high
return investments is bound to be attractive to many."

The 50pc income tax relief will apply to all investors, regardless of the rate
at which they pay tax.

The Government also simplified the rules for the existing EIS to allow
'connected parties' to invest under certain conditions family members, for
example and said it would relax the definition of shares that qualify for
relief.

EIS is currently restricted to ordinary shares, which angel investors complain
can leave them disadvantaged in subsequent investment rounds when larger
backers provide capital through preference shares on a non-EIS basis.

A £1m investment limit per company that exists for Venture Capital Trusts,
another tax efficient investment scheme, will also be removed.

Richard Anton, chairman of the British Venture Capital Association, said: "The
Chancellor has today offered an invitation to invest in innovation. This is
a rare case of a George coming to the assistance of dragons. Angel investors
will be delighted."

However, the Government said it would "tighten the focus" of EIS by
introducing a new test to "exclude companies set up for the purpose of
accessing relief". It will also exclude the acquisition of shares in another
company.

Roy Maugham, tax partner at accountants UHY Hacker Young, said some companies
will be excluded from EIS relief on the basis that they’re «not risky
enough».

"There have been some companies that have previously attracted EIS tax relief
for their investors, such as ones that trade in block bookings of theatre
tickets, who may find it harder to qualify for EIS relief."

The scheme is being paid for by a freeze in the general capital gains tax
threshold, at £10,600, which the Treasury predicted will cost an annual £30m
from 2013.

Stephen Bayfield, partner at PKF, said SEIS was a "step in the right
direction" but the relatively small number of experienced angel investors
means the £100,000 cap "effectively limits each dragon to helping one or two
start-ups a year. We'd like to see the limit increased to at least £300,000
to maximise the number of start-up businesses that can benefit."

The seed investment initiative follows an extensive relaxation of EIS
announced by Mr Osborne in the Budget last March. The rate of income tax
relief available under EIS rose from 20pc to 30pc, while the amount of
investment per company in any one tax year that can attract upfront tax
relief is due to double in 2012 from £500,000 to £1m.

The limit on the size of qualifying companies for general EIS relief is also
due to increase to include companies with up to 249 employees and
pre-investment growth assets of up to £15m.

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