Business angels to the rescue
HM government has introduced substantial loan schemes to reinvigorate the private sector post-lockdown: the big banks lend the money and the government, to some extent, guarantees repayment. One of the lessons of the last crash is that banks tend to demand repayment when it suits them, not the borrowers. The days of the friendly, open-door, local bank manager are long gone. Today we have centralised, tick-box systems looking for reasons to say “no”. The Chancellor had to coerce the banks to make the loans he was guaranteeing.
In any case, such loans are intrinsically short term. It can be much better for well heeled-companies and individuals to take equity interests in reviving businesses. Cash is only part of the medicine; general support, experience and encouragement can be even more important. Most of all: long-term shared interest. Venture capitalists, to some extent, meet these needs but most businesses find the City’s ramparts too steep to climb.
The government offers four venture capital support schemes:
The Enterprise Investment Scheme (EIS), maximum investment £12M;
The Seed Enterprise Investment Scheme (SEIS), maximum investment £150K;
Social Investment Tax Relief (SITR), maximum investment £1.5M;
Venture capital trust (VCT), maximum investment £12M.
The EIS was set up in 1994 and George Osborne, then Chancellor, added the SEIS for small start-ups in 2012. SITR was created in 2014; four years later, just 63 deals had been done. VCTs are a form of investment trust for City merchants with two levels of tax incentive: initial investments and subsequent share trading. The amounts raised by VCTs have grown slowly to £743M in 2018/19 and, though a helpful device, it is not relevant here. All four schemes offer financial support to small and medium sized companies and social enterprises significant tax advantages to the investor: e.g.
Income tax relief of 30% of investment;
No capital gains tax on profits (if held for defined period);
Investment losses can be offset against income tax;
No inheritance tax on shares.
But like anything administered by HMRC, the schemes are complex and bureaucratic. Many trades are excluded presumably because they are deemed unworthy of public support – residential care homes being a topical example. And having HMRC marriage-broking in the private sector is odd: their skills lie in taking our money, not providing it. True to form their “guidance” on using the schemes boils down to a list of reasons why they should refuse the tax benefits. And HMRC have set up plenty of traps for the unwary.
I am not decrying these schemes, far from it, but tax incentives can only be the jam on the bread. Fundamentally, government needs to lead us out of this Covid economic crisis by bringing together business angels and wealth creators. Only the private sector can do that, not tax inspectors.
Unlike lenders, equity investors are willing to take risk and a flexible time-line. Life will not return to what it was in the past. More will work from home. Meetings will be on Zoom or other web tools. Many will have to retool their business models and each company may need several iterations. Investors can be sympathetic to these needs and, using their own experience, valuably supportive.
In essence, the issue is how to bring private money to bear on rescuing the post-Covid economy. The two main ways are taxation and private investment. Socialists believe in the former but experience shows that government’s wastefulness in collecting money is only rivalled by its wastefulness in spending it. Leadership and tax incentives apart, the less government has to do with the rescue the better.
Leadership is needed in two areas: the array of networks for business angels and businesses seeking funding is bewildering. It is (or was) a free country and those who wish to create networks should be allowed to do so but rising above all the confusion we need just one country-wide marriage broking (so to speak) website which should be sponsored by the government and/or the British Chambers of Commerce as the go-to web source for an angel or an investee seeking a partner. Informal local business hubs should also be encouraged, linked with their local Chambers of Commerce.
Secondly, the EIS, SEIS and SITR incentive schemes should be simplified, broadened and merged. Just one site should explain what each pair of partners in a small business needs to know. Of course, each business may end up with multiple investors but, for simplicity here, I am assuming one will take the leadership role. HMRC has the knowledge and skills to manage the incentive schemes website but they also bring two handicaps: their tendency to bureaucratise, complicate and not answer telephones on the one hand and their reluctance to publicise perfectly legal tax avoidance schemes on the other. A great deal of private money lies fallow waiting to be hit by inheritance taxes when their times come. Reviving the economy demands that these funds are not left mouldering in minimal interest bank accounts but are invested in recovering businesses, using the inheritance tax relief to the benefit of all (except the banks).
Broadening the merged tax incentive scheme means that the permitted trades should be extended to just about anything that is good for the economy or national well-being, care homes for example. Currently preference shares, now banned for no obvious reasons, should be permitted. The partners should be able to agree to any share structure that suits them, though limiting the angel to the current 30% seems sensible. At present the tax schemes focus on start-ups, but post-Covid, reviving long-standing businesses will need as much, perhaps more, support. Maybe adjusting the tax reliefs would be the price but that should be for consultation.
The central facilitator envisaged here is the marriage-broking website. A prototype exists but is limited to SEIS and it lists only the businesses looking for investors. It is part of a group of companies founded by Kate Jackson in 2012; the extent of the site’s usage is unclear. There are three levels of annual fees depending on the extent of the listing.
The publicly- or BCC-owned future website would require some level of funding by users and/or the owner, not so much for operating the website itself (not expensive) as for the publicity needed to kick-start the post-Covid economy. Some levels of anonymity and verification, as for any other dating agency, would be needed. Since dating agencies already have the skills and the technology, why not invite them to tender for the website business leaving the size of the publicity budget for later consultation?
Back in 1993, Michael Heseltine, then President of the Board of Trade, sought to import the German model of bringing investors and businesses together to create wealth. In the event, the civil servants took it over and “Business Link” failed. HMRC was then put in charge with a “national helpline”. No prizes for guessing what happened then. The network of local advisers was disbanded in 2011 leaving some benighted business development officer in each larger local authority to do his or her best. That said, the local development officer can often be the most valuable point of contact for the smallest companies. They know how the system works. Furthermore, local crowd-funding may well be the best solution.
If we are to rescue the post-Covid economy along the lines proposed here, we need a strong leader with no other mission but this.