Good Growth and Why the London Plan is Strategically Flawed

NHS in crisis (queues in A&E, operations postponed and delays getting to see your GP), road network suffering from worse congestion, overcrowded trains and underground in London, air pollution still a problem, not enough schools to accommodate growing numbers of children and simply not enough houses to meet the demand for homes. These are simply symptoms of too many people and not enough infrastructure.

For those concerned about the future of one of the major financial capitals of the world, namely, London, here’s an editorial I wrote for the Alliance of British Drivers on the subject of the “London Plan” – on which there is a recently launched public consultation:

The population of the UK has been growing rapidly and particularly in London and the South-East. The latest figures from TfL show that the number of trips by London residents grew by 1.3% in 2016, up by 19.7% from the year 2000. The population of London grew by 21.4% in that period.

Forecasts for the future are for it to grow from the level of 8.8 million people in 2016 to 10.8 million in 2041 according to the Mayor’s London Plan, i.e. another 22%.

More people means more housing demand, more businesses in which they can work, more shops (or more internet shopping deliveries) to supply them, more transport to move them around and more demand on local authorities to supply services to them.

In addition more people means more air pollution – it’s not just transport that generates air pollution and even if every vehicle in London was a zero emission one we would still have major emissions from office and domestic heating, from construction activities, and from many other sources.

The London Plan and Mayor Sadiq Khan talk about “good growth” but unfortunately the exact opposite is likely to be the case. It will be “bad” growth as the infrastructure fails to keep up with population growth even if we could afford to build it.

In London we have not kept up with the pace of population growth for many years and the future will surely be no different.

London residents have suffered from the problems of past policies which condoned if not actually promoted the growth of London’s population. Indeed Mayor Khan insists London should remain “open” which no doubt means in other language that he is opposed to halting immigration – for example he opposes Brexit and any restrictions on EU residents moving to London which has been one source of growth in the population in recent years.

There are of course several policies that wise politicians might adopt to tackle these problems. Restrictions on immigration and the promotion of birth control are two of them that would limit population growth. China is a great example of how a public policy to discourage children has resulted in dynamic economic growth whereas previously China suffered from population growth that outpaced the provision of resources to support them – result: abject poverty for much of the population; that is now receding into history.

The other answer is to redistribute the population to less crowded parts of the country. It is easier and cheaper to build new infrastructure and homes in less populous parts of the country than London. Back in the 1940s and 1950s there was a national policy to encourage businesses and people to move out of London into “New Towns” such as Bracknell, Basildon, Harlow, Stevenage, Milton Keynes and even further afield.

Government departments that were based in central London were moved to places such as Cardiff or the North of England. The population of London fell as a result.

One way to solve the problems of traffic congestion and demand for housing in London would be to encourage redistribution. This could be encouraged by suitable planning policies, but there is nothing in the proposed London Plan to support such measures. In the past, businesses and people were only too happy to move to a better environment. Businesses got low cost factories and offices. People got new, better quality homes and there were well planned schools and medical facilities.

Despite the attitude of many non-residents to the New Towns, most of those who actually live in them thought they were a massive improvement and continue to do so. It just requires political leadership and wise financial policies to encourage such change.

These are towns with few traffic congestion or air pollution problems even though some of them are now the size of cities – for example Milton Keynes now has a population of 230,000.

It is worth pointing out that past policies for New Towns and redistribution of London’s population were supported by both Labour and Conservative Governments. But we have more recently had left-wing Mayors in London (Ken Livingstone and Sadiq Khan) who adopted policies that seemed to encourage the growth in the population of London for their own political purposes, thus ignoring the results of their own policies on the living standards of Londoners. So we get lots of young people living in poor quality flats, unable to buy a home while social housing provision cannot cope with the demand.

The Mayor’s London Plan is an example of how not to respond wisely to the forecast growth in the population of London. His only solution to the inadequate road network and inadequate capacity on the London Underground or surface rail is to encourage people to walk, cycle or catch a bus. But usage of buses has been declining as they get delayed by traffic congestion and provide a very poor quality experience for the users.

The London Plan should tackle this issue of inappropriate population growth. The rapid population growth that is forecast is bound to be “Bad Growth”, not “Good Growth” as the London Plan suggests. Population growth and its control should underpin every policy that needs to be adopted in the spatial development strategy of London.

