AfricaPositive’s UK director, Tony Granger, helped pioneer the UK’s successful Enterprise Investment Scheme (EIS) which has generated £12billion (R144 bn) in private investment funds into the SME sector. Ted Sceales discusses the huge positive impact that an EIS could have on wealth and work creation in Africa with Granger. Read on…
Many years ago, AfricaPositive’s UK director, Tony Granger - as a pioneer of the EIS in Britain -, broached the subject with President Mandela in London, who thought it an excellent idea and put
him in touch with various Government departments in South Africa. Granger came over to SA but failed to make an impression or to get to the right people at that time. We hope that the timing is different now. So our people are arranging meetings with SA Government, SARS and Treasury policy makers for Tony’s next trip to SA – in order to gets this moving.
We will also extend the invitation to other African governments, who support free enterprise.
Answers to Ted Sceales’ questions
Q1 Between 1994 and 2011 the Enterprise Investment Scheme (EIS) in the UK generated £12billion (R144 bn) in investment capital into the SME sector, through a combination of tax incentives and other government measures. How many enterprises were started or expanded through these facilities?
The official statistics from the HMRC website are that 29,082 companies were invested into over the period, and of these 17,640 received funds for the first time. 394,575 people invested, however some of them may have invested more than once. I believe more people may have wanted to invest, but the quality of investment product or companies offering themselves for investment may have been less. Certainly the more public offerings appear to fill up quickly once open, indicating a great demand for tax incentives to offset investors’ risk. There are two main routes in the UK to invest into unquoted companies (including AIM companies) – the EIS (Enterprise Investment Scheme) which caters for large and small companies, and the VCT (Venture Capital Trusts) which tend to invest into larger companies.
Q2. Are there any statistics or even conservative estimates of the number of jobs this has created?
The EIS brings new equity capital into a company, which is more readily available and also has no direct cost (as loan finance would have an interest cost and has to be paid back). As a result of being able to afford to employ more people, the increase in new jobs is significant. On average, a small company employs around 10 people, and many are start-ups. A good guesstimate would be around 300,000 new jobs have been created in the SME sector. Some companies use the EIS to raise expansion capital for an existing business – one company, for example, that I am familiar with, created 150 jobs; another only 2 jobs. We have recently gained HMRC approval for an EIS company which will create 6 jobs.
Q3. In layman’s terms, how does the scheme work? And who are the major beneficiaries, benefactors and facilitators?
The company must be undertaking a qualifying activity, usually manufacturing, marketing, distribution or whatever. Companies that do not qualify are finance companies, farms, nursing homes, hotels, investment companies. An application is made to HMRC (tax people) under Form EIS The HMRC gives provisional EIS approval, allowing investors tax relief when they subscribe for shares. Shares must be newly issued ordinary shares only. This means the money comes in to the company and not to anyone else. After trading for four months, tax reliefs are available. These are claimed on another form or your tax return. The tax reliefs are very generous. You can invest up to £500,000 (R6 million) in this tax year, and after 5 April 2012, up to £1m (R12 m) per person per year. You get 30% of your investment directly off your tax bill. In addition you can defer a capital gain and not pay capital gains tax through making the investment; after two years, the value of the shares fall out of your estate for estate duties. Very generous indeed. This also means that the taxman is taking some of the investment pain, and it is the Government way of sharing your risk without outlaying hard cash. No one investor can own more than 30% of the company invested into. To keep your tax reliefs you must stay invested for 3 years. After that time you can sell your shares. The company is very happy – it gets your money in exchange for shares. It can now expand and employ more people. You are happy as you have invested into a company that will grow and deliver you dividends in the future. The cost of investing is reduced by 30%, which makes you even happier. The Government is happy because it has supported the SME sector and is actively helping the sector to grow and create jobs. The company is even happier if an investor takes an interest in the company, and helps with his expertise. He can be paid fees or a salary for his input. Many businesses would welcome a part- time finance director, or marketing person. I envisage helping make this mobilisation of capital to SMEs a reality in South Africa. We can build an exchange that places investors with businesses, for example. We have a lot to offer to facilitate the process.
Q4. Most African governments believe they need more tax revenue to fund infrastructure and development. So aren’t tax breaks going to be a hard sell, when the prevailing thinking worldwide is to tax the Haves in order to help the Have-nots? How did you achieve this reversal of attitudes in the UK?
