While American politicians such as Sen. Kirsten Gillibrand, D-N.Y., are pushing to expand federal tax breaks for small businesses, the U.K. government has already announced a move to help small and early-stage businesses find easier means of financing: tax relief for private investors who finance new, risky businesses that entrepreneurs have opened up with sums of capital as small as £10 ($15.48).
The venture-capital initiative, called the Seed Enterprise Investment Scheme, or SEIS, was first introduced by U.K. Chancellor of the Exchequer George Osborne during his autumn statement last year as a part of a broader set of tax reforms. The measure aims at stimulating entrepreneurship and boosting the country's growth, the U.K. Treasury and Her Majesty's Revenue and Customs (HMRC) stated in a joint proposal to the government.
While small and medium enterprises, or SMEs, currently account for 99 percent of all businesses in the U.K., small businesses across the U.S. generate two-thirds of American jobs and account for roughly one-half of U.S. national output. With borrowing costs down and interest rates likely to be at Federal Reserve-mandated near-zero levels until at least 2014, lending to small businesses in the U.S. jumped in May to its highest level in the past year. However, the benefits of increased credit supply are not percolating down to many entrepreneurs, investors say.
The U.K. government's aim to improve credit outreach to businesses in the country comes at a time of reduced credibility for big British banks in terms of their role as small business lenders. HSBC (NYSE: HSC), Barclays (NYSE: BCS), Santander (LON: SANB), Lloyds (NYSE: LYG) and taxpayer-owned Royal Bank of Scotland (NYSE: RBS) lent only £74.9 billion ($116 billion) to small businesses last year, rather than the £76 billion ($118 billion) that they had promised under a Merlin deal they had signed with Prime Minister David Cameron's Conservative-led coalition government early last year to expand credit flow, boost lending, and cut executive pay and bonus packages.
Net lending volumes of the big banks shrank by £9.6 billion ($14.8 billion) last year, according to data from the Bank of England. Since then, banks have been criticized for putting healthy firms out of business.
SMEs are beginning to scout for alternative funding options. Nevertheless, access to a varied finance market remains a stifling barrier for entrepreneurs, small and large. While U.K.-based SMEs are growing at an annual rate of about 10 percent, the private-equity investments that are made to help these smaller-scale enterprises flourish is fewer than 50, economists say.
The U.K. government's venture-capital program will be a boon for start-up businesses and seed-level companies that are scrambling for equity finance from external funding agencies. The initiative is not entirely in the limelight because of bad publicity that the government got when it released its budget earlier this year. However, it is beginning to garner support from U.K. businesses in a quest for finding and retaining talent in the country.
Michael Moszynski, 49, who started a global advertising outfit, London Advertising with meager revenues just shortly after the collapse of Lehman Brothers in 2008, is now joining hands with the government with an offer of £100,000 in seed-funding for a new digital agency. Moszynski, who pumped money into his business from his own pension funds, says that there will be a competition to select recipients for the seed funding opportunity.
When Moszynski, a former employee of M&C Saatchi, an international advertising agency, embarked on his own business, it was like jumping into a swimming pool in the dark and not knowing if there is any water in it.
The government is generating new economic value. It has put in the best initiative in the world to help businesses, Moszynski said. People are not as aware of it right now and we hope to raise more awareness by supporting the government.
Tax-law experts say that the SEIS would be a substantial improvement over the government's current Enterprise Investment Scheme, or EIS, which provides investors with tax holidays of about 30 percent and opportunities to claim income-tax and capital-gains benefits by repurchasing shares of venture-capital trusts listed on the London Stock Exchange.
Under the new SEIS initiative, however, investors backing early-stage companies can get as much 78 percent in tax incentives, beginning in April of next year.
For every £100 ($155) invested, the government will underwrite 78 percent. You are on the hook for only 22 percent, Brooks Newmark, a conservative member of Parliament and a private-equity investor promoting the SEIS initiative, said during a speech last month.
Investors will be able to claim as much as 50 percent in tax benefits by pumping funds of as little as £100,000 ($155,000) into start-ups, the proposal says. They are also spared the compulsion of paying taxes on capital gains from disposing of assets for the current fiscal year, and taxes on gains they reinvest into the shares of SEIS companies.
It's a perfect scheme for this sort of start-up, Moszynski said.
The relief is closely targeted at genuine start-ups, and the amount of investment qualifying for relief is quite low -- only £150,000 in total for the company, compared to £10 million for EIS from 2012-13, Chris Thomas, a London-based tax law expert at Pinsent Masons, told Out-Law.com.
Meanwhile, U.S. President Barack Obama's JOBS (Jumpstart Our Business Startups) Act, which was signed into law in April to help small businesses raise capital by easing regulatory burdens for companies raising money by going public, is facing criticism for sidelining investor protections. The JOBS Act makes it easier for companies to cheat investors, the Securities and Exchange Commission said.
Too often, investors are the target of fraudulent schemes disguised as investment opportunities, SEC Chairman Mary L. Schapiro wrote in a scathing letter to the Senate Banking Committee in March. As you know, if the balance is tipped to the point where investors are not confident that there are appropriate protections, investors will lose confidence in our markets, and capital formation will ultimately be made more difficult and expensive.