23 January 2012
Publications that covered this article include The Financial Times, 22 January 2012.
- A better use of the £billions of cash being stockpiled by FTSE-100?
- Figures suggest Labour Government was pre-emptive in scrapping the scheme
A last minute rush to take advantage of the now closed Corporate Venturing Scheme resulted in a 65% jump in investment in small companies, to £28m, in its final year.
The Corporate Venturing Scheme was set up and then abolished by the Labour Government. It aimed to increase funding of small companies by giving larger businesses tax breaks to buy minority shareholdings in small high-risk companies.
Under the scheme companies were given upfront corporate tax relief of 20% of the value of the investment as well as relief against losses. During its ten years of operation £132 million was invested in just under 600 small companies.
According to our research, corporate venturing could play a useful role in bridging the huge funding gap left by the lack of bank lending to small businesses.
Corporate venturing is far more widely used in the US than in the UK. The corporate venturing arm of Intel has invested $10 billion in the last ten years and it is estimated that $1.9 billion was invested through corporate venturing in the US in 2010.
Roy Maugham, partner at our London office says: “The Government may have been too hasty in scrapping this scheme. The level of investment under the scheme had been gradually increasing over the past five years of its life.”
“Although the sums raised under the scheme were not huge they were a useful amount especially in light of the current drought of funding for small businesses.”
“With the FTSE-100 sitting on billions in cash there is no shortage of potential Corporate Venturing funds – it’s a case of encouraging big companies to do more. The possible benefits to the economy are huge.”
GlaxoSmithKline alone has over £5.4 billion in cash and cash equivalents on its balance sheet (as of September 30 2011).
Large companies in engineering, technology and healthcare often use corporate venturing as it allows them to access emerging technologies being developed by smaller companies without having to take over that company. The smaller business can access capital, maintain their independence and benefit from additional management support from the larger company.
Roy adds: “George Osborne should consider reintroducing these tax breaks and widen the criteria for the Corporate Venturing Scheme. For example open it for investing in small business with assets in excess of the old limit of £7million and allow a stake of up to 50% in any one business.”
CVS provided tax incentives for investment in unquoted business with gross assets under £7 million and limited the investment to up to 30% of the issuing company.
The incentives were available from 1 April 2000 to 31 March 2010 and offered three types of tax relief: Investment relief against corporation tax of 20% of the amount subscribed for full-risk ordinary shares; Deferral relief from tax when the shares were sold and the funds reinvested and relief against income if shares were sold at a loss.