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Archive for the ‘Finance’ Category

Beyond the Future Fund: What it means for VCTs

Nearly two weeks ago, HM Treasury launched the Future Fund, the latest in a series of schemes to support businesses through the economic crisis brought on by Covid-19 and lockdown. Having been overlooked by the Coronavirus Business Interruption Loan Scheme, start-ups are now eligible for government financial assistance via the Future Fund. While this funding will help many pre-profit firms through the immediate disruption, it could also present opportunities for VCTs down the line.

The Future Fund, administered by the British Business Bank (BBB), provides an initial £250 million in funding to UK start-ups. Through the Fund, firms have access to convertible loans of between £125,000 and £5 million as long as government investment is matched by third-party investors. Funding is offered in the form of a convertible loan, with no requirement that companies make regular payments; the convertible loans will convert into equity at the next funding round. Firms must have raised at least £250,000 in third-party equity investment over the last five years to be eligible for future fund investment.

As with almost every government intervention since the start of the Covid-19 pandemic, the Future Fund has been created against a very tight timetable which led to initial criticism of the scheme on the grounds it was not compatible with the existing Enterprise Investment Scheme (EIS). The EIS is a government scheme to help early-stage firms raise money by offering tax reliefs to individual investors that buy shares in a company, but the EIS could only be made compatible with the Future Fund following new legislation. Having been keen to avoid further delays to launching the Future Fund, the government decided to exclude the EIS; this decision led one investor to claim: “If it’s not EIS-able, the scheme just doesn’t work.”

Despite this criticism, there has been significant take-up of the government’s offer of matched funding through the Future Fund, with the BBB receiving requests for £515 million of funding on the day of launch. Funding is being allocated on a first-come-first-served basis, with those firms that have all their application materials in order at the front of the queue to receive a slice of the £250 million on offer. However, the BBB has indicated it is confident the Treasury will increase the size of the Future Fund following the strong initial response from investors, and an announcement setting out additional funding is likely to be made soon.

The popularity of the Future Fund may have dispelled fears prompted by its lack of compatibility with the EIS, but Katherine Griffiths, writing in The Times, points out there are issues with the Future Fund that will only be realised once the crisis has passed. Griffiths argues that the way the Future Fund is set up means that there will inevitably be a battle for control of the business at some point because “the government and its matching investors will decide whether to convert the loan into equity at the end of the term, removing significant freedom from the founders.”

While this may be suboptimal for founders, it could be a bonus for VCTs. In the event the government does convert loans to equity, it will have little interest in holding the equity stakes for a long period of time, particularly given the coming pressures on the government’s balance sheet. When the government does choose to sell, it will provide investors with the opportunity to take equity in firms that have received a healthy dose of government funding to help them to the position they are in. While investors will have to pay government for the privilege, it is possible the Future Fund may be responsible for a wave of high-growth firms coming to market at the same time, ready for VCTs to use their knowledge and expertise to propel them to further growth.

 

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Budget 2020 Analysis

This was a Budget of two halves.

The Chancellor started on a sombre note as he gave a detailed statement on the coronavirus and the Government’s response.

To manage temporary disruption to the economy, he pledged that the Government would:

Collectively, the fiscal stimulus package amounts to an eye-watering £32 billion.

MPs behind the dispatch box were visibly surprised by the scale of the intervention, but it did not stop there as the Chancellor moved from ‘providing security today’ to ‘planning for prosperity tomorrow’.

‘Planning for Prosperity’

Added up, the Chancellor’s forward-looking ‘prosperity’ pledges come to an additional £175 billion over five years with money allocated to transport, digital and energy infrastructure; public services; research and development and the wider enterprise environment.

Despite the sombre start, the self-assured delivery and bullish outlook in the face of an unprecedented global event looked like an early pitch for higher office.

The Chancellor said that while the commitments in Budget 2020 have remained within the limits of the existing fiscal rules, the framework would be reviewed – suggesting that a relaxation on borrowing could follow in the autumn in the face of low interest rates.

The Green Book, which sets the criteria by which infrastructure projects are judged, will also be reviewed – tying in with the Government’s commitment to shift investment out of the South East and towards the regions.

