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Raising Finance in Difficult TimesBristol & Bath Science Park,19th April 2012, 6-9pm

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Raising Finance in Difficult Times

This Evening’s Programme6:45-8:00 Speakers

Introduction Alastair Watson BEN

David Notley Impact Management Consultants

Andrew Jupp Smith & Williamson

Darren Westlake Crowdcube

8:00-8:30 Q & A

Discussion

8:30-9:00 Networking

Raising Finance in Difficult Times

April 2012

© Capitech Partners LLP

BEN Event 19th April 2012

The Funding Landscape

Delivered by David Notley - Impact Management Consultants

© Capitech Partners LLP

Sources of Finance

• What are they?

© Capitech Partners LLP

Types of Finance

Borrowing

GrantsEquity

© Capitech Partners LLP

Borrowing• Borrowing is characterised by the following:

– The loan capital repaid to an agreed schedule.– Interest paid at an agreed rate.– Fees and charges paid as agreed.– Security.– Fixed or limited upside.

• All of which means a lender is interested primarily in 2 key issues:– Can the business generate sufficient cash to pay

the interest and capital?– What security do we have if it all goes horribly

wrong?

© Capitech Partners LLP

Borrowing - Some examples

• Overdraft – note lack of capital repayment schedule.

• Term loan.• Invoice discounting/Factoring.• Asset Finance – HP leasing etc.• Credit from suppliers.• Up front payments from customers.• Directors/shareholder loan.• Enterprise Finance Guarantee Scheme

(EFGS).• Crowd Sourcing.

© Capitech Partners LLP

Equity• Share Capital (equity) is characterised by the

following:– Funds completely at risk.– Share in upside potential.– Opportunity to influence company management.

• All of which means an investor interested primarily in 4 key issues:– What is the upside potential of this investment?– Is the upside potential commensurate with the risk – can

we make 5 to 10 times our original investment?– Is the combination of management, technology and

market dynamics capable of delivering the upside potential?

– What is our exit route?

© Capitech Partners LLP

Equity – Some Examples

• Own money – Directors loans (often quasi equity), share capital, sweat equity.

• Family/Friends – (NB Financial Services Act)• Other management team.• Business Angels.• Venture Capitalists/Venture Capital Trust (VCTs).• Profits generated.• Corporate Venturing e.g. EADS Foundation.• NESTA.• Franchising (quasi equity).• www.bvca.co.uk

© Capitech Partners LLP

Grants• Grant Funding is characterised by the following:

– Tends to be non repayable.– Could be repayable if grant is not used correctly.– Need to achieve non financial outputs.

• All of which means a grant giver is interested primarily in the following key issues:– Is the project eligible under our criteria?– Will the project achieve the non financial outputs?– Will the project generate positive publicity?– Is there the potential for negative publicity?– Do we have budget capacity available?

© Capitech Partners LLP

Grants – Some Examples

• Business grants tend to be targeted at specific non financial outputs such as:– Innovation– Training– Capital expenditure– Academia/business collaboration– EU collaboration

• Sources include:– Technology Strategy Board– EU– Local Authorities (tend to be small)– Private Foundations e.g. Wellcome Trust– Carbon Trust

© Capitech Partners LLP

• Questions?

Dr Andrew JuppDirectorSmith & Williamson Limited

DisclaimerThis seminar is of a general nature and is not a

substitute for professional advice. No responsibility can be accepted for the

consequences of any action taken or refrained from as a result of what is said.

Tax-efficient ways of accessing finance

• Enterprise Investment Scheme (‘EIS’)

• Venture Capital Trusts (‘VCT’)

• Research and Development tax credits (‘R&D’)

Enterprise Investment Scheme (‘EIS’)and Venture Capital Trusts (‘VCTs’)

• Outline of the Schemes and their importance for tax-advantaged funding

• Significant changes from Royal Assent (June/July)

• Seed Enterprise Investment Scheme (“SEIS”)

EIS and VCTs

• Under EIS, individuals invest equity directly into qualifying companies

• Individuals subscribe for shares in VCTs (fully quoted companies) whose managers invest debt/equity in qualifying companies

Tax benefits for the individual investor

EIS VCTsIncome tax relief of subscriptions 30% (Note 1) 30%

Maximum subscriptions per tax year £1,000,000 £200,000

EIS/VCT in aggregate maximum investment per company increased to £5m (from £2m)

(Note 2)

