There is a simple message for wealthy individuals who are worried about their complex tax avoidance schemes. Do the economy a bit of good instead and put your money in high technology innovative early stage companies.
Innovative start- ups and small businesses are risky .
- Is there a market?
- Will the technology work?
- Can the technology be turned into a desirable product?
- Will the management team be knowledgeable, skilled, entrepreneurial and flexible?
So risky indeed, particularly before any sale has been made that it is virtually impossible to raise any money
- No equity because the chances of success are low and failure high.
- No loans because there is no security
Who can invest?
- Individuals who are using their own money: friends, family or angels, with an appetite for risk.
- Institutions which are using someone else’s money on an individual investment basis will find chances of failure high, and find the justification more difficult.
- Portfolio investors can balance the risk of some failing within an overall success package.
- Public money has a slightly different perspective. The country needs economic activity as whoever owns the shares, the one almost certain beneficiary of a successful company is the national economy from activity taxes, no unemployment pay, buying of other goods, and eventually maybe corporation tax. But it must come with private expertise.
Government gives tax allowances to individuals because the most likely winner from investment is society generally. They have recently, enhanced those in the last budget for three schemes:
- Enterprise Investment Schemes (EIS) enable Individuals to invest with income tax relief of 30% and capital gains tax relief.
- Venture Capital Trusts (VCTs) which provide vehicles for investment in groups of such companies will provide smaller but similar reliefs.
- A new seed EIS (SEIS) for companies with less than 25 employees will provide 50% income tax relief and capital gains tax relief.
Who provides the market access to these companies?
- Business angels groups are trying to help fledgling businesses they are always looking for new investors.
- Specialised small venture capital companies will do the due diligence and let angels invest alongside them.
- Science parks and universities are often looking for investors.
- There are official VCT and EIS funds publicised.
Why not accountants and IFAs?
You would expect to see accountants and IFAs acting as introducers but it is unusual. Possibly they are concerned about giving advice that leads to failure, and clearly these are risky otherwise why should there be a government subsidy. There is a mechanism that would absolve them of formal responsibility which they are loath to use. Maybe they should be recommending this rather than the tax avoidance schemes in which some of them specialise. Accountants, in particular, could form business angel groups in all localities. They know who has the money and who needs it, and government already gives tax encouragement to participate.
The message is : We could all, including professional advisers, utilise tax encouragement for national wealth generation in inovative start-ups, rather than tax avoidance for personal gain.
Norman Price 21.6.2012
Chair of Birmingham Science City
Chair of Regional Finance Forum