UK business funding and tax changes announced in Autumn Statement

Introduced by the current Government in 2013, an announcement was expected that new rules could be introduced aimed at restricting the scheme to apply only to patents directly resulting from research and development taking place within the UK. Such a proposal, already agreed between the UK and Germany, is incompatible with the existing Patent Box scheme and thus despite being omitted from the Autumn Statement a formal announcement can nevertheless be expected in due course as discussed in our previous article.

The Chancellor did, however, announce changes to another key scheme applicable to private sector research and development, namely research and development (R&D) tax credits. The Government will increase the rate of the 'above the line' credit from 10 per cent to 11 per cent and will increase the rate of the SME scheme from 225 per cent to 230 per cent, effective from 1 April 2015. In addition, the cash credit received by loss making SMEs will increase from 32.63 per cent to 33.35 per cent of all qualifying R&D expenditure from 1 April 2015. These increases in R&D tax credits are no doubt partly funded by a significant tightening up of the rules governing the types of R&D expenditure which qualify for the tax credits. From 1 April 2015, the costs of materials incorporated into products which are subsequently sold are not eligible for R&D tax credits. With this change, the R&D tax credits will become more targeted towards the actual research and development phase of product and technology development, rather than the production and commercialization stage. Effectively, to continue to be eligible for the tax credits, businesses will need to demonstrate continuing research and development on new products and technologies. The Chancellor also announced a streamlining of the application process for smaller companies investing in R&D, a measure which will hopefully make R&D tax credits more accessible to SMEs within the UK.

Other notable changes announced by the Chancellor include new rules surrounding Entrepreneurs' Relief (ER). The Government will stop individuals and partnerships from gaining a tax advantage by transferring their businesses into a company they control, and then claiming Corporation Tax deductions for assets linked to the business's reputation and customer relationships, thus preventing individuals from potentially extracting funds from a business at a 10 per cent tax rate rather than at income tax rates. The measures, outlined in the Finance Bill 2015, take effect from 3 December 2014. Furthermore, to better target the available tax reliefs, the government will exclude all companies substantially benefiting from government support for the generation of renewable energy. Alongside this, the Government will make it easier for qualifying investors and companies to use the tax-advantaged venture capital schemes by launching a new "digital process" in 2016.

Finally, and perhaps under the growing pressure of public opinion, the Chancellor set out plans aimed to ensure that multinational companies pay the right amount of UK tax. The so-called 'Diverted Profits' tax, heavily targeted towards technology businesses, is set to be applied at a rate of 25 per cent from 1 April 2015. However, a tax on global corporations will require international agreement, and whilst the OECD group of leading economies is currently in the process of seeking a global deal, the process is yet to be completed. Depending on what the OECD ultimately decides, the Chancellor's plans may be subject to future change, as the diverted profits tax would in any case have to be consistent with the international consensus arising from the OECD work.

In conclusion, widely anticipated changes to the Patent Box scheme are yet to be announced, which potentially provides a degree of uncertainty for businesses considering relocating R&D to the UK. Whilst increases in the amount of R&D tax credits on offer are welcomed, the tightening up of the rules surrounding qualifying expenditure may in practice take credits away from businesses aiming to mass-market products based on a handful of R&D successes. However, new innovation will continue to be rewarded with tax credits and moreover at an increased rate from 1 April 2015.

Marks & Clerk

Is Crowdfunding really democratic finance?

Certainly, alternative finance is reducing the cost of transaction, and giving ordinary people access to investment previously unimaginable. Crowdfunding platforms bypass institutions and the middle men who take fees for questionable effort. But I strongly dispute that this does away with the need for professional expertise.

At CrowdBnk we use that very expertise - lawyers, accountants, corporate financiers, and our own experienced team - to undertake old-fashioned due diligence, and then allow the crowd to make its decision about where it invests. That's where the democratic element comes in. We grill the management teams, and question their business plans and projections. Only then do we present a deal to the crowd, which goes on to take the risk, make the decision, and, one hopes, keep the upside. 

I know other platforms say it's the crowd's role to make a judgement about whether a venture will succeed or not. I think that's irresponsible. It's important to be realistic about what people can do in terms of time and resource. Realistically, who has the capacity to decide on all of these investments without the aid of proper background checks?  

