New Corporate Governance Code

The Financial Reporting Council (FRC) have published a new UK Corporate Governance Code – a draft that is subject to public consultation. The revised Code sets out good practice so that the boards of companies can:

  • Establish a company’s purpose, strategy and values and satisfy themselves that these and their culture are aligned;
  • Undertake effective engagement with wider stakeholders, to improve trust and achieve mutual benefit, and to have regard to wider society;
  • Gather views of the workforce;
  • Ensure appointments to boards and succession plans are based on merit and objective criteria to avoid group think, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths;
  • Be more specific about actions when they encounter significant shareholder opposition on any resolution, including those on executive pay policies and awards; and
  • Give remuneration committees broader responsibility and discretion for overseeing how remuneration and workforce policies align with strategic objectives.

Perhaps the most controversial change will be the requirement to consult with the workforce and suggests three ways this might be done (worker directors, a workforce advisory panel or a designated non-exec director), although it does not rule out other methods. This writer suggests this is a positive step but some shareholders might not agree.

It also suggests better engagement with shareholders although as usual there is an emphasis on a few major shareholders rather than the wider shareholder community.

The UK Corporate Governance Code has helped to improve the operation of UK company boards so it is important that any changes made are positive. On a quick review most of the changes seem to be improvements, but the devil is in the detail on such documents. More information including how to respond to the consultation is present here: https://www.frc.org.uk/news/december-2017-(1)/a-sharper-uk-corporate-governance-code-to-achieve

I may comment further at a later date.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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London Plan Published

I mainly comment on financial matters, but if you live or work in London you should pay attention to the “London Plan” that Mayor Sadiq Khan has recently published. Indeed if you live in other large conurbations you might wish to review it also because the policies he is promoting might spread elsewhere.

What’s the London Plan? It’s a document that sets the “spatial development” strategy for London over the next few years and has legal implications for planning developments, housing construction, transport infrastructure, and many other aspects of our lives.

The Mayor makes it plain that London needs to cope with the rapidly expanding population and business activity. The population of London might reach 10.5 million by 2041 he says (currently 8.8 million). That means a lot more houses have to be built (66,000 per annum he says) and support for more workplaces.

In addition it has major implications for transport infrastructure while at the same time he wants to clean up London’s air. He wants to make London a “zero carbon” city by 2050, although no doubt he will be long gone by then. As part of this he aims to reduce “car dependency” (an emotive and inaccurate phrase disparaging people who have made a rational or personal choice about how they travel when you don’t see this said about those who rely on cycles for their daily travel needs).

Why has the population of London grown so rapidly in recent years and continues to do so? Page 12 of the Plan explains why. It says 40 per cent of Londoners were born outside the UK, and the city is now home to 1 million EU citizens, no doubt attracted by the vibrant London economy. This has put a major strain on housing, transport, social services and other infrastructure (incidentally an unbelievable 1.2 million Londoners are apparently “disabled”).

This state of affairs has come about because of national policies on immigration with no effective policies to distribute that more widely across the country compounded no doubt by a desire by some politicians to improve their chances of being elected.

Specifically looking at transport, the Mayor’s target is for 80% of all journeys to be made by walking, cycling and public transport (that of course includes the 14% of Londoners who are disabled!). It’s currently 64%. This is going to mean an aggressive set of policies to reduce car use – hence the campaign against the Mayor’s Transport Strategy which supports the London Plan run by the Alliance of British Drivers – see http://www.freedomfordrivers.org/against-mts.htm

The Mayor highlights the health inequalities in London, with deprived areas of London having reduced life expectancies (as much as 15 years for men and 19 years for women) surely an astonishing statistic. What is the reason for this? Poor housing conditions are certainly one, but lack of daily activity is allegedly another so the Mayor wants us all to be walking and cycling.

The Mayor does have plans to improve public transport including proposals for Crossrail 2 and extension of the Bakerloo line but these proposals will do relatively little to soak up the increased demand, and with no proposals of significance to improve the road network, hence no doubt the need to encourage us all to walk or cycle.

The Mayor’s plans to support the need for more housing include targets for every London borough (for example over 2,000 new homes every year in Barnet, Brent, Ealing, Greenwich, Hounslow, Newham, Southwark, and Tower Hamlets). This includes high concentration developments in locations with good public transport access levels (PTALs), particularly inner London boroughs. Outer London boroughs might see a relaxation of planning regulations to allow more “in-fill” developments including building on back gardens as the Conservatives promptly complained about. There will be more encouragement for smaller builders, more efficient building techniques and “proactive” intervention in London’s land market (more “compulsory purchase” perhaps).

