Entrepreneur's tax relief - but who benefits?

GEORGE OSBORNE has announced a £100m-plus tax break for entrepreneurs who are willing to invest in Britain’s fastest-growing businesses, after getting the go-ahead from the European Commission.

The plan will involve raising the income tax relief from 20% to 30% for EIS investments, backdated to April 2011, and doubling investor limits to £1m, which will come into effect in April 2012.

I would never wish to obstruct anything that might encourage capital being made available to businesses and in particular smaller businesses which often have problems in raising such money. However, I question not only EIS relief but many of the tax reliefs granted to individuals and businesses which can have the effect of distorting commercial decisions.

Distorting commerce

If you do a simple Google search of EIS you may understand what I mean. There are many organisations out there marketing EIS ‘Schemes and Opportunities’, heavily promoting the tax relief benefits. We have organisations that are ‘constructing’ investments for investors to subscribe to on the basis that it is all about getting the tax relief and in essence getting one over the taxman.

I am not suggesting that all EIS opportunities marketed fall into this category – but many do – and the investor is happy because they have their tax relief and then, probably, in three years time get their original capital back may be with a small uplift because of the ‘safe’ nature of the underlying business; the company directors in which the investment has been made do well because they have been paid for ‘running’ a business, probably with a portfolio of others, as their ‘real’ business was operating companies which would give a return for investors; and finally the promoter of the ‘scheme’ will have made fees, along with all the other advisers, on the back of the original investments.

At the same time, the Treasury is out of pocket for the tax relief it has given which reduces the public purse while helping to fund business which in truth provide little benefit, coupled with this investor money has been sucked out of the system by the operators making money out of selling tax relief and it is therefore not available for the true entrepreneur who does not have the initial capital to attract the funds in the first place.

I appreciate that there may be many investors out there who do not have the knowledge of or the access to small businesses that may benefit from this sort of investment, just as there remain many small businesses that could benefit from such investment but do not have the resource to access them. Nonetheless, I question whether this type of tax relief should be marketed as a tax vehicle rather than the commercial investment it should be.

Reward higher risk

Higher risk should be coupled with higher reward and with the tax relief available the risk is reduced already, so maybe it should be limited to the higher risk end of the market. There is probably no real solution to the problem and there are examples of businesses which have benefited from this relief; but I doubt very much that EIS achieves the government’s intention of stimulating equity investment in up and coming private companies but I am sure many are doing well on selling the tax relief to the investors.

Jonathan Russell is a partner of ReesRussell and Russell Phillips, finance director of CountrySmiths and an executive member of the UK200Group

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