I do believe in the democracy of crowdfunding. It's opening up early stage opportunities to all, which is a truly revolutionary thing in the notoriously staid world of investment. But true democracy requires knowledge - and that's what we should be providing.

10 Predictions for 2015

It's almost Christmas so I am feeling brave or hopeful enough, depending on your point of view, to brave some predictions for our market for 2015, so here goes

1. VCT investment for the year ending April 2015 will top £425m.
2. Crowdfunding platform investment levels will exceed that of the visible angel market
3. (Nearly) every angel will have made at least one equity crowd funded investment.
4. Angel and VC "social value" investment will go mainstream led by SITR investment in renewables.
5. A major new entrant to the early stage investment market will add a revolutionary new dimension to investing.
6. A bank will acquire a peer to peer lending platform
7. A "secondaries" VC or angel group will acquire an extant portfolio of angel investments
8. There will be an upsurge in demand by angels to be granted the option to sell out of their investments, if they want to, at a fair market price before the "final exit" moment and assuming there is a buyer (which there will be!).
9. The Conservative Party will win a slim majority in the UK general election and will implement a raft of angel/entrepreneurial enhancing policies
10. Interest rates will stay at 0.5% in the UK throughout the year.

Turkey at Christmas

A week ago I was feeling very end of the yearish, but tonight it is a different story.  I have just had the great pleasure of speaking at the European Business Angel Forum in Istanbul - the "Queen of Cities" to around 200 South West European and other international angel investors as well as meeting dozens of local entrepreneurs.  And by local I mean those based in and around the Balkans, but also stretching across to Jordan and Israel.  My enlivening experience has been ably assisted by the dynamic Baybars Altuntas who organised the Forum and many members of EBAN, the European Business Angel Network who never cease to amaze me with their expertise on the angel market.  There is no question, neither the UK nor the US can claim the crown of best angel ecosystem - bigger perhaps, but better, certainly not. 

There were investors from Turkey, Macedonia, Kosovo, Estonia, Finland, the US, but there was a sad lack of representation from the UK, France and Germany - a pity as they are clearly missing a trick.  Amongst the many pitches I saw, included WeziWEzi an Arabic social network and some which saw growth in unique visitors rise from 3million to 4 million in the last month.  Taksibul which is aspiring to be the Uber of Istanbul and then onwards and upwards, and (useful for me!) Onatros from Greece which has created a well-being marketplace for the weight challenged.  Also of great interest was Funderbeam based in Estonia which is a discovery and analytics engine for early stage investment opportunities, but also a community platform for angel investors. 

Amidst an amazing "Turkish night" - music and a belly dancer - and a Gala Awards for the early stage investment industry in the region, I chatted to angels, went to the local 21^st century tech incubator ("everyone leaves with something") at Istanbul Technical University and engaged in an entertaining training session for angels on how to be a better angel investor led by the inspiring Paulo Andrez EBAN Emeritus President and a prolific angel investor in his own right. 

Earlier this year, our Pitching for Management series revealed that many investors particularly like to back immigrants - their passion and commitment to hard work beats that of many a locally born entrepreneur.  However, coming to Istanbul has reminded me that those immigrants' compatriots who have decided to stay at home, also share these characteristics, but have the advantage of operating in larger but much less crowded markets - I heard that Istanbul alone is a city of over 15 million people (and 210,000 taxi drivers according to Taksibul).  Now that there are established angel communities it would not be at all hard for an angel from London or the US (or elsewhere to hook up with fellow intelligent sophisticated and experiences angels based here on the ground and grab some incredible deals on amazing terms. 

In my other article this month, I will be talking about my observations on the latest EIS and SEIS statistics, which show, inter alia the bias in investment towards the South East of the UK.  It strikes me that there are regions of the UK that need a Baybars to stand as figureheads for their region in terms of driving forward the angel market locally.  The same will, no doubt, be true for other regions of great nations across the Western World.  What is clear though is that the magic does not come from government intervention to try and force markets to evolve, by creating business support schemes.  Market failure in angel investing is solved by letting inspired individuals start and shape the market with their friends and acquaintances.  And the best way government can help is to provide tax incentives to make it financially worthwhile to invest in the highest risk opportunities.  Here in the UK we pride ourselves on SEIS offering a 50% tax break, but next time you do an SEIS investment think of the Turkish angels who are benefitting from their 75% tax break to do the same thing and quite possibly at a better valuation!  Maybe the braver amongst you will head over in 2015 to the former capital of the world, meet up with Baybars and start investing there, as I understand from him that if you do invest, that tax break is on offer to you too.

