Small Talk: Seed scheme wins high praise – but there's still a downside
"If the investment doubles in value, your tax-free profit represents a gain of more than 800 per cent"
Doug Richard, the serial entrepreneur and former Dragons' Den panellist, describes the new Seed Enterprise Investment Scheme as potentially "one of the most extraordinary incentives ever created". High praise indeed, but does the scheme, which was launched on Friday, the first day of the 2012-13 tax year, really deserve to be lauded so highly?
There's no doubt that the SEIS offers generous tax breaks. There's 50 per cent upfront income tax relief on investments of up to £100,000 in the scheme, and all profits made through it are free from capital gains tax. Plus, during this first year of operation, gains realised on other investments that would otherwise incur a CGT bill will be exempt if they are reinvested in the SEIS.
Moreover, unlike similar ideas such as the enterprise investment scheme and venture capital trusts, the SEIS is designed to help start-up ventures. The rules of the scheme define start-ups as businesses that have been trading for two years or less. These are effectively brand new, since very few are able to prove themselves so quickly. In addition, to qualify as suitable candidates for SEIS investors, businesses must have assets worth no more than £200,000 and no more than 25 employees.
The principle is a good one. Like bank finance, seed capital often proves elusive for start-up businesses. So the SEIS offers the providers of that capital with generous incentives to part with it: lower hurdle rates to break even and souped-up returns in the event the business proves to be a success.
Invest £100,000 this year, for example, making full use of income tax and CGT rollover relief, and the stake will effectively cost you just £22,000. Your investment can lose more than 75 per cent of its value and you'll still break even. If the investment doubles in value, your tax-free profit represents a gain of more than 800 per cent. Under normal tax rules, the return would be 72 per cent.
The downside is the low investment limit, which will prevent business angels building any sort of diversified portfolio of risky SEIS holdings. Deal costs – particularly for due diligence – are likely to be disproportionately high. Some specialists in seed capital also warn the Government has set the maximum business size at too low a level.
Certainly, the latest Budget Red Book, the document that provides all the detail of the Chancellor's announcements, suggests that the take-up of the scheme is going to be limited. It puts the cost to the Treasury of the SEIS in 2013-14 at £40m, falling to £20m a year thereafter. That's a tiny sum compared to, say, the £20bn commitment the Government has made to underwriting loans to SMEs made by banks under the credit easing initiative.
The recurring £20m cost – assuming for the sake of simplicity that this is all accounted for by income tax relief – would suggest that even if the average investment under the SEIS is low, at £40,000, around 1,000 companies would benefit. Not bad, but hardly a breakthrough for the start-up economy.
The biggest opportunity of all may be for the directors of new businesses, who will be allowed to invest in their own companies and qualify for SEIS benefits (not allowed on any other tax-efficient investment scheme) as long as their stake doesn't rise above 30 per cent. That's worth considering, particularly if you were going to pump capital into the business in any case.
Lombard Medical in good health, and US could provide further tonic
Healthcare stocks are notoriously risky, but Lombard Medical at least has the potential for exciting gains from the sector. It's already making quite substantial revenues – £3.4m last year, the company's latest results show, a 31 per cent increase – from its flagship product, the Aorfix.
It's a stent that can be inserted into the arteries of patients with aneurysms – weaknesses in the artery wall – in order to provide support and prevent a potentially fatal condition developing.
The big question, however, is whether Lombard will get approval from the Food and Drugs Administration in the US to begin selling its devices, which are more flexible than existing products available, in the world's largest healthcare market.
House broker Canaccord Genuity points out that Lombard's current price, around 144p, effectively puts its chances of getting FDA approval at between 30 and 50 per cent. It thinks that's too low, with the Aorfix now formally accepted for review by the FDA, which has also just allowed it to continue treating small groups of US patients. Canaccord's target for the stock, predicated on FDA approval, is 377p.
Opportunity may be knocking amid flurry of Aim activity
The Alternative Investment Market hasn't had much to celebrate in recent times, with companies delisting in droves and new issues proving ever harder to come by.
But UHY Hacker Young reckons it has spotted one trend that represents better news for investors on Aim. In all, 21 companies left Aim following merger and acquisition activity during the first three months of 2012, the accountant points out. That was the busiest period for deal action in more than two years.
Moreover, adds UHY, more than half those deals involved private equity funds buying shareholders in Aim-listed companies out in order to take the businesses private.
The accountant says this suggests that private equity firms have spotted an opportunity in Aim's lacklustre performance – and that more deals will follow, providing a boost to returns from the market.
Small Businessman of the Week: Crispin Mair, co-founder of Crimson & Co, supply chain consultancy, Experts at straightening out the kinks in the chain
In practice, being a supply chain consultancy means that we advise companies on how to run the physical operations of their business – right through from the first supplier's input into the chain to the final delivery of the product to the consumer.
There are three common reasons why we might be called in: clients are unhappy with their operating costs; they're finding it difficult to hit the service standards their own customers demand; or they're struggling to get into new markets because of some sort of logistical barrier.
The important thing is that the principles by which we work are transferable, across industries such as consumer goods and retail, where we do a lot of work, but across other businesses too.
Some businesses see bringing in consultants as a sign of weakness, but others have set up their businesses to be so lean and mean that when some sort of change is needed, they don't have the people to manage that.
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