Venture capital investors and business angels on Wednesday claimed they had been unfairly hammered by a measure the chancellor intended to squeeze more tax from private equity bosses.
The specialists, who typically invest sums of up to a few million pounds in fledgling companies, are deeply unhappy about Alistair Darling’s proposed increase to capital gains tax on the sale of businesses.
Saul Klein of Index Ventures, a key figure in London’s high-tech start-up scene, said: “People have come out with the resounding view that this is a bad thing for small business and that it will discourage long-term investment.” Previously investors paid less tax the longer they kept their money in a start-up business. This is to be replaced with an 18 per cent flat rate.
Mr Klein, who co-founded Lovefilm, the online DVD rental company, believes the chancellor is sending mixed messages on enterprise. Just two weeks ago Mr Darling invited a group including him to Number 11 to discuss ways of stimulating start-ups. Doug Richard, the venture capital investor and chairman of Library House, a data company, described the reform as “a short-sighted and intrinsically unintelligent manoeuvre”.
“Taper relief is one of the very few things the Labour party has done to encourage entrepreneurship in Britain,” said Mr Richard, who chaired a working group on business support for Tory leader David Cameron.
In common with other venture capital investors, Mr Richard is perplexed that a move against private equity will result in damage to his sector too. Gordon Brown was a strong supporter of start-up investment when he was chancellor, diagnosing a dangerous “equity gap” and using public money to set up a string of venture funds.
Venture capital has, however, remained the poor relation of private equity, because of higher risks and overheads. “Inducing people to put money in these companies rather than Tesco is very hard,” said David Soskin, a venture investor and chairman of Cheapflights.co.uk, an internet travel company. UK venture investments are estimated to have produced small negative returns over a decade, compared with an average 20 per cent return for private equity.