Philip Hammond’s Autumn Budget promises an impressive funding and support programme to boost the UK economy, focusing squarely on backing high-potential scale-up businesses. While there has been a collective positive reaction to the chancellor’s budget, and understandably a palpable sense of relief from many investment providers in our ecosystem, what’s clear is that there’s a huge amount of work to be done.

Less than 24 hours after the chancellor’s visionary budget for small and medium-sized (SME) businesses, the big question is clear: is it really achievable? The simple answer is yes it is, if we join forces and work smartly to deliver stellar outcomes across the length and breadth of the UK’s SME investment ecosystem.

We believe that the majority of the changes that were announced yesterday are designed to reduce investment in lower-risk opportunities, and rightly so incentivise more investment in genuine high-growth companies across all sectors from Brighton to Belfast.

Minutes after the budget was delivered, we were talking to investment providers to gauge their views and opinions. Philip Hare, Founder at Philip Hare Associates said: “The budget is a lot more positive than we thought it might be, and we thought there might be changes made to the tax relief available. He added that it seems clear that the government is supportive of Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) sectors.

Jonothan McColgan, Director at Combined Financial Strategies told us that EIS has “returned to its initial purpose of a tax reward for high-risk investment”.

We’re extremely encouraged by the magnitude of announced government support and the acknowledgment that there needs to be a joined-up, concerted effort to make the UK a natural home for scale-up businesses. The challenge is clearly set to push the UK up the OECD rankings of scale-up countries from its current 13th place.

A huge commitment: £20bn for UK innovative companies

Addressing the UK’s current position, Hammond’s budget speech delivered a huge boost to improve the growth and scale-up outcomes of the UK’s innovative business community. He said: “A new tech business is founded every hour in the UK, I want that to be every half hour.”

In response to the Patient Capital Review (PCR), Hammond announced £20bn of investment into scale-up businesses, with the inclusion of a new fund in the British Business Bank that will be “seeded with £2.5bn of public money”.

We counted 10 different policy announcements addressed specifically to venture capital (VC) providers, with the key aim of supporting fast-growing, successful UK businesses. The British Business Bank takes a lead role with initiatives like the Enterprise Capital Fund programme, unlocking at least £1.5bn in new investment, with a focus on backing first-time and emerging fund managers.

The initial breakdown of the £20bn commitment is as follows:

• A new £2.5bn investment fund incubated in the British Business Bank to be floated or sold once it has established a sufficient track record. By co-investing with the private sector, a total of £7.5bn will be released.
• £500m of public money through the British Business Bank into a series of private sector funds of funds to encourage new institutional investment in high-growth sectors. Up to two further waves of investment will be launched, facilitating up to £4bn of financing in total.
• £1.5bn through the British Business Bank’s existing Enterprise Capital Fund programme.
• £1bn of support for overseas investment in UK venture capital through the Department for International Trade.
• The launch of a commercial investment programme run by the British Business Bank to develop groups of business ‘angels’ outside of London.
• A National Security Strategic Investment Fund to invest in advanced technologies that contribute to national security. If you were to read more on how malicious sometimes these cyber attacks can get, you’d know how much there is a need for a strategic investment fund to bolster cyber security. 

While the figures don’t perfectly match up at this point, it’s encouraging to see the government’s dedication to fast-growing businesses.

EIS and VCT limits doubled for “knowledge-intensive companies”

Despite a ‘will he, won’t he’ debate about Hammonds treatment of EIS and VCT,  there was an extremely positive reaction to the announcement that limits for knowledge-intensive companies were doubled from £5m to £10m. The investment limit for EIS investors was also doubled from £1m to £2m, provided that any amount above £1m is invested in these knowledge-intensive companies.

Mark Brownridge, Director General at the EISA, told us: “Knowledge-intensive rules being widened is good news, but over the years, knowledge-intensive hasn’t really been taken up massively by companies, or a lot of companies find it hard to qualify – given its quite tight criteria. Obviously the budget concentrates on the limits, but it’ll be interesting to see whether more companies will qualify and expand.”

However, the budget left some feeling somewhat deflated. Dennis Hall, Managing Director at Yellowtail, believes that the budget could have done more for non-knowledge-based businesses. “There’s a big hurrah for the doubling of investment limits into knowledge-based businesses,” he told us. “However, if I were a traditional business looking to raise capital, I’d be feeling as though I wasn’t that relevant in the modern economy.”  

At the same time, in terms of the increase in the investment limit, CFS’s McColgan said that there are very few people who are set to benefit from the increased threshold.

He explained: “The current limit is £1m. You need to have tax owed of £300,000 to make that worthwhile to get the full income tax relief. Going up to £2m, you’re talking about people who owe £600,000 in income tax – that’s a tiny proportion of the population.”

That said, the benefits for knowledge-intensive companies are potentially extensive, with the government also announcing greater flexibility over how the age limit on EIS and VCT qualification for innovative firms is applied.

Crackdown on EIS and VCT as capital preservation plays

While we heard Hammond make reference to restrictions on low-risk investments within EIS and VCT, HM Treasury’s response to the PCR detailed more stringent requirements for tax-efficient investments.

Introducing a principles-based ‘risk to capital’ test

Notably, a principles-based ‘risk to capital’ test will be introduced into VC-based schemes. The new test will ensure that the schemes are focused on investment in companies seeking investment for their long-term growth and development.

However, the test will not affect independent, entrepreneurial companies seeking to expand. Tax-motivated investments, where the tax relief provides all or most of the return, will no longer be eligible.

