Budget2011: Enterprise investment good news

FOR THOSE who were hoping for measures to help entrepreneurs in today’s Budget, chancellor George Osborne didn’t disappoint. But, while advisers have hailed them as “positive”, whether they deliver the much-hoped for growth will, of course, remain to be seen.

One move the chancellor made which was highlighted as particularly striking was on entrepreneurs’ relief. From 6 April 2011, the lifetime limit on capital gains qualifying for entrepreneurs’ relief is being doubled to £10m – which means it will have increased from £1m to £10m in the space of a year.

While this is not expected to cost the Treasury anything in the 2011/12 tax year, the cost will be £50m in 2012/13, gradually rising to a cost of £100m by 2015/16.

Another signal to investors is the reform of the Enterprise Investment Scheme (EIS), where the rate of income tax relief from investing under the scheme will increase from 20% to 30%, again from the start of the 2011/12 tax year.

From April 2012 the qualifying company limits for EIS will increase to 250 employees and gross assets of £15 million, and the annual investment limit for individuals will increase to £1m, while the annual investment limit for qualifying companies will increase to £10 million.

Again this change is not expected to cost the Treasury anything for the next tax year – but will cost between £105m and £120m between 2012/13 and 2015/16.

Both these measures will be seen as good news for individual investors, serial entrepreneurs, and business angels. However, Lisa Macpherson, national tax director at PKF, wondered if it will actually help kick-start the economy and whether there were other better measures for SMEs the chancellor could have introduced.

While keen to stress the changes are “a good thing”, she said: “What SME businesses need right now is access to finance. Even though entrepreneurs’ relief will now cover the first £10m of gains made on selling businesses, few are likely to start towards that goal at present.

“Iit might actually encourage entrepreneurs to grow their businesses to that level, but obviously that would depend on other factors, such as whether they already have a strong management team in place.”

Alex Henderson, tax partner at PwC, said the increase in entrepreneurs’ relief was encouraging. “It’s striking that the chancellor has chosen to double the relief – he’s trying to send a signal to entrepreneurs,” he said.

“It’s true that these measures are aimed for businesses in the middle rather than small start-ups, but it keeps in with his theme of balancing the Budget and trying to simplify the tax system for businesses.”

Henderson hailed the EIS changes as “generous” and “encouraging to those investing in companies they work in and to business angels,” although many of the changes will not come into play until 2012 pending EU State Aid approval.

John Whiting, tax policy director of the CIOT, welcomed the extension of the incentives, saying: “We are regularly told the limits on the size of company that can raise money under the EIS make it too restrictive.

“We are therefore very pleased to see that the Cchancellor has heeded calls to raise these thresholds, which will make the scheme much more widely available.

“In many ways, this widening of the eligibility criteria is more significant than the increase in the rate of tax relief.”

Macpherson also welcomed the EIS reforms: “EIS investors will now be able to invest in businesses with a bit more of a track record, which may make it less risky for them”, she said, but she pointed out it wasn’t going to make a great change to current investor behaviour when it came to entrepreneurial businesses.

“The changes will be attractive to people who would have made investment by EIS anyway,” she said. “It won’t encourage new investors who hadn’t been thinking of EIS before.” It seems, therefore, we won’t see hordes of business angels – and angel finance for SMEs – soon.

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