More Fiscal Events this Year

The Budget also launched a consultation on the Comprehensive Spending Review (CSR), which will close in July.

The exact timing of the CSR, which will set out detailed spending plans for public services and investment, will be confirmed by the Government once it has a clearer understanding of the coronavirus’ economic impact.

Collectively the Budget amounts to some very big spending commitments but with little detail on exactly when, where and how large chunks of the money will be spent.

What happens next

Four days of debate will now follow as MPs get to grips with the detail of Budget 2020, before the Finance Bill, which enacts the proposals for taxation, is tabled in Parliament.

The Budget will also be scrutinised by the Treasury Select Committee, with expert witnesses providing evidence to committee members.

With a majority of 80, we can expect the debates and Bill to pass without too much drama, but as the ‘omnishambles’ in 2012 showed a second round of scrutiny can throw-up unexpected surprises for the Government.

Looking further ahead, the Chancellor knows that his first Budget will be like no other and further tests sit on the horizon – the CSR later this year which will see an inevitable bun fight ensue as departments square up for longer-term funding allocations, and the Autumn Budget just a few weeks before we’re due to leave the EU for good.

 

 

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Money matters

In 2017 there was a huge fiscal gulf between the two main parties.  Labour was the party of tax and spend and the Tories the party of fiscal conservatism.  It was an election of opposites.

Fast forward two-and-a-half years and the scale of spending announcements by BOTH parties is already eye watering by anybody’s measure. Notwithstanding Labour’s unexpected and radical announcement to nationalise Openreach, the Conservatives are opening their own spending floodgates.

Why have the Conservatives seemingly ditched fiscal rectitude, how could this play out over the course of the campaign, and what could it mean for businesses after the dust of the election has settled?

Two factors have compelled the Conservatives to change tac: a decade of austerity and the success of Labour in shifting the battleground on which they must fight.

Jeremy Corbyn lost in 2017, but he made up considerable ground over the course of the campaign by appealing to an electorate fed-up after almost a decade of cuts.  Theresa May had a poll lead of around 20% when the starting whistle for the election was blown. This had narrowed to 2.5% by polling day with the biggest gains made in the final half of the campaign.  Corbyn’s personal poll ratings may be worse than rock bottom at -60 percent, and the wider problems of May’s campaigns are well known, but Labour’s campaigning capability is not underestimated by the Conservatives.

This election was called because of Brexit, but the Conservatives knew that Labour would again look to move the focus back on to the domestic agenda.  Hence the mantra of the Conservative campaign has been ‘Get Brexit Done’, while a steady number of booming funding announcements has been the resounding drumbeat against which it has been sung.

Conservative Campaign Headquarters is hoping that this harmonious combination will be music to the ears of voters fed up of Brexit and austerity and rousing enough to win traditionally Labour seats necessary for a majority.

The challenge is that by taking on Labour on domestic issues, the Conservatives have opened themselves up to an attack line of ‘it’s too little too late’.  Johnson has sought to distance his four-month-old Government from those of May and Cameron, but the sheer scale of funding announcements has exposed other flanks that Labour has sought to capitalise on.

In 2017 Labour made a big deal about its manifesto being costed and the Conservatives failing to do their homework.  It was a punch that didn’t land as hard as it could have because the Conservative manifesto was so light on the draw down from the public purse compared to Labour. This time round Labour is doing the same thing and it could be much more painful as Corbyn and McDonnell will again argue that Johnson does not care about the detail and cannot be trusted to honour commitments.

We are only two weeks into a six-week campaign, and we haven’t even got to the manifestos themselves (Labour’s is expected next week).  For companies planning for the future it will be critical to understand how the details of what has already been pledged fits together into a wider picture of a mandate for government.

The dearth of funding, and arguably policy as a consequence, looks like it is coming to an end.  This will present opportunities and risks for businesses across all areas of the economy, whether they operate in energy or education, transport or telecoms, financial services or food technology.  Those businesses that have early insight into what could come their way, and when, over the course of the next five years from a government of any primary (or secondary) colour will be best placed to engage, adapt and succeed.

For comprehensive analysis on what the manifestos could mean for your business and advice on what to do next, please contact the WA Comms team at contact@wacomms.co.uk.