This ‘risk to capital’ condition depends on taking a ‘reasonable’ view about whether an investment has been structured to provide a low-risk return for investors.

The condition has two parts: whether the company has objectives to grow and develop over the long-term; and whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return.

Commenting on these points, Philip Hare Associates’ Hare voiced some concerns about “how the new Principles Based Approach identifies lower-risk businesses”. He added: “It talks about a reasonable person’s view, but that will ultimately depend on what the revenue thinks, and not what anybody else thinks.”

David Scrivens, Director at Club Finance, told us: “The government is trying to put a principle into place that says that if you’re investing purely for tax reasons, it’s not an investment that should get relief, but if it’s for a proper growing company where you’re exposed to significant risk – then you will get relief.”

Scrivens raised the point about how this would be calculated. He surmised: “How am I going to input the right data to prove that the investor is at significant risk of losing all of their capital, and then how am I going to promote that to the investor that it’s still a good investment?”

He added: “We’ve got to prove that the schemes are more risky than the potential gain – that’s how I’m reading it. The government has given a general description of the measure and the policy objective, but they haven’t really said the technical details.”

HMRC’s 15-day turnaround commitment

After the 2015 changes to EIS and VCT, which introduced the requirement for HMRC to review business plans to verify how the underlying investment was to be used for growth, the timeline for providing Advance Assurance jumped up significantly.

In spite of the additional submissions that the risk to capital condition may require, HMRC views its introduction as a factor that will cut Advance Assurance waiting times thanks to the  exclusion of capital preservation arrangements.

HMRC has committed to a 15-day turnaround for companies applying for Advance Assurance may stem the backlog of applications, and allow more companies to receive much needed investment sooner.

EISA’ s Brownridge said: “It’s nice to see a commitment to a 15-day turnaround for advance assurances, but there’s some nervousness around how that will work and operate. I’d be surprised if that came in by the spring Budget, but at least HMRC are heading in the right direction.”

Exclusion of specific investment sectors

Investments in crematoriums, for example, have heard the death knell and are now unlikely to qualify as permissible EIS investments, as they will not pass the risk to capital condition. This comes as no surprise to the sector, as it was well known that this area was a ‘pain point’ for the government.

The budget has not specifically outlawed the use of double-dip tax reliefs (such as simultaneously benefitting from EIS and film tax credits) that have been exploited by the film and media industry. But, it seems this will depend on the remaining risk after any film tax credit is taken into account.

These changes are also likely to impact similar VCT allocations.

Subtle adjustments to VCT restrictions

Ian Sayers, Chief Executive of the Association of Investment Companies said: “It’s reassuring that private investors will continue to receive the existing tax reliefs on VCT investments. This will help VCTs provide vital scale-up capital for the UK’s most innovative and ambitious smaller companies.”

This is a measure of the concern that existed in the VC sector before the Budget.

However, Sayers added: “The VCT industry faces significant challenges in complying with these rule changes but the industry has the benefit of highly experienced managers. These managers have adapted to changes in the past and continued to deliver good returns for shareholders.”

In an effort to target VCTs towards investment in higher-risk areas of the market, while also responding to concerns that certain conditions currently placed on VCTs restrict their activities unnecessarily, the government rules changes included:

• With effect on or after 6 April 2019, the period VCTs have to reinvest gains will be doubled from six months to 12 months.  
• From 6 April 2018, certain historic rules that provide more favourable conditions for some VCTs (“grandfathered” provisions) will be removed
• From 6 April 2018, VCTs will be required to invest at least 30% of funds raised in qualifying holdings within 12 months after the end of the accounting period
• With effect on or after 6 April 2019, the percentage of funds VCTs must hold in qualifying holdings will increase to 80% from 70%.

Changes to loan investments are also to be implemented that will outlaw the use of secured loans via Dealstruck.

Club Finance’s Scrivens,expanded on the changes: “VCTs will not be able to do loans as cheekily as they used to. Loans can no longer go above 10% without being a commercial return on the principal. In the past, they’ve put much higher rates on the loans.”

And then there was a virtual silence on BPR

Business Property Relief (BPR) escaped almost entirely unscathed from the Budget and the Treasury’s consultation response continued to support BPR, but noted that it was under review: “BPR plays a valuable role in preventing the breakup of otherwise viable businesses purely in order to meet IHT liabilities.

“The government will keep BPR under review, and is committed to protecting the important role that this tax relief plays in supporting family-owned businesses, and growth investment in the AIM and other growth markets.”

Elizabeth Bagger, Executive Director at the Institute for Family Business, commented:

“We are delighted the Government has listened to family business and recognises the valuable role that Business Property Relief plays in preventing the break-up of successful family firms, and supports them in investing in future growth.”

The BPR market has witnessed substantial growth in AIM-focused products in recent years.

Marcus Stuttard, Deputy Head of AIM at the London Stock Exchange, said: “We are pleased that the Chancellor has acknowledged the important role that BPR plays in supporting family-owned businesses, and growth investment in AIM and other growth markets.”

Of course, all of the budget’s updates are subject to further guidance to be published in the coming days and months. It’s no wonder that respondents to this article all echo that the devil’s in the detail.

Nevertheless, it’s clear that the gauntlet has well and truly been thrown down for everyone across the SME investment ecosystem to make the best use of the support and resources now available. The success of UK scale-up ambition depends on a wide range of stakeholders coming together to reap the rewards of the incredible pool of talent and innovation the UK has to offer.