For more background on the London Plan, see:

Roger Lawson (Twitter: )

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South African Politics, Pan African Resources and Mondi

The election of Cyril Ramaphosa as the President of the ANC suggests that the country may be taking a positive step forwards. Under Jacob Zuma South Africa has become riddled with corruption and “state capture” where assets are sold off to favoured parties. Whether Cyril Ramaphosa can become President of the country in due course remains to be seen but it is worth looking at his background.

He has a legal qualification and became a trade union activist. After being active in politics, including helping to develop the “Black Economic Empowerment” policy that affects any company operating in the country, he became a businessman. Indeed he was for a time Chairman of gold miner Pan African Resources (PAF) which I held shares in for a while. This is a company registered in the UK and they hold their AGMs in London, although I don’t recall Mr Ramaphosa ever turning up for one. But with this and his other business interests he should have learned something about business to offset his left-wing sympathies.

There are of course other businesses operating in South Africa that are registered in the UK and the risk of political interference is always at the back of investors minds. One I currently hold is Mondi which is actually dual-listed on both the London and Johannesburg stock exchanges. This means it is subject to regulation in both the UK and South Africa (the South African financial regulations are actually very good), but one disadvantage is that a withholding tax is payable on dividends. It holds its AGMs in London.

Mondi (MNDI) is a paper and packaging producer with interests in many countries. Its share price does seem to be affected to some extent by political events in South Africa and one gets the impression that the valuation if slightly lower than other packaging companies for that reason (e.g. a somewhat lower prospective p/e than D.S. Smith). Goldman Sachs recently upgraded Mondi to a “buy” with a 2200 price target.

So apart from wishing Mr Ramaphosa well, investors do need to take into account the political risks of investing in South Africa. But my experience has been positive to date with the ANC seeming to take care not to damage large businesses overtly. However, the general economic trends in South Africa under Zuma have not been good even though the per capita wealth of the country at $11,300 is still the highest in Africa (excepting Mauritius).

A sound economy, rational economic policies and the rule of law are the key to generating wealth. Compare the wealth of South Africans with that of Zimbabwe where it is estimated to be as little as $200!

Perhaps the moral is that politics does matter!

Roger Lawson (Twitter: )

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ADVFN AGM – How to Disenfranchise Shareholders, and OFCOM Interest

I was surprised yesterday to pick up an RNS Announcement from ADVFN Plc (AFN) stating that the company’s Annual General Meeting had taken place on that day and all resolutions were duly passed. I was surprised because as a shareholder in the company (and on the register), I had received no notification of the AGM and no proxy voting form either of course.

In addition there is no notice of the AGM given in any RNS announcement, and there is no information on it on the company’s web site. It’s an easy way to avoid folks from voting or turning up at the AGM – you simply don’t tell anyone about it!

Now admittedly I don’t hold many shares. I only bought a few in early 2017 because ADVFN were peripherally involved in a libel suit I was pursing (settled in the High Court on Thursday to my satisfaction – more on that another time). I thought it would be helpful to attend any General Meetings of the company to learn more about the business.

This might be one of my best investments in 2017. Share price when purchased was 27.4p, share price now is 39.5p (i.e. up 44%). But the price did fall 9% yesterday, so perhaps other folks did attend the AGM and asked some awkward questions. If any readers of this blog did so, a report on the meeting would be helpful.

ADVFN run investment information platforms including a popular bulletin board. Profits have been non-existent for most of the last few years, but revenue was £8.2 million last year so the current market cap of £10.5 million is not totally bonkers. The company also indicated it was now focusing on profits rather than growth so results might improve – or at least they might not run out of cash and need to do more fund raising although the picture is not totally clear. One reason for the share price rise was probably the announcement by the company of a cryptocurrency project, using blockchain technology. The application is for a digital wallet to support a social media cryptocurrency. Although it is not altogether apparent who might use that and what the benefits might be, it appears to possibly be a way to support micropayment services for blog contributions. Any company that can claim involvement in the blockchain/cryptocurrency world gets their share price inflated it seems. It’s another “bubble” just like the Bitcoin price.

