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Extra tax relief would encourage private business investment

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An increase in tax incentives would act as a spur to business angels who are thinking of investing in start-up businesses, it has been claimed.

New research published by the National Endowment for Science, Technology and the Arts (NESTA) and the British Business Angels Association (BBAA) found that tax relief plays an important role in promoting private business investment.

According to the study, the Enterprise Investment Scheme (EIS) and other tax incentives contribute substantially to angel activity, with 82 per cent of British angels using the EIS at least once.

Almost a quarter (24 per cent) of business angels in the UK said that they would not have made the investments they did without the tax incentives.

However, both NESTA and the BBAA are urging the government to increase EIS tax relief from the current level of 20 per cent to 30 per cent in the case of those pre-revenue start-ups that tend to pose a much higher risk for investors.

The joint report revealed that, on average, private investors enjoy an internal rate of return on investments in start-up enterprises of 22 per cent over four years.

Anthony Clarke, chairman of the BBAA, said: “This research has proven that business angels are now the key source of investment in early stage high risk companies. The BBAA estimates that angels are currently investing about £1billion a year in the UK, and it is important that further individuals should be encouraged to consider this asset class supported by targeted financial incentives.

“Angels bring not only their own finance, but business-building skills. The UK needs to significantly increase the pool of business angels to invest in the successful innovators of tomorrow.”

Jonathan Kestenbaum, NESTA’s chief executive, added: “Angel investing can be a strong viable complement to traditional forms of investment which are not making anywhere close to 22 per cent returns. As the UK grapples with finding new sources of finance to build the sectors that will drive our economic recovery, business angels will form a critical new asset class.”