One year carry back of income tax relief Yes No

CGT exemption on disposal of shares Yes Yes

CGT deferral relief Yes No

Loss relief Yes No

Dividends tax free No Yes

IHT exemption Yes No

Note 1: For shares issued after 5 April 2011

Note 2: For shares issued after Royal Assent

EIS/VCT qualifying companies

• Must be unquoted (AIM is OK)

• Must carry on a qualifying trade within two years of share issue (see list of excluded activities) or carry on qualifying R&D activities leading to a qualifying trade

• Must not be under the control of another company

• Company issuing the shares must have a ‘permanent establishment’ in the UK

EIS/VCT qualifying companies (cont’d)

• Book value of gross assets must not exceed £15m immediately before the investment and £16m immediately afterwards

• Fewer than 250 full-time employees

• Cannot raise more than £2m in aggregate under EIS and from VCTs in any 12 month period (Rising to £5m on Royal Assent)

• Removal of £500 minimum subscription for EIS

• Removal of £1m limit on investment by a VCT in a single company

EIS/VCT disqualifying trades

• Dealing in property, shares, commodities and other financial instruments

• Property investment and development

• Insurance and banking (though not insurance broking)

• Leasing

• Legal and accounting services

• Farming, market gardening and forestry activities

• Hotels and nursing homes

• Exploitation of intellectual property rights (not created by the company)

• Ship building

• Coal and steel production

SEED EIS (‘SEIS’)Legislation included in 2012 Finance Bill published on 29 March 2012

The following applies to qualifying shares issued after 5 April 2012

• Income tax relief at 50% on maximum annual equity subscriptions per individual (across all qualifying companies) of £100,000

• CGT exemption on sale of SEIS shares if held for at least 3 years provided income tax relief was claimed and not subsequently withdrawn

• Relief available for owner managers if they own less than 30% of the equity

• Investors will be able to reinvest 2012/13 chargeable gains into Seed EIS shares in 2012/13, with the CGT on those gains totally falling out of charge

SEED EIS (‘SEIS’)Legislation included in 2012 Finance Bill published on 29 March 2012

• SEIS money must be utilised within 3 years

• A company may only raise EIS and VCT funds once 75% of the SEIS money has been utilised

• A company cannot raise SEIS money if it has already raised any EIS/VCT funds

• Maximum amount of SEIS money a company can raise is £150,000 (cumulative, not per year)

• A SEIS company cannot be a subsidiary, or have subsidiaries

R&D tax credits – a reminder

• Enhanced tax deductions for qualifying R&D costs to reduce taxable profits or increase tax losses

– For SMEs, tax relief on 225% of original cost– For large companies, on 130% of original cost (but see new

proposed rules)

• Loss-making SMEs can claim payable tax credit, on 11% of enhanced deduction

• PAYE/NIC restriction abolished for APs ending after 1 April 2012

• Consultation on an “above the line” tax credit for large companies

SMEs

• Defined by EC

• Fewer than 500 employees, AND

• Turnover up to €100m, OR

• Gross assets up to € 86m

• Watch changes in status/years of grace

What is R&D?

“a project seeks to achieve an advance in science or technology…through

the resolution of scientific or technological uncertainty”_

- 2004 DTI Guidelines on R&D

What is R&D?

• The project may:– extend overall knowledge or capability– Create a process, material, device, product or service

that incorporates or represents an advancement– Make an appreciable improvement to an existing

process, material, device, product or service through scientific or technological changes

– Use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way

What is R&D?

• Focus is entirely on science or technology, not commerce, but commercial companies may carry out R&D

• Not known if scientifically or technologically feasible, or

• Uncertain how to achieve something in practice

• Test is based on judgement of the ‘competent professional in the field’

What is R&D?

• Still qualifies for R&D relief even if uncertainty is not overcome on advance is not fully realised

• R&D starts when ‘work to resolve scientific or technological uncertainty starts’

• R&D ends when ‘knowledge is codified in a form usable by a competent professional working in the field, or when a prototype with all the functional characteristics of the final product or service is produced’

Examples

• Gaming machine hardware including software

• Hosting/software for mobile phone access to lotteries

• Mobile phone mast trees

• Semiconductors

• Internet games/auctions/security

• Software for securities/carbon trading/asset security/brand control/calendars/engineering structures

• Integration/extension to internet use/client adaptation

• Geothermal energy plant

• Decontamination of nuclear power stations

• Control of emissions from buses

Which costs can be claimed?