One aspect of transport infrastructure that the London Plan covers is that of parking provision for new housing, office or shop developments. It wants most developments to be “car free” (i.e. no parking provision), particularly those with high PTAL levels. The details of what this means in practice are not clear, but it looks like the intention is to reduce parking provision substantially, thus resulting in more on-street parking and obstruction.

The Mayor concludes his near 500-page tome on the subject of the “Funding Gap”. By this he means the gap between the public sector funding required to support London’s growth (and his plans) and the money currently committed. In other words, he wants more money, including a bigger share of taxation collected from Londoners. For example, he repeats his call for control of Vehicle Excise Duty (VED) which any right-thinking person should surely oppose. Yes the Mayor wants more money and more power. Unfortunately the establishment of directly elected Mayors such as Mr Khan has resulted in empire building of the worst kind. They are effectively dictators within their realms with no effective democratic constraints on their policies and negligible public accountability.

In summary, it is not clear that the building of lots of new homes (which of course will emit more pollutants, particularly during constructions, more than offsetting any reduction from restraining car use), of a fairly low standard in dense conurbations, is going to improve the quality of life for Londoners. It is undoubtedly the case that more new homes are needed in London but building new homes without complementary improvements to the transport infrastructure, which has consistently lagged behind the growth in London’s population, does not make much sense.

As is already seen in the statistics, older London residents are moving out and being replaced by immigrants. Some readers might wish to consider doing the same given the outlook for the quality of life in London. Simply reacting to the population growth in London without trying to constrain it, or divert it elsewhere, is surely a mistake.

You can submit your comments on the London Plan to the public consultation by going here: https://www.london.gov.uk/what-we-do/planning/london-plan/new-london-plan/comment-draft-london-plan . Please be sure to do so. 

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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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: https://twitter.com/RogerWLawson )

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ULS Technology, Keystone Law and Collusion on IPO Pricing

Yesterday I attended an interim results presentation by ULS Technology (ULS). They have been listed on AIM for a couple of years and have grown both from organic increases in revenue and from acquisitions which is often a good formula. They operate in the legal conveyancing and estate agency market where volumes have not been great of late – it seems house prices have made it difficult for folks to move plus changes to stamp duty and buy-to-let taxes have deterred transactions. But they seem to be prospering regardless.

I first became interested in this company, and acquired some shares, when I noticed that Geoff Wicks have become a director. He has also just been made Chairman. Geoff used to be CEO of Group NBT which was one of my most successful technology investments and he did a great job of sorting out and then growing a failing dotcom business.

I did perhaps amuse the CEO of ULS, Ben Thompson, by noting that I don’t really like companies with unmemorable three letter acronym names (ULS, NBT for example). Investors can never recall what they do. ULS used to be called United Legal Services but needed a new “umbrella” name so came up quickly with ULS. Should have used a branding consultancy I suggest. Unless you are a really big company, like IBM or BAE, establishing name recognition for such “brands” is hard work.

So ULS it is for the present, but understanding what they do and how they make money is not necessarily easy. Attending the seminar helped with understanding that. In summary, ULS aim to make house moving easier by making conveyancing easier, quicker and lower costs. They use web technology to support that. So if you are looking for a conveyancing solicitor they can help, and they have partnerships with other businesses in the house buying space such as mortgage brokers/lenders so that their service is offered when required. For example, Lloyds Bank is one of their largest partners. In addition they have a specialist comparison web site for when you are looking for an estate agent (includes price and performance comparisons).

For the conveyancing service they get paid by solicitors to which customers are referred, who pay 5 days after the legal completion with a fixed fee (does not vary with house price cost). The customer saves on paperwork such as filling out multiple forms. The customer introducers are many small mortgage brokers, large financial networks and others such as Moneysupermarket.com and Home Owners Alliance. They do seem to have some competitors but these are generally smaller in size and have nowhere near the same size of “panel” containing solicitors to which referrals are sent. The market generally for conveyancing services is still very old fashioned and dominated by “cottage industry” firms. ULS have only 2.6% of the conveyancing market but have a desire to become much larger. It certainly seems a market that is ripe for technical disruption.

Estateagent4me.com is their estate agency comparison site where you can search for agents and select on the basis of: the Fees they will charge; Average time to sell a property like yours; How close they might get to achieving an asking price; and How successful they are at selling similar homes. I asked whether they had received any legal threats from Purplebricks who apparently were not happy at all about some reviews that were published on their service, but it seems they have not.

The company expects to grow by: 1) Organic growth; 2) M&A (already done some of those); 3) Future new product development. They are not rushing to move outside the UK although there might be opportunities there. In essence they seem to be aiming for a conservative, profitable growth strategy which is often the kind of company I like, rather than betting the farm on a very rapid expansion as per Purplebricks. Return on capital is what matters, not empire building at huge cost.

