Budget 1999: Enterprise Measures - Changes too cautious, say companies

The Budget and Business

GORDON BROWN promised a set of reforms which would create "a new enterprise economy for all". Yet, while the measures he announced received a guarded welcome from entrepreneurs and venture capitalists, some felt the Chancellor had been overly cautious.

"The direction is right, but the impetus should be much stronger," said Ronald Cohen, chairman of high-tech venture capitalists Apax and a member of a Department of Trade and Industry committee which is looking at encouraging young technology companies.

David Svendsen, the UK chairman of Microsoft, the software giant, said the measures announced by the Chancellor "get Britain started on the path to the enterprise economy".

The move to stimulate high-tech companies will allow smaller firms to lure experienced managers from larger firms by offering them large packages of share options.

The Government does not plan to publish the details until today. However, the broad outline is to allow small companies to offer equity worth up to pounds 100,000 to executives without it incurring income tax. The previous ceiling was pounds 30,000.

"It's a very good idea," said David Stroud, managing director of sparesfinder.com, an Internet-based company which helps firms find spare parts around the world. "If I want a good sales guy how am I going to lure him out of his nice established sales job? If I can offer him some equity he might think differently about it."

Venture capital groups, which have lobbied heavily for the move, also approved the initiative, although they had argued for the Chancellor to adopt a ceiling of pounds 250,000.

"It should make a significant difference in recruiting what is a relatively small number of people into a relatively small number of jobs," said Jonathan Clarke, an executive with Cinven and chairman of the British Venture Capital Association's taxation committee.

The Government also plans to introduce a new tax break that will encourage large firms with spare capital to invest in innovative smaller companies. Once again, the details will not be published until today, but the move is likely to allow large firms to write off some or all of the investment they make in smaller companies against tax.

The principle is well- established in the United States, where large high-tech firms, such as Microsoft and Intel, regularly provide backing to former employees who leave to start up their own companies.

"A large company that has got a vested interest in a small company's growth can offer some advice and mentoring rather than trying to smash the small guy because he's a threat," said Mr Stroud.

But other observers pointed out that large firms have traditionally been very bad at backing start-up companies, and have tended to fund bad businesses or strangle them in excessive bureaucracy.

Venture capitalists welcomed plans to make pounds 20m available for high-tech venture capital investment in small companies. The cash, which will be awarded through a competition to lever in cash from the private sector, is expected to be targeted at small firms requiring a relatively small amount of funding.

Treasury research has shown that the venture capital industry consistently fails companies that need cash injections of pounds 250,000 or less.

Another source of funding for small companies will come from a new capital gains tax relief which will encourage serial entrepreneurs and investors in Enterprise Investment Scheme companies. It will allow investors to carry their capital gains tax relief made on one investment over to another company. The move builds on last year's reform of CGT, by which the tax rate gradually declines depending on how long the investment is held.

However, observers said the Chancellor would not be able to create the large technology businesses of tomorrow with tax breaks. "If they have a good idea people will go and do it anyway," said Mr Stroud. "What we really need is less of the Government giving its money away and more structural incentives."