Mercia EIS Funds

Autumn statement 2013: raise the seed funding cap or SMEs won’t flourish

Mark Payton, Managing Director of Mercia Fund Management, wants to see more support from the government for the SME sector in Chancellor George Osborne’s autumn statement, due on 5 December 2013.

“The Government simply isn’t doing enough to support SMEs and we’d like to see the Seed EIS (Enterprise Investment Scheme), investment limit per company rise from £150,000 to £500,000.

Government figures estimate that the number of SMEs in the UK is growing at roughly 3% per year, 99% of all businesses are SMEs that employ approximately 60% of the work force and account for around 50% of total trading turnover.

While these figures are encouraging – approximately 45% of new start-ups fail within five years of set up. This figure could be greatly reduced with the right support and resources.

We are pleased that the Government continues to support the SME community via Seed EIS, EIS and VCTs, while providing attractive and legitimate tax incentives for private investors.

But for economic growth, re-balancing of the economy and security for investors, we believe the Government should do more. In this autumn statement, we would like to see the Government maintain the current reliefs associated with Seed EIS provision in particular, while also extending the investment limit per company from £150,000 to £500,000.

A big concern of ours, as a fund manager with many years of experience in investing in SMEs, is that new private investors are attracted (be it directly or indirectly through the multitude of crowd funding platforms) to the tax reliefs without the realisation that many businesses will often require (from start-up) substantially more than £150,000 to realise a return on their investment and for the business to reach a sustainable trading position.

A majority of EIS capital is allocated to more mature and often cash generative businesses where the risk profile and tax reliefs align more closely. The result is that there is a large funding and support gap for businesses at an early (or potentially pre) revenue stage requiring additional investment, which can be deemed too risky for EIS capital to follow.

To mitigate the lack of capital available after SEIS, we allocate a modest portion of our own EIS funds under management for follow-on for emerging stars from within our SEIS portfolio. This is a luxury not available for most start up businesses that do not benefit from the support afforded by Mercia Fund Management and this should be of concern to the government. If the Government would raise the limit to £500,000, this substantial funding gap would be markedly reduced.

To fuel and sustain the level of SME growth and the re-balancing of the economy, active fund management through legitimate taxation frameworks is what is required, with an emphasis on Seed EIS extension and improvement. The tax reliefs given to SEIS will be more than offset by the tax returned to HMRC relating to increased employment (and thus tax contributions) and improvement in exports and corporation related tax charges.

It should also be noted that over 80% of our portfolio export product and services (compared to circa 30% of the SME population as a whole), and thus helping to create a sustainable portfolio of companies that contribute to the re-balancing of the UK economy.”