• Staff costs– Staff engaged directly in R&D, in full or in part– Includes employer’s NICs and pension contributions– Excludes benefits in kind– Sub-contractor costs for SMEs– Unconnected - claim restricted to 65% of cost– Connected - 100% of the actual R&D expenditure of

the subcontractor– Joint election for ‘connected’ treatment

• PAYE/NIC restriction now removed

Which costs can be claimed?

• Externally-provided workers (i.e. through an agency)– Unconnected – claim restricted to 65% of cost– Connected – 100% of the actual cost of worker to the agency– Joint election for ‘connected’ treatment

• Consumable and transformable items– Any materials consumed in the R&D process– Can include fuel, power and water

• Software

• Other qualifying indirect costs

• Large companies can claim contributions to qualifying research bodies

General conditions to claim R&D

• Company within charge to corporation tax

• Relevant to the company’s trade

• Revenue expenditure not capital (watch accounting treatment)

• Restrictions where expenditure is subsidised or grant received by SMEs

• R&D must not be subcontracted in for SME rates

• Maximum of €7.5m R&D per project for SME rates

• For SMEs, IPR need no longer vest in the claimant company (only APs ending before December 2009)

• Minimal annual spend of £10,000 gone

Subsidies and grants – SMEs only

• No SME rate of R&D tax relief on any project subject to the receipt of (EU) notifiable State Aid

• Speak to provider of grant to find out if it falls to be notifiable State Aid

• No SME rate of R&D tax relief on any qualifying expenditure that is grant funded or funded externally to the company

• Can claim under large company scheme instead

Maximising claims

• Claim can be made annually as part of company tax return

• Claim can also be made within two years of the end of the accounting period

• Letter/report should clearly demonstrate that all conditions are met

• Reduces/eliminates HMRC queries and should avoid penalties

• Claim reviewed by HMRC in Specialist R&D units

Latest developments

• Production costs – improved guidance

• Voluntary assurance pilot – conclusions awaited

• Updated guidance on software R&D expected

Common pitfalls

• R&D lost in accounts

• Capitalised R&D

• Employees/externally provided workers/subcontractors

• R&D subcontracted in

• Two year time limit missed

• Poor presentation to HMRC

Conclusions

• CT reductions worth up to 34% of cost

• Repayments worth up to 25% of cost

• R&D widely defined, and not industry specific

• Two year time limit

• Maximise claims and presentation

These notes have been produced for the guidance of delegates at the conference for which they were prepared and are not a substitute for detailed professional advice.

No responsibility can be accepted for the consequences of any action taken or refrained from as a result of these

notes or the talk for which they were prepared.

Smith & Williamson Limited

Regulated by the Institute of Chartered Accountants in England and Wales

for a range of investment business activities

A member of Nexia International

Portwall Place

Portwall Lane

Bristol BS1 6NA

Tel: 0117 376 2000 Fax: 0117 376 2001

www.smith.williamson.co.uk

Dr Andrew JuppDirectorSmith & Williamson Limited

Darren Westlake

BEN - Raising Finance in Difficult Times

• UK has lots of great ideas• Need to cultivate ideas into the next

Google/Twitter/GroupOn• Often stifled by access to

The Status Quo

A wealth of entrepreneurial talent

Google says searches for "business plan UK" have increased by 60% over the past year and searches for "small business loan" are up by 34%

Money

• Venture capital difficult to find for smaller requirements

• Debt finance hard to come by• Business angels – limited investments

• Typically a syndicate each investing £10k - £100k• What if there was a way to have say 5000 angels

each investing £10?• What if anyone could become a business angel?

The Status Quo

The Status Quo

Crowdcube and Crowdfunding

• Crowdcube provides a web-based central hub for entrepreneurs to meet micro-investors. It uses the power of Crowdfunding to provide a unique service to two types of people:• for entrepreneurs to source funding more accessibly than

conventional routes• for smaller investors to have the opportunity to invest in exciting

high-potential businesses

What is Crowdcube?

“$100 invested in Microsoft at their IPO would now be worth approximately $35k.”

Crowdfunding

Crowdfunding• Crowdfunding is an approach to raising the capital required for a new

project or enterprise by appealing to large numbers of ordinary people for small donations

• Social Media• Crowdfunding examples

• Kiva.org - $212m funding raised, >800,000 lenders, ~500,000 entrepreneurs

• Kickstarter.com – 7,496 projects funded, $27m pledged in 2010, runrate $7m/mth

How it works

How it works

How it works

Benefits

Benefits

Successes

Successes

www.crowdcube.com

Thanks