Every Government believes it needs to make as much as possible from taxing the income generators. In this way they fund infrastructure and development. However, they are also socially responsible and must realise that creating jobs reduces unemployment, creates a larger tax base, develops a happier working class, reduces crime and anti social behaviour. It is a known fact that small business is the engine room of the economy. They may be small, but overall they can pack a punch. If you are looking for growth, go for the individual’s entrepreneurial skills and develop these. Those business- growers will create wealth. In doing so they will employ people. So what do we have? At some stage the Government would find itself investing on its own in various ‘get back to work schemes’ – but if there are no jobs, all you will have are better educated unemployed people and more frustration. Going the tax incentive route brings together those with tax rands to provide opportunities in a structured way – and a legal way- to make an important contribution to the economy through investing in small businesses. The SME makes a proposition and in a free society the investor decides whether to invest or not. This helps him with his thinking by giving him tax relief. Here, in the UK, in the new tax year our Government is giving 50% tax relief to investors who will invest into start up companies – which is very high risk. You could lose all your capital. But they are doing it – why? Because they believe that it is at the grass roots that the greatest financial help is needed and this is precisely where the banks are not interested. The UK has 25 years of experience in giving tax reliefs for businesses and investors in them – they think the scheme is so successful that they have nearly doubled the tax relief for businesses wanting smaller amounts. To qualify as a 50% tax relief investor, the company can raise a maximum of £150,000 (R1.6m). In the final analysis this is the coming together of private investors and the State for the benefit of the SME sector. The Haves pay a lot of tax. The Have Nots pay nothing. Any tax relief is worth considering if you are a tax payer. However, as they say never only invest for tax reasons. I will let you in to a trade secret here. Many people have money, but they can’t get jobs, or have been made redundant/retrenched. All they want is a job or a reason to get up every morning. If an astute investor invests his retrenchment lump sum into say 6-10 small businesses and they each pay him a monthly fee for working 2-3 days a month, giving his expertise to the business, he is not only keeping an eye on his money, but also helping to develop the businesses he is involved with. Guess what? He becomes a taxpayer again!
Q5. Have you had any indication of interest from influential government leaders?
As you are aware, I have been beating the tax incentives drum for SMEs in the UK and more recently in SA, as a way to mobilise investors’ capital for small business growth. Many years ago, I broached the subject with Madiba in London and he thought it an excellent idea and put me in touch with various Government departments in South Africa. I did come over to SA but failed to make an impression or to get to the right people at that time. I think the timing is different now and my people are arranging meetings with SA Government, SARS and Treasury policy makers on my next trip to SA, in order to get this moving. I have also formed a private equity team in SA to bring money to SA for projects and investment into companies there. A lot of South Africans living abroad will invest without tax reliefs, because they believe that their money can do some good by creating employment opportunities, and give them good returns at the same time. I am involved at a high level in the UK to facilitate UK companies investing in SA and creating jobs – right now we have a number of active projects on the go. I am working with South African universities, like the Rhodes University Business School, to train entrepreneurs and business leaders. Also to show them how the very successful UK EIS scheme works for us in developing business growth and opportunities. So much so that the SA Business Club in London awarded me a Lifetime Achievement Award recently. If you can get more SA leaders to talk to me, I will get things done.
Q6. Do you think Her Majesty’s Government might be prepared to share their expertise and technical know-how with Africa for home grown EIS- type projects?
There is no question that the UK Government will do everything it can to assist through technical know-how and sharing of expertises. I believe it already does so. If it’s a matter of sharing tax legislation to enable things to get up and running, they would be only too willing to do so. I cannot speak for the Government, but was recently at a University Forum on Africa at the Henley Business School – where these people have so much to give – but don’t know the best route to give it. It is a matter of facilitation and opening doors. You have much of the expertise in SA, in any event. It’s just how to mobilise it for best effect. Let Tony Granger become your Small Business Tsar in SA and we will get ahead in no time at all! Ted, let me give you some firsts. Everyone remembers who ran the first sub 4 minute mile – Roger Bannister. Not many people remember who was second – Chris Chataway. In the UK I launched the first EIS fund approved by the Revenue; I developed the first portfolios of SMEs with different risk levels to offer investors an investment spread of high, medium and low risk companies; the first due diligence process for SMEs so that investors had a universal investment criteria process available to them before investing; and many other firsts. I also grew and edited the first EIS and VCT Investors Guide for over ten years in the UK to show investors the way in the UK. Whilst Governments are good for macro decision-making, when it comes to grass roots business success, we can deliver the expertise and the know-how. All the SA Government needs to do is to give tax incentivisation for investment into SMEs the go ahead, and people like me will deliver the BluePrint for Success.