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A taxing question: is globalisation compatible with national sovereignty?

Amid the political turmoil surrounding Brexit, you would be forgiven for missing the recent row about British Crown Dependencies and financial transparency. On 4 March, the House of Commons was due to vote on the Financial Services Bill, a piece of legislation concerning the regulation of financial services in the event of a ‘no deal’ Brexit. However, the government pulled the bill at the last minute because they feared that they would be defeated on an amendment requiring Jersey, Guernsey and the Isle of Man to introduce public registers detailing who owns companies registered there.

The government’s move to delay the bill was not just an attempt to avoid the embarrassment of yet another defeat; it was also done to avert something much more serious – a constitutional crisis. Legislation passed in Westminster does not usually apply to Crown Dependencies, and their consent typically accompanies legislation that does apply. The UK government does have the power to impose legislation on the Crown Dependencies as a last resort, but this power is seldom used and would represent a break with convention. As such, any attempt by Westminster to interfere in the domestic matters of Crown Dependencies without their consent could present the UK with yet another constitutional headache.

Following the release of the Paradise Papers in 2017, in which Jersey and the Isle of Man featured prominently, there has been an increased focus on the Crown Dependencies and the role they play in facilitating tax evasion, tax avoidance and money laundering. The move to force the islands to publish details of anyone owning more than 25 per cent of a company registered there aims to increase transparency. In response, the dependencies argue that they are already committed to transparency and provide ownership details to law enforcement and tax authorities within 24 hours of a request.

However, while stricter rules on financial transparency in the Crown Dependencies may make it more difficult for some to engage in activities that are either illegal or deprive governments of revenue, the debate masks an even greater problem: tax. Guernsey, Jersey and the Isle of Man all have a standard corporation tax of zero per cent, with some higher rates (but not greater than 20 per cent) applicable to firms in certain industries, for example, Jersey charges financial services companies ten per cent corporation tax. The rate of corporation tax in the UK is currently 19 per cent and set to fall to 18 per cent by 2020. The average corporate tax rate in the EU is 22.5 per cent; France has the highest corporation tax at 34.4 per cent and Hungary the lowest with nine per cent.

The advantageous corporate tax rates available in the Crown Dependencies have played a large role in attracting companies to register there; as of December 2018, collectively they were home to 76,000 companies. This amounts to one business for every three residents, whereas the UK has one firm for every 11 residents. In 2017, the EU placed the Crown Dependencies on a ‘grey list’ of jurisdictions that had committed to reform their tax structures to avoid being branded ‘tax havens’. The EU is particularly concerned that firms route profits via the Crown Dependencies to avoid paying taxes in EU member states, weakening the tax base in those countries. In response, the Crown Dependencies have introduced stricter requirements on businesses to prove they are truly resident in either Guernsey, Jersey or the Isle of Man. However, it is unlikely the new regulations will significantly reduce the number of firms registered in Crown Dependencies.

The Crown Dependencies are not the only entities to have drawn the attention of the EU over their corporate tax rates. Ireland has a corporate tax rate of 12.5 per cent, a rate that has encouraged companies such as Apple and Google to base their operations there. In January, the European Commission published a proposal to remove national vetoes of tax matters and to use qualified majority voting instead. The move has been strongly opposed by the Irish government, on the basis that a new voting system will remove Ireland’s ability to set corporation tax rates at the level it wishes.

At heart, the debate about financial transparency and tax comes back to one question: how can national sovereignty be reconciled with a globalised economy? Governments, in competition with each other to attract businesses, have an incentive to lower taxes and loosen regulations. The only way to avoid this potentially damaging race to the bottom is global cooperation, either voluntary or enforced. However, the former may not be possible because of the incentives faced by governments, and the latter would involve countries voluntarily giving up power over tax policy.

The UK is finding out first-hand that determining the ‘optimal’ amount of sovereignty is a tricky business, but it is a question that many more countries will have to grapple with in the near future. Globalisation has made it easier for capital to cross international borders, while public opinion concerning which decisions should be made at the level of the nation-state has remained relatively static. Harmonised tax and regulatory systems may win the economic argument, but as the political landscape confronts a more globalised world, it’s not always the economy, stupid.

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