Navigating business through uncharted economic waters

Navigating business through uncharted economic waters

The financial crisis that began in 2007 continues to impact on the growth prospects for many businesses – particularly small and medium-sized businesses.

Bank lending to SME’s remains constrained, although there is some truth in the view that there is a lack of demand for loans with many businesses being somewhat reluctant to invest for the future.

However, the Funding for Lending Scheme (FLS) introduced in July 2012 by the Bank of England and HM Treasury – subsequently extended until January 2015 – has definitely provided a renewed impetus in lending to the SME sector.

The FLS initially provided direct incentives to banks and building societies to expand household lending, largely in the form of residential mortgages. However, in November 2013 changes were made to the scheme to focus it on businesses by incentivising institutions to boost lending skewed towards SMEs.

Additionally, the rise of so called ‘challenger’ banks and other avenues including ‘peer-to-peer’ lending and ‘crowd-funding’, have provided growth businesses with a real alternative to the big four UK clearing institutions in their attempts to secure appropriate finance.

Many SMEs also recognise that ‘business angels’ can offer substantial expertise and know-how in addition to the provision of development funding.

The Seed Enterprise Investment Scheme (SEIS) that was introduced in April 2012 has provided similar tax incentives to that offered by the pre-existing Enterprise Investment Scheme (EIS).

SEIS can be of particular benefit to personal investors in smaller, early stage companies who wish to raise new share capital of up to £150,000 within a three year period. This can include directors who invest in their own companies.

The scheme is designed to help early start-up businesses which would otherwise face barriers in raising external finance.

To qualify, companies must have 25 or fewer, full-time or equivalent employees, assets of no more than £200,000 and be undertaking, or starting up a new business in a qualifying trade. Any existing trade must have been carried out for less than two years at the date of issue of the shares. Shares must be issued before 6 April 2017.

Any investor must hold no more than 30% of the shares in issue and the annual maximum amount of investment is £100,000 per investor. Unused annual amounts can be carried back to the previous tax year. The scheme offers 50% income tax relief on monies invested, with the potential to defer tax on Capital Gains (CGT). At a tax rate of 28% an investor can potentially obtain tax relief of 78% in 2014-15.

In addition, if SEIS tax relief has been given on shares that are disposed of after being held for a period of broadly three years, there is no charge to CGT. However, tax relief can be withdrawn in certain circumstances, if say, the investor were to receive ‘value’ from the company within the first 3 years.

Reports that the number of start-ups applying for the SEIS have shot up by 73% is nothing to be sniffed at. The scheme provides a fantastic incentive for investors, making it much easier for many very early-stage businesses to raise funds for growth.

David Johnson is a Director at Strathmore Accountants