There has been a lot of public debate about the problem of “fake news” on social media and the failure to remove abusive content or more generally censor irresponsible stories. Financial bulletin boards and blogs are one part of this world of dubious content often posted by anonymous contributors who frequently get their facts wrong. And sometimes possibly deliberately so.

One interesting comment last week was from the Chairman of OFCOM, the media regulator. Patricia Hodgson said internet businesses such as Google and Facebook are “publishers” and not simply “platforms”. In other words, they might be responsible for their content after all. Ofcom are considering the issues although she indicated it was for Government to decide on any action in this area and OFCOM probably do not have the resources at present to cover it. But businesses such as ADVFN might find they are caught up with any general media regulation even though they have so far avoided interference from financial regulators such as the FCA – why that is so I have never understood.

Freedom of the press is a meritorious policy, but the internet has introduced numerous problems such as “trolls” who abuse folks in public often for dubious motives. Politicians are frequently attacked now (death threats are common for example) so we might see some action from them once the politics of Brexit are out of the way.

Roger Lawson (Twitter: )

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Brexit, HBOS, Globo and the FRC

Is it not heartening that the Brexit divorce bill, and other terms, have been settled? The exact cost is unclear but it could be up to £40 billion – a lot of money you may say! However, the fact that the key negotiators, Mrs May, Barnier et al, all looked somewhat glum about the deal when announced perhaps tells us that it was a compromise in which both sides had to concede ground. Or perhaps they were just tired. The terms of any future arrangements including trade deals still need to be worked out so it’s a long way from being concluded.

Now that £40 billion figure, sounds a lot, even if it is spread over some years. Hard line brexiteers will be unhappy. But it’s all relative. For example the annual UK Defence Budget is over £35 billion and rising. In addition, I have just read the Financial Reporting Council’s report on the HBOS audit and you can see there on page 7 that HBOS had to write off £63.3 billion in loan losses. That was only one smaller sized UK bank. According to the Bank of England, the financial crisis that affected HBOS caused £7.3 trillion of losses in total in the UK.

The report from the Financial Reporting Council (FRC) on the audit of HBOS is a quite tedious and turgid document. To remind you, HBOS was a bank that almost went bust after making imprudent commercial property loans financed by short term debt. When Lehman’s collapsed and debt became difficult to raise, HBOS had to be supported by the Government and then bailed out by a merger with Lloyds TSB. The latter’s shareholders are currently pursuing a claim against the company and its directors over that event.

The reason the audit of HBOS was examined by the FRC was because the company obtained an unqualified audit report suggesting that it was a “going concern” when it soon turned out to be otherwise. These events date back to 2008 – that’s 9 years ago which shows the speed with which the FRC typically operates.

One interesting comment made in the FRC report is that it suggests on page 11 that liquidity support from central banks may be considered “a normal funding source…..and therefore reliance on such support does not mean that the bank is not a going concern…..”. As banks with a positive balance sheet are usually assumed to be eligible for “lending of last resort” from the Bank of England that might mean that HBOS would be considered to be a going concern even if it ran out of cash (which is the reason most banks go bust, not because of defective balance sheets – Northern Rock is a good example).

The report also refers on page 29 to “market expectations” at the time. Market participants did not expect the financial crisis to get worse which affected the auditor’s views. So now we know why the FRC let the auditors of HBOS (KPMG) off the hook!

As I mentioned in a blog post a couple of weeks ago (see ), I attended a meeting with the FRC organised by ShareSoc/UKSA. One of the issues raised was the lack of feedback from the FRC on the progress of investigations. I followed up with one of the speakers after the meeting, specifically about the case of Globo. I asked what was the status on the investigation of the audit of their accounts by Grant Thornton. As readers may know, Globo was a company that went into administration in 2015 after it was revealed that the revenue of the company was probably fictitious (see for details). The report of the administrators made it clear that the cash on the balance sheet of Globo plc seemed to have disappeared, bringing into doubt the preceding audit report on that ground alone let alone the revenue recognition issue.

