A high-risk way to have fun

Invest in nightclubs with an African theme or a satirical magazine - and get tax relief. David Porter explains

Given the state of the housing market, who would dare risk investing in residential property development? Or take a stake in a new satirical magazine due to launch soon? Or buy shares in a company operating North African-themed nightclubs in southern England?

Projects like these are high risk. Not surprisingly, they offer the chance of spectacular returns if they succeed. Inevitably there is a chance they will fail. But in recent weeks investors have been invited to put cash into just such types of venture.

Taxpayers can shelter up to pounds 100,000 in any tax year on investments qualifying for relief under the Enterprise Investment Scheme. Tax relief is at the lowest rate of tax (20 per cent), cutting the initial investment outlay to 80 per cent. Gains are tax-free if the taxpayer retains the investment for five years.

If the investment turns into a dud, losses can be set against a taxpayer's highest rate of tax. Claiming the initial tax relief is easy. The company issues tax form EIS3 to investors, who then send this to their tax office.

Tax coding is altered for PAYE taxpayers, while the self-employed, paying tax by instalments, will enjoy reduced payments. To qualify for the tax relief taxpayers must invest at least pounds 500 in any one EIS approved company, although companies themselves may insist on a higher minimum investment.

While tax reliefs available make high risks more palatable, investors should look carefully at each prospect. Take projected profits with a pinch of salt.

There are several essential questions investors should ask themselves. Does the company and founder have a track record? Are the costs excessive in raising up to pounds 1m allowed per company? How does the investor cash in his or her investment?

Cadogan (0171 738 1961), a publisher of travel guides, is close to raising the pounds 1m needed to buy rival David Campbell Publishers and provide working capital to expand.

DCP was founded in 1990 and made pre-interest and tax profits of pounds 446,000 on sales of pounds 3.7m last year. Cadogan generated profits last year of pounds 70,000 on turnover of pounds 1.1m.

Its EIS fund-raising will cost 7.25 per cent of the amount raised. Cadogan was initially funded through a Business Expansion Scheme, a forerunner to the EIS. Backers have seen more than a 30 per cent return on their initial investment in 1993.

The cost of the Cadogan issue compares favourably to Po Na Na, a group that operates North African-theme nightclubs. Raising pounds 500,000 cost pounds 70,000, although given the popularity of this issue it could have pulled in the pounds 1m maximum permitted.

Proceeds were used to buy Po Na Na's London club, buy the management contract for Po Na Na in Oxford and refurbish its Cambridge premises. According to the prospectus, each club attempts to create the "warm and cosy surroundings of North African bazaars and market places."

Those who would like to be mini-media tycoons need look no further than Insider (0171 233 5914), a fortnightly satirical magazine launched by gossip journalist Tim Satchell.

He hopes to raise up to pounds 240,000 at a cost of pounds 16,400 for his publishing venture. Break-even equates to 20,000 sales per issue. It will publish on alternate weeks to Private Eye, the satirical magazine that sells an average of 192,000 copies.

More run of the mill are the numerous residential property schemes on offer. While investing in EIS companies can provide a lot of fun, never forget they are high risk prospects. At least with the tax advantages not all is lost when they go belly up.