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Tax changes needed to encourage start-up investments

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The Chancellor should use the forthcoming Budget to create extra tax incentives for investors who put money into start-up enterprises and who fund firms at the concept stage.

The call was made by the British Venture Capital Association (BVCA).

The BVCA argued that, between 2007 and 2009, private investments in enterprises that were still on the drawing board slid by two-thirds; investment in start-up firms by business angels shrank by 90 per cent.

Follow-on funding, once a business is up and running, is also scarce, the BVCA reported.

In its submission to the Chancellor, the BVCA put forward the case for amending the rules on entrepreneurs’ relief.

At the moment, the rules place a ceiling of 10 per cent on capital gains tax on the sale of business assets under set conditions.

The BVCA said that the relief should be extended from business owners to include all angel investors.

The qualification of a minimum 5 per cent holding requirement should be removed, so that employees and investors with small equity stakes can take advantage of the tax break, and the limit of a £5 million lifetime cap should be abolished.

The BVCA went on to say that the Enterprise Investment Scheme (EIS) should include preference shares in order to offer an incentive to seed investments from early-stage backers. It is argued that many such seed investors are discouraged by the possibility of being placed at a disadvantage when venture capitalists, who may require preference shares, invest during a later stage in the development of the enterprise.

Investments made though Venture Capital Trusts (VCTs) should be expanded to cover firms employing up to 250 workers (the present limit is 50) and the annual investment limit should climb to £5 million, up from the current £2 million, so that greater efforts can be made to close the equity gap for enterprises wanting more than the banks will lend but less than might interest large-scale venture capital companies.

The BVCA concluded by urging the Government to open up its £1.4 billion Regional Growth Fund to co-investment deals with local networks of business angels.