The FRC announced an investigation in December 2015, i.e. two years ago. What have the FRC been doing, when will the investigation likely conclude, are there any preliminary conclusions, etc, etc? All of these questions are very relevant as the answers might provide the basis for legal action by shareholders against the auditors and others. After several email exchanges with FRC staff, the only answer I managed to elicit is that the investigation is on-going. It has not even been turned into a “Formal Complaint”.

The reason more information could not be supplied is that it might prejudice “the overarching requirement for fairness”. My response was “I really do suggest that the FRC needs to reconsider its policies in this area. You have too much emphasis on treating those who have been complained about (i.e. auditors) fairly, while those who have complained are treated unfairly. This rather suggests, as we already knew, that the FRC is dominated by auditors who are the people it is supposed to be regulating”.

You will be amused to read in the FRC’s Publication Policy document (para. 3) that “Transparency contributes to public confidence in independent disciplinary arrangements….” but then proceeds to spell out all the restrictions it imposes that thwart it.

Roger Lawson (Twitter: )

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Brexit Bill – How It’s Worked Out

Here is an explanation of how the EU calculates the Brexit Bill, forwarded to me anonymously:

Mr Dave Davis is at the golf club returning his locker key when Mr Barnier, the membership secretary sees him. “Hello Mr Davis”, says Mr Barnier. “I’m sorry to hear you are no longer renewing your club membership, if you would like to come to my office we can settle your account”. “I have settled my bar bill” says Mr Davis.. “Ah yes Mr Davis”, says Mr Barnier, “but there are other matters that need settlement”

In Mr Barnier’s office Mr Davis explains that he has settled his bar bill so wonders what else he can possibly owe the Golf Club? “Well Mr Davis” begins Mr Barnier, “you did agree to buy one of our Club Jackets”. “Yes” agrees Mr Davis “I did agree to buy a jacket but I haven’t received it yet”. “As soon as you supply the jacket I will send you a cheque for the full amount”. “That will not be possible” explains Mr Barnier. “As you are no longer a club member you will not be entitled to buy one of our jackets”! “But you still want me to pay for it” exclaims Mr Davis. “Yes” says Mr Barnier, “That will be £500 for the jacket. “There is also your bar bill”. “But I’ve already settled my bar bill” says Mr Davis. “Yes” says Mr Barnier, “but as you can appreciate, we need to place our orders from the Brewery in advance to ensure our bar is properly stocked”.. “You regularly used to spend at least £50 a week in the bar so we have placed orders with the brewery accordingly for the coming year”. “You therefore owe us £2600 for the year”. “Will you still allow me to have these drinks?” asks Mr Davis.

“No of course not Mr Davis”. “You are no longer a club member!” says Mr Barnier.

“Next is your restaurant bill” continues Mr Barnier. “In the same manner we have to make arrangements in advance with our catering suppliers”. “Your average restaurant bill was in the order of £300 a month, so we’ll require payment of £3600 for the next year”. “I don’t suppose you’ll be letting me have these meals either” asks Mr Davis. “No, of course not” says an irritated Mr Barnier, “you are no longer a club member!” “Then of course” Mr Barnier continues, “there are repairs to the clubhouse roof”. “Clubhouse roof” exclaims Mr Davis, “What’s that got to do with me?” “Well it still needs to be repaired and the builders are coming in next week”, your share of the bill is £2000″. “I see” says Mr Davis, “anything else?”. “Now you mention it” says Mr Barnier, “there is Fred the Barman’s pension”. “We would like you to pay £5 a week towards Fred’s pension when he retires next month”. “He’s not well you know so I doubt we’ll need to ask you for payment for longer than about five years, so £1300 should do it”. “This brings your total bill to £10,000” says Mr Barnier. “Let me get this straight” says Mr Davis, “you want me to pay £500 for a jacket you won’t let me have, £2600 for beverages you won’t let me drink and £3600 for  food you won’t let me eat, all under a roof I won’t be allowed under and not served by a bloke who’s going to retire next month!” “Yes, it’s all perfectly clear and quite reasonable” says Mr Barnier. “Piss off!” says Mr Davis

Comment: Now you can understand what the Brexit bill negotiation is about, but it does depend of course on the membership terms when you sign up to join a club. Did anyone read the small print?

Roger Lawson (Twitter: )

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Industrial Strategy – Is It More Than a PR Document?

