November 9, 2014 by Paul Goldsmith
I haven’t been a big fan of Vince Cable’s performance as Business Secretary during these four and a half years of coalition. Having had the job of approving Rupert Murdoch’s buying of BSkyB because he saw his impartial role as “declaring war on Murdoch”, Cable has been happy to play politics with his role more than economics. In particular, I got fed up of him being the go-to guy for political journalists when they wanted a disloyal, left-leaning rent-a-quote on government policy that he didn’t agree with.
Yet, as is often the case with Cable, he has been doing some good behind the scenes. In 2012 he was involved in the creation of the Seed Enterprise Investment Scheme (SEIS). It has been an immensely successful example of government intervention in a very important part of our economy – the risks that entrepreneurs take when they begin their businesses.
Often, when I start teaching economics A-level, we run through the factors of production (land, labour, capital and enterprise) – which are the resources that go into supplying goods and services. We look at what they are, and also how they can be increased – or how they get decreased. This is a very useful example of something created to increase enterprise in the UK.
When people start a firm, they often need money. It might be for marketing, it might be for production, it might be to pay salaries until revenue starts coming in. A start-up business needs money. That money could come from a bank loan – but it has to be paid back – and banks are wary of taking that risk . Better for many entrepreneurs is the ability to sell some equity (shares) in their business. The investors lose only the money they put in if the business fails, but get the possibility of huge gains if it succeeds.
SEIS encourages investment in start-ups and early stage businesses by offering very favourable tax breaks to private investors. The tax breaks include 50% tax relief on investments of up to £100,000 a year. 86% of business “angel” investors say they use SEIS or its sister initiative EIS (for investments up to £5m). 58% of them say that without these schemes they would never have invested at all. Quite a vote of confidence.
So it is no surprise that there has been a 73% rise in the number of start-ups raising funds through this scheme, with 2,582 firms applying for them through HM Revenue and Customs during the year ending April 5 2014, compared to 1,644 applications the previous year. Over the last two years, SEIS helped more than 1,600 companies raise in excess of £135m in investment.
When the recession started in 2008, it was cash-starved young businesses that were hit particularly hard by the ensuing credit crunch. As the economy emerged from recession, the Government introduced SEIS to try to mitigate risk for investors. Now that the economic recovery has (apparently) arrived, some feel that SEIS could be stopped. But economic growth doesn’t stop small and growing firms existing – so it is to hoped that these schemes will be retained for the future. For that, at least until May, we need to rely on Vince Cable. Let’s hope he’s up to it.