Social Investment Tax Relief

With the second reading of the Finance Bill on the agenda for 1^st April 2014, the final hurdle of this worthwhile tax relief will be scaled - the relevant chapters are 9 and 10 and can be viewed here. The relief will come as a deduction from income tax, equal to 30% of the amount invested - in line with EIS - and will begin from 6th April this year. 

Eligible businesses are regulated social enterprises - in this case, charities, community benefit societies (Bencoms) and community interest companies (CICs), giving investors an incentive for helping worthwhile projects and enterprise, and the scope to gain while maintaining a feel-good factor!  Now there is at least equal treatment of social enterprises and other small businesses, and for entrepreneurs whose businesses have  a social or environmental impact at their core.

This is a complex course to navigate - with tax relief for investors including SEIS, EIS and now 'SITR', but a worthwhile exercise with benefits now on all sides.

For HMRC technical guidance, please visit the draft notes which were published on 27^th March 2014 in preparation for the implementation on 6^th April.

The Emergence of the "Angel-Worker"

For as long as I can remember, one of the defining features of angel investing has been that money should be invested with the primary objective of creating capital growth in preparation for that gargantuan exit one day.  Never mind the failures, never mind the time to exit - everything will be mitigated by the 3 in 30 gangbuster exits at 10x, 20x or 30x your money.  Investment theory, with the Capital Asset Pricing Model et al., and the fact that, in the UK, the primary tax break schemes for angels - EIS and SEIS - disallow the payment of tax free dividends, but do permit the payment of tax free capital gains, has further reinforced the principle.  All well and good I suppose for those businesses that come good in the end, but not so good for the 50%+ that fail to return capital to their investors, especially for those angels whose entire portfolio falls into this latter group.

The ramifications of George Osborne's marvellous announcement about the end of the obligation for pension holders to purchase an annuity, will I think, have far reaching consequences, especially in the context of angel investing.

The world of the 21^st century is much changed from the 1960s and 1970s when much of the investment theory behind venture and angel investing was adopted.  The 21^st Century is the age of the SME (did I read somewhere that there are over 4.5m SMEs in the UK now?), the age of flexible working and, most importantly of all, the age of the much longer, but much more interesting plural career, where it is "uncool" to retire and "cool" to enter a phase of "slowerment," where you start doing a little bit less as time goes on, but continuing to earn from work until your 70s, 80s or even 90s.

At the other end of the spectrum, "cool" graduates would not be seen dead starting their working lives as a wage slave banker, lawyer or accountant when they could be working with a mate on their new gaming/tech or whatever start up, whilst selling their tech/marketing/sales skills to an established company who will pay you a great day rate, 8 days a month, to fund the bills until the business takes off.

And in the middle, as flexible working becomes the norm, parents are combining work to bring home the bacon whilst sharing child care, whilst exploring third, fourth and fifth sources of income to supplement the pay cheques.  It's no surprise that new business models such as Airb'nb and www.mondaytofriday.com are proving so very popular as ways of generating additional "unearned" income.

No longer the preserve of the "retired," many more people are moving into a portfolio or plural career at a younger age.  From the ladies working on the tills in Tesco and then rushing off to be the dinner lady at school to the fashionable "portfolio entrepreneur," when these people are added to all those "slowerment" workers, dynamic graduates and flexible workers, it is not surprising that in the UK around 47% of working people no longer work full time.

Thus, we have replaced a world where Society dictates that we should learn (and get into debt), earn (increasing our debt and then trying to pay it off) and retire to enjoy the proceeds of our labours, with one where we are all learn, earn and enjoy those proceeds in parallel.

With this empowerment it is no surprise that people are becoming much more confident that they can take control of the decision about where they make money throughout adulthood.  If you can be a worker and an investor and, for goodness sake, even a bank - well peer to peer lender - all at the same time, you can do anything! You can even become a venture capitalist by investing in VCTs and become an angel through crowd funding.

As a result we are seeing the emergence of a new type of angel.   What I call the "angel worker." These people see that it makes sense for them to offer their skills and services not just for salary and a pension.  They want to be able to "own" part of what they are working in and are prepared to invest cash and salary sacrifice to gain access to a better type of work.  They see business ownership not in the form of a bonus for hard work or as a route to an exit one day, but as part of their working life. They see the point of investing in the business they work for especially if it will mean a long term stream of dividends in the future, but they also see the point of working to build long term capital value. In a sense they are the mirror image of an entrepreneurially minded manager who is given EMI share options.