Yesterday the Government published their “Industrial Strategy” – subtitled “Building a Britain fit for the future”. This is a “White Paper” that lays out how the Government plans to tackle the issues identified in a previous “Green Paper”. Does it have any relevance to investors views of the prospects for UK companies and the economy as a whole? I will try to answer that question later.

It certainly reads positively with glowing comments on the history of innovation in the UK, the great business environment, record levels of employment, vibrant culture, best universities in the world…….I could go on but you can read the whole 255 page document if you want more of the same.

But there are four “grand challenges” it focuses upon as key themes in improving our competitiveness and productivity:

  • Artificial intelligence and big data.
  • Clean growth.
  • The future of mobility.
  • Meeting the needs of an ageing population.

These will be supported by investment via an “Industrial Strategy Challenge Fund” (Government funding but matched by commercial investment), plus increasing R&D tax credits and putting more money into R&D investment. Education in STEM subjects (Science, Technology, Engineering and Mathematics) will be enhanced with the establishment of a technical education system and a National Retraining Scheme. This is surely all sound (speaking as an engineer by education) because it is surely clear that poor productivity in the UK is the result of poor education and skills compounded by cultural biases against technology.

There is a big emphasis on improving productivity in this document which is definitely to be applauded. We cannot grow the economy by simply opening more cafés and gastro pubs.

As regards infrastructure there is money to support 5G and fibre optic networks, and support for electric vehicles. In addition the Government expects self-driving cars to be on our roads by 2021 – that’s only four years away. I am sceptical of what might happen when my top of the range SATNAV (not that inbuilt in the car which is hopeless) managed to get me lost in London only yesterday. As John Thornhill said in an interesting article in the FT today that “technology promises to free us from the human touch that caused millions of deaths [on the roads worldwide], but then quoted one tech executive as saying “the assumption that you can go from 1m road deaths to zero is very naive”.

There is also a commitment to “transform construction techniques” where old fashioned methods of house building, which are hopelessly labour intensive, remain in use. In another sector they will improve teaching of computer science and invest £20m in a new “Institute of Coding”, presumably to teach computer programming. I have to advise them as a former programmer that coding is an inefficient way of developing applications and teaching folks how to do it rather than implement systems in other ways is a retrograde step. This is surely a case of the Government fighting the new economic wars with old tactics.

Likewise a commitment to invest in AI, when it’s been around for many years but has yet to revolutionise the world, could be seen as unreal when it is unclear how that will have a big impact. AI is a myriad of technologies that might have impacts in many cumulative minor ways, but it’s the detail that matters.

In many ways this document is big on vision, but short on specifics (other than the few things I have mentioned above). It will take consistent follow through to make a concrete success of these policies – not something our existing political system is best designed to achieve.

So my conclusion is that it is a valiant attempt to guide the UK economy in the right future direction. Whether it will have a major impact or success remains to be seen. It may have little impact on the decisions by UK companies, who are always wary of Government hand-outs or policy changes.

Roger Lawson (Twitter: )

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Budget Feedback, the Patient Capital Review and Productivity

My last post was on the Chancellors Budget which was written quickly but seems to have covered most of the important points. Perhaps one significant item missed was the additional liability of foreign investors for capital gains tax on property sales, although institutional investors may be exempt. This might have some impact but as the details are not yet clear, it remains to be seen what.

Otherwise the media feedback on the budget was generally positive although there was a big emphasis on the poor economic forecast for growth that the Chancellor announced. The OBR has substantially reduced growth forecasts which is one reason why debt will not be falling as quickly as previously indicated and future tax revenues will likewise be lower. Part of the problem is a failure to improve productivity. This also means that average wages in real terms may not grow as expected.

Why did I not comment on this? Because firstly economic forecasts (the OBR or anyone else’s) are notoriously unreliable, and secondly it makes little difference to most UK investors. It might suggest it would be wiser to invest more in overseas companies than UK ones, but in reality many UK companies have major revenues and profits from abroad. In any case, a lot of investors have already hedged their portfolios against the possible damage of a “hard Brexit” by adjusting their portfolios somewhat.

My experience is that investing based on country economic forecasts is very questionable. Good companies do well irrespective of the state of the general economy.

