'Changing tax laws would help business angels invest in SMEs'

It is hoped that more high-net worth individuals invest and lend their expertise to start-ups if the Government simplified tax legislation.

This in turn could stem the tide of wealth heading out of the UK to the Far East in search of better returns.

The Government is pinning its hopes on an enterprise-led economic recovery as it embarks on a programme of spending cuts expected to lead to hundreds of thousands of redundancies across the public sector.

Bank lending remains restricted though, as financial institutions continue to recapitalise after the credit crunch.

Andrew Burton, managing director of Normanton-based Viking Fund Managers, said he expected the spending cuts to result in a slew of new companies being formed, but warned that these start-ups may run into trouble later on.

"There has to be a new way of getting those companies to commercial success," he said, adding that the Alternative Investment Market appeared to be stagnating.

"The pipeline is always going to be there – how we build the conveyer belt after that I'm not so sure."

Karl Chapman, a Leeds-based private banker at Coutts, said wealthy clients have approached him over the last year asking for introductions to businesses looking for equity investment and non-executive roles.

He said there is appetite for vehicles such as the enterprise investment scheme (EIS), which offers tax breaks to investors in business. There are setbacks to the scheme though, warned Mr Burton, who is chairman of the Yorkshire Association of Business Angels.

He said: "Tax relief under the EIS is vital to getting private investment into SMEs.

"It's believed that three quarters of business angels take advantage of it when making investments. But like a lot of tax legislation, it can be complex, people can easily and unwittingly trip themselves up and, in some places, it's not aligned to the principles of good business finance."

For example, investors are disqualified from tax relief if they have had any previous contact with companies, such as in mentoring roles.

Mr Burton and industry colleagues met with Government officials to discuss how to get more private investment into smaller businesses.

He said the Green Paper on financing business growth suggests there may be some relaxation of EIS rules "which would encourage more people to roll their sleeves up before they even make an investment".

With interest rates at an all-time low, uncertainty over the future performance of the stock market, inactive commercial and residential property markets and foreign exchange risk, private equity investment is starting to look increasingly attractive to investors.

They might be tempted to invest overseas though, warned David Hughes, chief executive of Ellis Bates Group, the Harrogate-based financial adviser and insurance broker.

He said: "If the Government is right that the solution to our woes is the sponsorship of private enterprise, then you have got to go for it and make people want to invest locally as opposed to looking for returns abroad."

He said the Government should consider allowing employees and directors the benefits of EIS.

Ministers have said they will consider changes that have no cost. Mr Burton said: "Tweaking rules on EIS relief could have a cost through lower tax receipts though this would be offset by the leverage in jobs and tax which comes from greater investment."

Recent estimates suggest that 300,000 people have used EIS since its launch in 1993.

Looking at ways to fund growth

The Government launched a consultation in the summer on how to finance business growth.

Ministers are encouraging the development of a new business angel co-investment fund, which would apply for funding from the new 1.4bn regional growth fund.

They have also acknowledged the importance of the enterprise investment scheme and are considering proposals from business angels.