UK budget tax breaks a boon for PE

There was good news for many UK buyout professionals in UK Chancellor of the Exchequer George Osborne’s Budget speech to the House of Commons today: as widely trailed in the press, the top rate of income tax will drop from 50 percent to 45 percent as of April 2013.

“The 50 percent income tax rate has from the outset cost more in reputational harm for this country than it has raised or ever would raise in revenue for the Exchequer,” BVCA chief executive Mark Florman said in a statement. “The reduction to 45 percent in April 2013 will make Britain a more attractive location for international investment.”

UK companies will also benefit from a reduction in the main rate of corporation tax, which will be cut to 24 percent from next month. It will fall again to 22 percent by 2014.

George Osborne

“It is also right to reduce corporation tax further and faster than previously signalled, and to focus on small and medium companies as these will be the engine for employment,” Florman said.

There will also be significant changes to tax incentive schemes designed to benefit entrepreneurs and investors in small businesses.

Notably, the Chancellor announced an extension of the Enterprise Investment Scheme (EIS), which offers income and capital gains tax relief to investors in small businesses. Income tax relief under EIS will rise from 20 percent to 30 percent, while the investment amount per company in any one tax year that qualifies for tax relief will double this year from £500,000 to £1 million.

Other qualifying criteria for investment under Venture Capital Trusts (VCT) and EIS have been relaxed. Investments in companies with as many as 250 employees and gross assets of up to £15 million will qualify, up from 50 employees and gross assets of £7 million. Companies will be able to take up to £10 million of investment a year under both schemes.

“This means later stage investment prospects will now qualify for EIS relief and therefore become available to EIS investors. Furthermore, EIS investors are now entitled to invest via preference shares, a mechanism providing priority access to dividends and investment exit,” said Mark Payton, managing director of Mercia Fund Management, an EIS fund manager.

The Association of Investment Companies welcomed the changes. “The proposed rule changes allow VCTs to invest in a wider range of companies which is a welcome boost to the sector and businesses desperately seeking finance,” said Ian Sayers, director general of the AIC.

“The Chancellor’s removal of the £1 million limit on VCT investment in a single company will ensure more efficient support to smaller businesses in the UK. Due to the withdrawal of banks from small business lending, there is an increase in the range of companies which are unable to secure development capital from traditional sources. VCTs are able to help address this issue, stimulating enterprise,” he added. 

However, Payton said the proposals bring ambiguity to certain capital preservation products offered to EIS investors, and could also be detrimental to EIS qualifying businesses.

“For both EIS and VCTs, the Government will also introduce a new disqualifying purpose test to exclude companies set up for the purpose of accessing relief, exclude acquisition of shares by a qualifying company in another company and exclude investment in some Feed-in Tariff businesses,” he said.