OVER the next few weeks stockbrokers, banks and venture capital companies will be competing with each other to attract their annual share of BES money - the tax driven Business Expansion Scheme vehicle that has certainly played its part in helping small companies grow, but with some casualties along the way as well.
BES started in 1984 and it continues to encourage people to invest their money in companies that meet the criteria for this sort of investment: a firm must be valued at less than £250,000 and it must fall into certain categories of manufacturing or services. Small manufacturing companies that pay the 10 per cent corporate tax rate are good candidates to raise BES money. Tourism projects (often referred to as bricks and mortar investments and considered less risky than other activities) have also become particularly popular in recent years, as have marine and distribution operations. This year, music industry projects have been added to the approved list.
The main selling point of BES schemes is the tax relief they offer for the investor. There is a personal investment limit of £25,000 (£50,000 for a married couple) into a BES project, from which you may claim full tax relief of 48 per cent, usually in the year in which you made the investment. If you invest more than the allowable amount you can roll up the difference into the next tax year. There is no longer a lifetime limit to the amount you can invest in BES schemes (it was £75,000, but the limit was abolished in the 1993 Budget) and the total fund value has been raised to £10 million.
There is nothing to stop someone from investing directly in a BES approved company, but most people opt for a designated managed BES fund in which a promoter - usually the investment division of a bank, a venture capital company or a stockbrokers - identifies several companies which they believe are worthy of investment. By having a pool of small firms in the designated fund, the risks associated with this scheme can be reduced and the idea is that weaker performing firms will be carried by stronger ones.
There is a five year minimum investment period for BES investment. If you dispose of your shares in the firm or the designated fund before then, you risk losing any further tax relief or may even have to refund the tax savings.
The tax relief available from BES schemes is highly tempting for higher income earner. Only pension fund investment and Section 23 property deals continue to offer such lucrative tax saving. The negative side of BES is that your capital is being tied up for a minimum of five years in a high risk investment which offers absolutely no guarantees and which, in the case of a designated fund, may not allow you to exit even after the minimum five year period.
Family Money has written about the difficulties some investors have faced with earlier BES schemes that were not going well. In at least two cases, the fund managers declined to allow our readers to encash their investment well after the five year initial period because of the negative effect such an encashment would have on the overall value of the fund.
As with nearly every BES scheme, the encashment of the investor's stake in the fund was permitted at the discretion of the fund manager. Our readers had simply failed to notice this when they bought into the scheme. For some BES investors, of course, the project may fail altogether - the Celtworld collapse being a good example.
Some of the companies participating in BES schemes have succeeded and some have failed, reflecting the general experience of small and start up companies. Investors need to keep this in mind when they seek out a BES prospectus and should never invest in a BES company or fund simply for the tax break, says TIPS managing director Eddie Hobbs.
"The problem with some fringe BES schemes is that the only return that investors have got back over the five years is the tax relief. The Post Office was guaranteeing 40 per cent over five years not too long ago, without any risk at all," says Mr Hobbs. "There is no point in a BES investment if you are not convinced that you have a good chance of being rewarded for taking the risk.
"The other problem I have with BES," he says, "is that the big marketing push takes place every year exactly six weeks before the April 5 tax deadline and the pressure really intensifies in the last two weeks. No one should make hasty investment decisions in that climate of hype.
Mr Hobbs recommends that only the well researched and well documented BES proposals, mainly on offer from the larger banks and institutions be considered by investors. A prospectus can "be very short on detail", he warns, but should be read very carefully nonetheless with special attention paid to exit mechanism clauses.
