How to Understand Business Expansion Scheme


Persuading the owner of the smaller business that taking in an outside shareholder could be beneficial to the financial stability of the company has always been difficult, but if the success of the Business Expansion Scheme is anything to go by attitudes are changing.

Since the scheme was launched in its present form – as a suc­cessor to the ill-fated and unlamented Business Start-up Scheme – it has not only attracted strong support from investors looking for the tax benefits but also the number of projects seeking finance in this way has also been considerable.

One of its aims was to fill the gap believed to exist at the mailer end of the market, for firms looking for equity invest­ment of under £50,000, the relatively small sums which in the distant past came from private sources – the legendary Aunt Agatha.

While the scheme has not entirely succeeded in doing that it has been more successful than had previously been thought as figures from both the Inland Revenue and the Peat Marwick re­port on the scheme showed.

The government certainly considers that the scheme has been a success. The Inland Revenue statistics show that in the tax year 1983-84 some £105 million was raised and investments were made in 715 companies. More than half of these, 388, re­ceived less than £50,000; in fact the average funding was £18,500.

Three-quarters of those companies receiving less than £50,000 were regarded as start-ups, that is, less than five years old. These figures are encouraging to those who believed there was previously a gap at this level but of some concern was the fact that these companies also had a significant failure rate, though there are no overall failure figures.

The most comprehensive report on the scheme so far has been carried out for the government by chartered accountants, Peat Marwick. Their report said that more than 70 per cent of the funds invested could not have been raised as equity if the BES had not existed.

Firms which raised less than £50,000 only accounted for 3 per cent of the total amount invested but they represented more than a third of the 102 firms surveyed, confirming the Inland Revenue’s indications that the scheme was benefiting an area of the market which more conventional sources were not interested in because they found it uneconomic.

The scheme has also been a good generator of jobs, with the 715 firms receiving investments in 1983-84 producing 4000 additional jobs and a combined £100 million a year rise in turnover 12 months later.

Later figures on job creation may be somewhat distorted by the explosion of asset-backed schemes which could have drawn funds away from companies which generate jobs. This loophole was closed in a recent Budget, however, and heavily asset-backed projects no longer qualify.

Businesses with more than half their assets in land or buildings do not qualify for BES relief, unless the amount raised is less than £50,000 in any one tax year. Businesses based on items normally collected for investment purposes, such as wine or antiques, are also excluded.

The attractions of the scheme for investors have also been improved. Investors are able to offset investments in the equity of most unquoted companies against their highest rate of tax up to a maximum of £40,000 a year. The investment must be held for at least five years to qualify for relief.

An investor taxed at the top rate of 40 per cent could, for ex­ample, invest £20,000 in a qualifying company at a net cost of only £12,000. It should also be remembered that the minimum amount which can be invested in a company is £500, so the benefits of the scheme are open to the smaller investor as well as the wealthy, provided a home can be found for the invest­ment.

In addition to these incentives for investors, in the 1986 Budget the Chancellor gave a concession under which BES shares can be sold free of capital gains tax – an encouragement to invest­ment in riskier projects.

A chance for the smaller investor to identify possible invest­ment opportunities has over the past year or so materialised in the form of the investment registers, held by enterprise agencies, which provide lists of companies looking for funds and of potential investors.

The ‘marriage bureau’ idea was initiated by the London En­terprise Agency but variations of it have been developed at other agencies such as those in Manchester, Milton Keynes, and Colchester. In the Manchester Business Venture register, called Business Capital Connection, businesses file detailed business plans with the BCC and prospective investors can examine them. If they find anything of interest a meeting is arranged and the two parties pursue the matter with their professional advisers. Businesses pay nothing for the service but there is a charge to investors. Business Capital Connection is not a fund and no in­vestment advice is given; its role is purely an introductory one.

Another platform of this kind is the investors’ clubs which are rapidly springing up in association with enterprise agencies. This again was a London Enterprise Agency idea under which several entrepreneurs give presentations to a group of potential investors, who are then free to approach and question anyone they find interesting.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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