There were a number of good questions from the audience of private investors (organised by Walbrook) but I’ll only cover one that arose. The accounts show a very low “current ratio” because the current liabilities, particularly the “Trade and other payables” figure is high at £7.8 million. This does include two earn-out payments due from past acquisitions of £5.2 million and taking those out makes the ratio look more reasonable. It would seem they do have a credit facility lined up to cover those payments, but this will add to the gearing of the company of course, at least temporarily even if operating cash flow is positive as it appears to be. They may wish to raise more equity also I suspect, particularly if other acquisitions are contemplated.

Also yesterday a legal firm named Keystone Law Group Plc listed on AIM. I think this is only the second of two commercial legal firms to list (Gateley Holdings, GTLY, was the first). Keystone promptly went to a premium over the listing price. I’ll have to read the IPO Prospectus which is available on the company’s web site under AIM Rule 26. Keystone are different to many law firms in that most of their solicitors are effectively freelances and they only get paid when the client pays (yes they are part of the new “gig” economy). The prospectus should make interesting reading as I have been a client of theirs in a libel action I have been pursuing of late which you should hear more about very soon. But buying shares in new IPOs is generally something to avoid.

Meanwhile the Financial Conduct Authority (FCA) FCA has accused fund managements of colluding on IPOs. The regulator alleges Artemis, Newton, River and Mercantile and Hargreave Hale shared the prices they were willing to pay for shares. This story should run and run as it attacks the informal nature of conversations in the City of London about deals under consideration. But colluding on pricing is a breach of competition law as anyone in business should surely know.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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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: https://twitter.com/RogerWLawson )

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A Cautionary Tale from Paul Scott

City AM published an educational story last week which is worth repeating. It covered the investment record of Paul Scott who is very well known in the small cap investment world. He writes very perceptive, and quick, analyses of announcements by smaller companies for Stockopedia with a strong emphasis on the financial accounts. He trained as an accountant and worked for a retailing company as finance director for some years. He then became a professional investor – one might say living off his wits – and reportedly turned £50,000 into more than £5m in a few years. Then the financial crisis hit in 2008/9.

This is what he said in the City AM interview: ““I lost the lot and had to start all over again in the financial crisis. It was horrendous, it ruined my life at the time. I had to sell my house, I lost all my savings, I ended up £2m in debt. It was a catastrophe.”

The article suggests Scott made two mistakes: “One was investing in stocks with low liquidity. The other was gearing up on them through spread-betting. When the crisis hit, he couldn’t get out.”

Now with speculative small-cap stocks again riding high, with valuations not based on current fundamentals such as profits and cash flow, but on their future prospects and for their ability to dominate their markets, it is surely again a time to be wary.

Markets are driven by emotions and once a panic sets in then small cap stocks in particular could become very illiquid. Having a major proportion of your portfolio in such stocks may have done wonders for your investment performance in the last couple of years but it is high risk. That is particularly so if you also gear up, and have an undiversified group of holdings – a portfolio of less than a dozen holdings of such companies is positively dangerous.

So the moral is surely never to hold a company on the premise that you can get out if the market turns sour for shares in that company, or in general. Unless you are sure you want to hold a company for the long term, and can afford to do so (i.e. you have not borrowed money to buy it), you should not buy it in the first place.

In addition never let a few holdings dominate your portfolio. And in particular be very wary of companies where there is little trading (i.e. low liquidity). If your own holding is a multiple of the daily trading volume, you’ll never be able to get out at a fair price if there is a crash.

This is what Paul had to say recently in an interview for Stockopedia: “I’ve learnt all my investing decisions the hard way. 2008 taught me that you need to keep an eye on the exit and you need to consider what will happen to liquidity if there is some sort of awful event. Not necessarily a minor event, but if the financial system starts to cave in again – which it might well do. So for that reason, this time my risk management is much better. I’m keeping the gearing lower than it was and I have a general rule that I want to be able to exit every position I hold within a maximum of two days in a bear market. So I position size accordingly. If something is very small and illiquid, I wouldn’t have more than £30,000 – 40,000 worth of it. If it’s nice and liquid then I’ll have £500,000 of it. I think liquidity is so important.”

I would only comment that when everyone wants to exit, shifting even a relatively small amount of stock in small caps can be damn difficult. Having solely small cap stocks in your portfolio can be a risky strategy when mid to large cap stocks will be much more liquid and less volatile. For example, private investors could easily sell their holdings in HBOS, RBS, Northern Rock and Bradford & Bingley even when they were in dire difficulties.

Diversity in individual holdings, and in company size, are both prudent.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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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: http://www.roliscon.com/Roliscon-Response-to-Financing-Growth-in-Innovative-Firms.pdf ), 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.

Productivity

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: https://twitter.com/RogerWLawson )

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