Budget 1999: Enterprise culture is given a mixed bag of sweeteners

"THE BUSINESS success stories of tomorrow need all the help the Government can give them today." So said the Confederation of British Industry in its pre-Budget submission. The Government has itself frequently talked about the need to encourage so-called serial entrepreneurs. What then, has the Chancellor delivered?

His speech suggested the best incentives in a generation, but closer inspection suggests a more mixed bag. Measures to create an environment encouraging enterprise and innovation on a tax-friendly basis are a key theme of this mid-term Budget. There are also strong links with the encouragement to individuals to gain personal technological skills and knowledge.

The range of measures is very wide, but the value of some is likely to be small. Whether they are sufficient to deliver an enterprise culture remains to be seen. The US lesson is that entrepreneurial success requires a combination of factors. Tax breaks have their place, but equally important is a willingness to embrace change, the availability of skilled managers and access to capital markets. The Government's role is to provide the enabling infrastructure, and this Budget goes further in its scope than merely the tax aspects.

The Budget announcements on research and development credits, enterprise management incentives and measures to encourage wider employee share ownership, combined with the new 10 per cent small companies rate of tax (only on the first pounds 10,000 of profits, not the first pounds 50,000), are the main planks of this support.

R&D credits are novel as they provide cash at 24 per cent of expenditure even in advance of profits, and 12.5 per cent for taxpayers, but not until 2000. With the extension for a year of higher first-year allowances at 40 per cent for SMEs (small and medium-sized enterprises), the immediate effect is to yield small amounts of cash flow relief to a fairly wide audience - spreading Mr Brown's bets. He is also focusing money on science in universities, with limited funds for high-tech start-ups. We await details eagerly.

The measures to promote share ownership are meant to encourage a rise in companies in which all employees have the chance to hold shares. It is clear that society cannot rely on a few Richard Bransons, and that successful companies need a skilled workforce equally motivated and engaged in growing the business.

There is no doubt that having an interest in a business is strongly motivating. The question has always been whether share incentives are the best way of delivering this, particularly in unquoted companies where there is neither a ready market for the shares nor a cultural appetite for widespread share ownership. But a start needs to be made, and it is easy to forget how wide share ownership has become since Sid in the early Eighties.

The detailed proposals on corporate venturing are the other piece of the puzzle designed to bring the resources of big business into the entrepreneurial marketplace. Again this concept has been drawn from the US. The possibilities here are an investment relief linked to the amount of the upfront investment and/or relief on exit. The Chancellor has chosen to delay publication of proposals, with implementation still planned for 2000.

Our research indicates that business would generally prefer a mechanism to allow both the investee and investing companies to make better use of start-up losses, and which would require only relatively minor reform of existing consortium and corporation tax reliefs. What the Chancellor has decided remains to be seen.

As with all these matters, however, the proof of the pudding will be in the eating. There is a danger that with so much reform in recent years, business appetite for change has been dulled, in particular if the price to pay is more legislation. As the Chancellor said, all businesses value stability and simplicity - entrepreneurs more than most abhor red tape. Unfortunately the Government/Inland Revenue record here is less than perfect. The tax law initiative to draft legislation in clearer terms is proceeding at a snail's pace, and the initial payments on account regulations are just one example of draft legislation that brought uncertainty rather than clarity.

Clearly, many of the proposed reforms will involve quite detailed technical changes, often for small amounts. However, if these are to succeed they need to be implemented in the right spirit, which means the various enforcement authorities need to buy into the approach. It is positive to note that the ill-conceived general anti avoidance rule appears to have been shelved in favour of a number of specific measures to counter avoidance in defined areas. We strongly opposed the rule, as did many others; in this case consultation has proved to be effective.

The reason we are all talking about the need to promote entrepreneurs is the expectation that at least some will succeed and promote higher growth. Many of the measures announced have been about encouraging investment and start-ups. The other end of the business cycle is equally important.

Serial entrepreneurs and share- owning employees alike need exit routes. Tax is a major cost in the entrepreneur's personal profit-and-loss account, and it is encouraging that with the extension of capital gains taper relief to serial Enterprise Investment Scheme (EIS) reinvestments, the nation's entrepreneurs should eventually come to pay tax at 10 per cent. In practice, they will do so only if they can comply with the restrictions on these tax reliefs. One still has to question whether the existing EIS regime is too complex and detailed.

Equally critical is the need for access to capital markets. Entrepreneurs, employees and investors all need liquidity to move on. Currently, the smaller listed company market in the UK is relatively unencouraged and significantly underperforming - something for the Chancellor to address next year perhaps. For the moment, however, a good Budget for business people and their employees.

David Sproul is head of corporate tax at accountants Arthur Andersen