And now that Mr Osborne has, at last, also given everyone control over how we spend our pension savings, we will only see more and more of them appearing in the market, especially when they reach a time when they want to go plural, can access a bit of their pension pot to invest in something worth working for and commence their journey to "slowerment".

Meanwhile in SME-land a quiet revolution is taking place.  Big corporates tell me that they are struggling to recruit top talent onto their graduate schemes, because "it's more fun and more profitable" for these people to do a start-up. For more experienced workers, it's now easy to run a business from your laptop or in our local town in parallel with your part time or flexible job.  For joint income families, what better than to set up together in business rather than juggle two separate employers if you have a good business idea? Everyone can be an entrepreneur these days.

Many of these businesses will never be gazelles, but they will play a vital role as Mittelstand businesses in society, contributing to GDP, creating employment, turning over not £100,000s but potentially £10ms and generating those all important profits, if we give them the opportunity so to do.

Today's angels will not love them - they still want only to back gazelles.  Banks don't really want them until they get large enough to be profitable customers. But they still need and deserve 3^rdparty human and cash capital to optimise themselves. 

And of course, they will be the ones from which angel workers will be able to create an enhanced income and build some wealth if we let them.  We need to make it easy for angel workers to be rewarded for taking salary sacrifice by getting tax breaks on their earnings in these companies, especially if they have invested in them too (with some of that pension pot?).  And these companies need to be able to pay tax free dividends to their angel workers too.

It would be extremely helpful if the Chancellor took the opportunity of this year's review of EIS to consider creating a special type of EIS for angel workers along these lines. Maybe they will have to sacrifice the opportunity for a tax free capital gain, but that will be no loss if they end up creating a stalwart "Mittelstand" of British business which can thrive for generations to come and generate a living annuity model for people until they die.

And it is the votes of those SME's owners and employees which will elect the next government so that is even more reason to do what you can for them now rather than later.

How to Protect your Brand

"What name do I call my business or product and what kind of logo should I have?" is a key question all entrepreneurs must consider. When considering the options, as equally important, but perhaps not always as obvious, is "am I free to use this name and logo?" In the midst of all the other distractions of a new business venture or product launch, it might be tempting to overlook the trade mark element, and rely only on checks on Google or Companies House; but this could lead to serious problems down the line.

As a first step, businesses should check whether their proposed name or logo conflicts with any registered trade marks through trade mark searches. An estate agency service in Battersea, London, learnt this lesson the hard way when it depicted the iconic local power station in its logo. This prompted swift action from the property owners whose trade mark registration incorporated a depiction of the building. As there was a clear infringement by the estate agency, they had to remove the logo from all business materials, including the shop front. There are clear financial implications associated with rebranding, along with intangible costs such as eroding the goodwill built up by a business in its name or logo, or the delay in getting a product to market or recalling the same.

Falling foul of third parties' rights and other legislation that governs the use of certain terms can result in an injunction being issued by the Courts to stop a business using a brand, and potentially incurring damages and legal costs. This kind of damage can be fatal to a business; the cost of a re-branding exercise is a huge draw on the resources of a new business and the potential loss of the goodwill associated with a name or other kind of brand that you can no longer use should not be underestimated.

Trade mark searches can be conducted to check if your chosen name or brand is available or if there are risks in adopting this brand for use. If your chosen name is available, appropriate steps should be taken to register the trade mark in the appropriate countries. Trade Marks are jurisdictional and therefore a UK trade mark does not offer protection in another country. Consideration needs to be given to whether you will be expanding the business internationally in the future and what timescales are involved, thereby balancing protection and cost and doing whatever necessary to future proof your brand.

These simple, inexpensive steps will help protect your brand and help ensure business continuity, avoid potential disputes further down the line and maximise your ability to exploit the goodwill and reputation a business builds up over time.

If you would like any further information please contact Esther Gottschalk or say hello at the London Pitching 4 Management event on 25^th March.

In our next article we will look at Protecting Intellectual Property in the EU.

EIS Survey

We are doing some research with Intelligent Partnership about what investors think about EIS, and we would be most grateful if you would take the time to complete this survey

https://www.surveymonkey.com/s/EISSurveyforInvestors

Once we have compiled the report, we would be happy to send you a copy.

Many thanks for your help!