Patient Capital Review

On Budget day the Government (HM Treasury) also published their consultation response to the “Patient Capital Review” – or “Financing Growth in Innovative Firms” as it is officially called. You can find it on the internet. This review was aimed to review incentives to invest in early stage companies with a view to promoting more investment in such companies as part of the attempt to improve productivity in the UK economy. It potentially had significant impacts for investors – for example on the EIS and VCT tax reliefs. What follows is an attempt to bring out the key points:

The review considered not just the tax incentives, and whether they were effective, but whether more direct investment (supported directly or indirectly by the Government) should be undertaken. They got more than 200 written responses to the original consultation on this subject (see mine here: ), plus some on-line responses and they also used a panel of industry experts.

Although they have not published all the responses or broken them down in detail, one gets the impression that most respondents considered that the VCT/EIS regime was generally effective in stimulating investment in early stage companies and that there were few abuses. But the Treasury had expressed concern about some of the investments made in EIS/VCT companies which were often focussed more on “asset preservation” than in funding new growing businesses. So the rules are being tightened in that regard – see below.

A personal note: having invested in two EIS schemes that promoted country pubs the asset preservation capability might have made for a good sales pitch by the promoters but they subsequently turned out to be very poor investments even after the generous EIS tax reliefs. One is being wound up with the assets being sold for much less than purchased while the other one only made any money after it turned into a bailiff business subsequent to a shareholder revolt. The Government’s policy of ensuring a focus on “riskier” investments might actually be good for the investors as well as the economy! It will avoid inexperienced investors getting sucked into dubious investments by sharp promoters who can make even lemons sound attractive because of the generous tax reliefs.

On the support for new investment front, the Government is taking these steps:

  • Establishing a new £2.5 billion Investment Fund incubated in the British Business Bank with the intention to float or sell once it has established a sufficient track record. By co-investing with the private sector, a total of £7.5 billion of investment will be supported.
  • Significantly expanding the support that innovative knowledge-intensive companies can receive through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) while introducing a test to reduce the scope for and redirect low-risk investment, together unlocking over £7 billion of new investment in high-growth firms through EIS and VCTs.
  • Investing in a series of private sector fund of funds of scale. The British Business Bank will seed the first wave of investment with up to £500m, unlocking double its investment in private capital. Up to three waves will be launched, attracting a total of up to a total of £4 billion of investment.
  • Backing first-time and emerging fund managers through the British Business Bank’s established Enterprise Capital Fund programme, supporting at least £1.5 billion of new investment.
  • Backing overseas investment in UK venture capital through the Department for International Trade, expected to drive £1 billion of investment.
  • Launching a National Security Strategic Investment Fund of up to £85m to invest in advanced technologies that contribute to our national security mission.

In addition the Pensions Regulator will clarify guidance on inclusion of venture capital, infrastructure and other illiquid assets in portfolios and HM Treasury will encourage defined contribution pension savers to invest in such assets.

Entrepreneur’s Relief rules will be changed to reduce the disincentive to accept more outside investment, and the Government will also look at a guarantee programme modelled on the US “Small Business Investment Company”.

They will also work with the Intellectual Property Office on overcoming the barriers to high growth in the creative and digital sector. What this implies is not clear. Does that mean they are suggesting introducing software patents perhaps?

Several gaps in the investment market for early stage or follow-on funding were identified but one telling comment from the expert panel was this: “…the UK venture capital market has historically delivered poor returns; this results in less capital being attracted to the asset class, which in turn results in less talent being attracted to the patient capital sector; this then depresses returns, completing the circle”. But they did suggest this could be fixed.

There apparently were many comments on the importance of the EIS/SEIS schemes for funding innovative businesses – for example: “EIS and SEIS incentives have been particularly effective at stimulating investment and are extremely valuable to bioscience investors”. But I suspect that has been of more benefit to companies raising capital than it has been in terms of achieving long-term positive returns for investors. It is a pity not more evidence was provided on that.

The Treasury response is to double the annual investment limit to £2 million for EIS investors, so long as any amount over £1 million is invested in knowledge-intensive companies. Also the annual investment limit for knowledge-intensive firms will be doubled from £5 million to £10 million for EIS and VCT companies, and a new fund structure for such firms will be consulted upon. There will also be more flexibility on how the “age limit” is applied for companies applying. Question: what is a knowledge-intensive company? The answer is not given in the Treasury’s response.

