Investment tax incentives in the UK“Skatteincentiver for business angels i Storbritannia”

Arne H. Tonning – arne.tonning@invanor.no

Innovation Norway - www.invanor.no/london

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Agenda

• Introduction – why am I here?

• The financial and business angel market in the UK

• Tax incentives in the UK

• Enterprise Investment Scheme (EIS)

• Venture Capital Trusts (VCT)

• Corporate Venturing Scheme (CVS)

• Public funding initiatives in the UK

• Effect on the finance gap

• New developments – Enterprise Capital Funds (ECF)

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Innovation Norway in London

A solid set of people and skills:

16 professional staff - British and Norwegian nationals

Different age and educational backgrounds

Experience that mirrors key Norwegian sectors

• Tourism, oil & gas, ICT, food (seafood)

Key assets:

• Marketing skills

• Internationalisation and business

development experience

• Extensive networks

• UK specific expertise

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Early-stage investment in the UK

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Early-stage investment in the UK

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Business angels in the UK

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Business angels in the UK

• 2000 Estimate: 20,000 to 40,000 business angels investing between £0.5-£1 billion in 3,000-6,000 businesses. An average of £167k. (Mason and Harrison)

• 2003 Estimate: Median business angel investment £35k.

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Access to equity funding in the UK

• Europe’s largest and most advanced capital market• London Stock Exchange is well known• Also so-called Small Cap markets: AIM and OFEX• Large and advanced Venture Capital (VC) industry• UK VCs account for 40% of total European activity• Commercial VCs generally focus on mature and large deals• For early stage funding there are various forces:

• Unstructured and networks sources (business angels)

• Tax incentives

• Publicly supported funds• Still challenges of a ”finance gap”

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The Enterprise Investment Scheme (EIS)

• Individual investors subscribe directly for shares in an EIS-eligible company

• The tax incentives are:

• 20% ‘front-end’ income tax relief on investments in EIS shares up to an investment of £200k in a single year

• Exception from capital gains tax (CGT) on disposal of EIS shares

• Unlimited CGT deferral where chargeable gains on other assets are invested in EIS companies

• Income tax relief on most losses on EIS shares

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The Enterprise Investment Scheme (EIS)

• Limitations:

• Shares must generally be held for >3 years for EIS income tax relief to be retained

• The investee company’s gross assets must be no more than £15 million before the investment and no more than £16 million afterwards

• Funds must be employed by the investee companies within 13 months

• Not all types of companies

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Venture Capital Trusts (VCT)

• Individual investors subscribe for shares in a VCT – a quoted, professionally-managed company investing in qualifying companies

• The tax incentives are:

• 20% ‘front-end’ income tax relief on investments in VCT shares up to an investment of £200k in a single year

• Exception from capital gains tax (CGT) on disposal of VCT shares

• CGT deferral where chargeable gains on other assets are invested in new VCT shares

• VCT dividend payments exempt from income tax

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Venture Capital Trusts (VCT)

• Limitations:

• Shares must generally be held for >3 years for VCT income tax relief to be retained

• The investee company’s gross assets must be no more than £15 million before the investment and no more than £16 million afterwards

• 70% of investments by the VCT must be in newly-issued securities in eligible companies

• A VCT may invest no more than £1 million/year in any company and not more than 15% of its total investments

• Companies issuing shares to a VCT must be unlisted (but AIM and OFEX is OK)

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Corporate Venturing Scheme (CVS)

• A “non-financial company” not owning more than 30 % of the issuing company subscribe for shares issued by this company

• The tax incentives are:

• 20% ‘front-end’ corporation tax relief on investments in shares

• CGT deferral on gains arising from the disposal of shares on which investment relief has been obtained and not withdrawn in full, if the gains are reinvested in new shares for which investment relief is obtained

• Income tax relief on most losses on CVS shares

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Corporate Venturing Scheme (CVS)

• Limitations:

• Shares must generally be held for >3 years for CVS income tax relief to be retained

• The investee company’s gross assets must be no more than £15 million before the investment and no more than £16 million afterwards

• Companies issuing shares must be unlisted (but AIM and OFEX is OK)

• Not all companies qualify

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EIS and VCT investors

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EIS and VCT investors

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Effects of EIS and VCT

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Government supported investment funds

Regional Venture Capital Funds (started 2000) – total £270 mill.

• Investments restricted to amounts of up to £250k, with an opportunity for a follow-up investment of £250k

• Open tender. Approx. 30% from government and 20% from EIF

• 10-12 years on a limited partnership model

• Government cap on return and first loss from £80 mill.

Early-Growth Funding Programme

• Investments restricted to amounts of up to £100k, with an opportunity for a follow-up investment of £100k

• Regional funds with various structures

• Many requiring matching of investment from business angels

• Also subordinating the government funds (£50 mill.)

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Government supported investment funds

• UK High-Technology Fund

• ‘Fund of funds’ supporting early-stage high-technology

• Government investment of £20 million together with £106 million from corporate investors and the EIB

• University Challenge Fund Scheme

• Assist universities setting up seed funds

• £45 million from government, the Wellcome Trust and the Gatsby Charitable Foundation

• Seed funds can investment of up to £250k

• University incubators, TTOs and funds

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The finance gap

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Plugging the gap? – Enterprise Capital Funds

• Enterprise Capital Funds (ECF) is a UK version of the US SBIC• Targeting the ‘new finance gap’• Current bidding process for pathfinder funds• Funds leveraged by government loans to increase reward and

risk for investors• Government loans at gilt rate (currently. 4.5%) – i.e. at lower

cost than in commercial market for the risk involved• Loans expected to make up 2/3 of fund size• Priority: (1) loan interest, (2) repay capital, (3) distribute profits

incl. government share• Structured as limited partnerships or limited companies• Targeting investment of up to £1 mill. (£2. mill. rounds)

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Two types of ECFs

• ECF for passive investors

• Managed by fund mangers licensed by the FSA

• Investors are expected to be passive

• Management fee and carried interest

• Business angel led ECF

• No FSA licence required

• Active investors that will require smaller management fees

• Intended to drive business angel syndication

• Investors must be ‘high net worth individuals’ or ‘sophisticated investors’

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Continuous funding and exit opportunities

£0 £1M£100k £500k £2M£250k £5M

Tax incentives

Comm. sources

Non-com. sources

EIS VCT

CVS

”FFF”

Business angels

Priv. Inv. Priv. Inv.

Venture capital & PE

OFEX LSE

RVCFE. Growth f.

University challenge seed funds

AIM

ECF

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Thanks for listening!

• Questions?

• Feel free to contact me:

• Arne H. Tonning, IN London

• E-mail: arne.tonning@invanor.no

• Phone: +44 20 7389 8808