In 9 days' time, when I am munching on my roast turkey, I will think of the bird's city namesake and raise a toast to the global angel community which just grows and grows and has enabled me to create a business on the back of it.  Happy Christmas everyone!

EIS falls as founders consult or code 

The publication of the latest EIS and the first SEIS statistics make for interesting reading this year, ably helped by a useful commentary piece from HMRC analysing the statistics - see https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/386296/Commentary_EIS_SEIS_Dec_14_V2.pdf

The notable information that has emerged includes

1. EIS investment is marginally down year on year, in terms of both value and volume, suggesting that the general belief that following the recovery we have moved into a "business as usual phase" of investment activity.  Of course the year reported on is the one prior to the real start of equity crowdfunding - the 2014 figures due out next year (hopefully before December 2015) will tell us a lot about how crowd funding is impacting on investment, but in the meantime we must remain concerned that the private investor market is not really growing.  Maybe the FCA needs to think about how it can improve the regulatory framework to alter this situation for the better. 

2. HMRC's attempts to start reclassifying investments by sector is very welcome - it reveals that investors continue to love businesses in sectors with low capex requirements and high margins ranging from business services to tech (especially software).  We remain pretty unenamoured about making things, moving things and well being which is sad.

3. There remains a very healthy market for investors to support follow on funding rounds in companies that are eligible for EIS which bodes well for companies that want to scale as well as start.

4. Raising investment limits works - nearly 40% of funds raised for EIS were in amounts of £2-5m per company.  Around 115 companies that received the sorts of sums that can really help them scale, either as first or later rounds of investment.

5. With 15% of investment coming from people investing £500,000-£1m each we can also see the power of allowing investors to invest more is increasing the super angel market - there are probably over 200 such individuals investing under the scheme at these levels now.  This provides a useful counterbalance to the tiddler investors investing a few £000 per year via the crowd etc.  One of our industry's challenges will be how to deliver the types of returns that encourage investors to invest more on a per capita basis in the future. 

6. There are some amazingly helpful clues about how much investors invest per deal. Historically I recollect that the typical EIS investor makes about 2 investments per year, so the figures provided suggest that the optimum amount to raise from an investor is around £25k, there is a bunch of investors investing around £50k-£100k per deal and for the lucky few you will find the odd £500k+ investor.  However the power of the small ticket investor should not be underestimated - around 40% of investors are still investing less than £10k per year all in, so it may pay for entrepreneurs to differentiate their fundraising plans - if you are raising a little, raise it from a lot of people, if you are raising a lot, raise it from just a few.

7. When it comes to regional breakdowns, we really need HMRC to start gathering data not on registered office address, but on location of operations, but that being said, the London/South East bias still drowns the rest of the UK.  Lets hope that in time HS2, HS3 and better road links such as the upgrade to the A303 improve the desire of investors to invest more evenly across the UK, not least because entrepreneurs desire to operate from all over the place.  It would be useful if HMRC stated to gather stats on the location of investors and to provide EIS and SEIS data based on % activity relative to regional gdp and population sizes so that we can start to understand which region gives the most bang for its buck.

8. With 7,500 subscriptions for SEIS raising around £83m for over 1,100 companies from around 5,000 investors we can see that SEIS investors are probably slightly less active than EIS ones, although with only 1 year of data this can hardly be said to be setting a trend.  We will find out more when we have 2014 data, although the hint in the press in July 2014 from the Chancellor that a further £95m was raised in 2014 for around 1,000 companies suggests the SEIS scheme is in rude health. It will be telling to discover what proportion of this sum went into follow on rounds for existing SEIS companies and what was for new ones.  I hope HMRC will also "join the dots" and tell us how many companies are raising both SEIS and then EIS monies so we can truly assess what is going on.