A “principles-based” test will be introduced for all tax-advantaged venture capital schemes. This will ensure that the schemes are focussed “towards investment in companies seeking investment for long-term growth and development”. Tax motivated investments where the tax relief provides most of the returns to investors will be ruled out in future. There must be “a risk to capital” for firms to qualify. Detailed guidance will be published on this and there are some examples given in the response document, although it is far from clear from those what the rules might be. Comment: as this is going to be “principle-based” rather than based on specific rules it looks like a case of the Treasury saying “we can’t say what is objectionable now but we will know when we see it”. This might create a lot of uncertainty among VCT and EIS fund managers and company advisors.

The rules for VCT investments will also be tightened up with the following changes:

  • from 6 April 2018 certain historic rules that provide more favourable conditions for some VCTs (“grandfathered” provisions) will be removed
  • from 6 April 2018, VCTs will be required to invest at least 30% of funds raised in qualifying holdings within 12 months after the end of the accounting period
  • from Royal Assent of the Finance Bill, a new-anti abuse rule will be introduced to prevent loans being used to preserve and return equity capital to investors. Loans will be have to be unsecured and will be assessed on a principled basis. Safe harbour rules will provide certainty to VCTs using debt investments that return no more than 10% on average over a five year period
  • with effect on or after 6 April 2019 the percentage of funds VCTs must hold in qualifying holdings will increase to 80% from 70%
  • with effect on or after 6 April 2019 the period VCTs have to reinvest gains will be doubled from 6 months to 12 months

Comment: these changes would not seem to cause great difficulties for VCT managers and should not affect the returns to investors. Some of the changes might be helpful. The feedback from VCT managers is awaited.

But the income and capital gains tax reliefs for investors are basically unchanged, as is Business Property Relief on “unlisted” companies such as AIM stocks which were both mooted as being under consideration. As I wrote in my previous blog post on the budget, at least the Chancellor and the Treasury seem to have minimised the changes which is always helpful for investors. Being unable to plan many years ahead because of taxation rules and levels continually changing has been a major problem for investors. So on that score alone, the budget is to be welcomed.

As regards Entrepreneurs’ Relief, the government is concerned that the qualifying rules of Entrepreneurs’ Relief should encourage long-term business growth. The rules will therefore be changed to ensure that entrepreneurs are not discouraged from seeking external investment through the dilution of their shareholding. This will take the form of allowing individuals to elect to be treated as disposing of and reacquiring their shares at the then market-value. The government will consult on the technical detail. Comment: this seems to be yet another complication to taxation rules which is unfortunate.


These changes to the tax incentivised schemes, and the Government investment in funds, may assist to improve the productivity of the UK population by focussing on high growth technology businesses. One cannot improve productivity by employing more coffee bar baristas, and such jobs are always likely to remain low paid. The budget change to increase the National Living Wage (the Minimum Wage) from next April will also promote improvement in productivity as it will make employers consider investment in automation rather than simply employing more staff.

There is also investment in infrastructure committed to in the budget, which might assist. Is it not the case that productivity is reduced because of the distances and time wasted in commuting in the South-East of England? The transport network (road or rail) is truly abysmal in the UK and has been getting worse. This means that folks are tired before they even get into work. The encouragement of commuting by cycle also surely results in tired and unproductive staff. It might be fashionable, and good for their health in the long term, but is it good for the economy? Unfortunately the housing market has been made more inflexible in recent years in some respects so people cannot move nearer to their workplace. Stamp duty increases have deterred moving to reduce travel costs, and higher house prices in some areas have not helped. For example, this writer recently met someone who lives in Southampton when his employer was based in Oxford – he could not afford to move. The reduction in stamp duty for first-time buyers in the Budget is not going to make a big difference to these problems.

So overall the Budget changes are more “nudges” in the right direction to improve the economy, while not being revolutionary. The Government’s tax base is not undermined and investors tax planning not significantly affected, so Philip Hammond may find he is in the job longer than expected after all.

Roger Lawson (Twitter: )

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