by Andrew Hore
There was little in the UK’s emergency Budget last month to encourage Alternative Investment Market-quoted cleantech companies. Although the capital gains tax (CGT) change was not as harsh as first feared, there were no additional investment incentives for the sector or for small companies in general. The new coalition Government’s Chancellor confirmed that the Green Investment Bank will go ahead, but it seems likely that this will involve the axing of several funds and government-sponsored bodies, including the Carbon Trust.
The basic rate of CGT for UK residents remains at 18%, while higher rate taxpayers will have to pay 28%. Entrepreneurs starting up firms will be luckier: they will only have to pay a 10% CGT charge on their first £5 million of gains, up from £2 million previously.
This new CGT regime, which came into force the day after the Budget, does not include a return to taper relief for shares held for a minimum period – previously two years. Taper relief, a measure that once applied to AIM companies but not fully-listed ones, helped to attract investment in AIM companies. With no additional incentive to back AIM companies, it would seem to make more sense to invest in fully-listed companies through an Individual Savings Account (a tax-free wrapper for UK savers and investors), as these investments are not subject to CGT. This will make it more difficult for cleantech companies to attract finance, since investors are more likely to go for the less risky option with the additional tax benefits.
The Budget contained no news about AIM shares being allowed into ISAs, a move which has been suggested by the Quoted Companies Alliance, a UK lobby group. This would at least be helpful to cleantech companies looking to gain interest from investors and raise money. With the abolition of taper relief, the old argument – that taper relief on CGT and other tax benefits are available for AIM shares so they should not be allowed into ISAs – is much weaker.
Also conspicuous by its absence in the emergency Budget was any mention of Venture Capital Trusts and the Enterprise Investment Scheme. VCTs and the EIS are important sources of funding for small, growing companies, including some quoted on AIM.
Under these schemes, investors can receive part of their investment back through a reduction in their income tax bills or by reclaiming tax that has already been paid – 30% in the case of VCTs and 20% for the EIS. Gains on investments in VCTs and the EIS are not subject to CGT so long as the shares are held for the required time. Existing gains can also be deferred by investing in an EIS qualifying investment.
VCTs offer investors the relative safety of a portfolio of unquoted or AIM companies, while the EIS was designed by the Government to provide investors with an incentive to back small, growing, unquoted businesses. These schemes could be an important source of finance for cleantech firms, but the tight rules mean that only very small companies are eligible for such investment.
Meanwhile, plans for the Green Investment Bank suggest that there will be no additional cash made available by the government for cleantech companies. A recent report from the GIB Commission recommended the GIB should “use the potential rationalisation of quangos and their funds to radically improve Government support for low carbon innovation and commercialisation”.
This means that organisations like the Carbon Trust, the Technology Strategy Board and the Marine Renewables Deployment Fund could be closed in order to provide around £2 billion of funding to the GIB, so it is questionable how much additional finance will really be made available for the new entity. This proposal is different from the plans of the previous Government, which had hoped to sell off assets to finance the bank.
The Carbon Trust not only invests in young cleantech companies, it also provides grants to help finance the purchase of their products. For example, the installation of AIM-quoted Eruma’s Illuminex low-energy, intelligent lighting can be financed by grants from the Carbon Trust. And AIM-quoted technology consultant Angle receives £450,000 a year from the Carbon Trust to provide incubation services for cleantech start-ups.
Overall, the Budget contained little to please AIM cleantech firms unless they are already profitable, in which case they will benefit from the staged reduction in corporation tax from 28% to 24% over four years.
Billions of pounds will need to be invested for the UK to meet its renewable energy targets for 2020. This Budget has done nothing to encourage private investors to come up with any additional investment – whether it is in AIM-quoted companies or other businesses.
Andrew Hore is a small company journalist who has covered London’s Alternative Investment Market for more than a decade and is the publisher of AIM Micro: www.aimmicro.com
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