Slides from the BEN Raising Finance Event 19/4/12

1. BEN Networking:
Raising Finance in
Difficult Times
Bristol & Bath Science Park,
19th April 2012, 6-9pm
Sponsored by:
in collaboration with:

2. Practicalities
 phones
 emergency exits

3. Keep in touch!

4. Upcoming BEN Networking Events
Theme When Where What
Technology 3rd May 2012 Bristol & Bath • The state of the art for intelligent
6-9pm Science Park networks in building automation
Update: systems
Smart • Business opportunities
Buildings • The future – emerging technology
Tech Startup 14th May 2012 Bristol & Bath • Starting up and Planning
6-9pm Science Park • Marketing and Sales
School 2012 • Raising Finance
- Starting up • Building the Team
and Planning • Making Your Pitch
Entrepreneur 14th June 2012 Bristol & Bath • What does it take to be an
6-9pm Science Park entrepreneur?
-ship • What skills do you need to learn?
• Can you ‘become’ one, or are you
born to it?
Venturefest Wednesday UWE • Keynote speakers
7th November Conference • Workshops
Bristol 2012 Centre • Innovation showcase
2012 All day • Pitching panel

5. Tech Startup School 2012

6. Raising Finance in Difficult Times

7. This Evening’s Programme
6:45-8:00 Speakers
Introduction Alastair Watson BEN
David Notley Impact Management
Consultants
Andrew Jupp Smith & Williamson
Darren Westlake Crowdcube
8:00-8:30 Q&A
Discussion
8:30-9:00 Networking

8. Raising Finance in
Difficult Times
April 2012

10. BEN Event 19th April 2012
The Funding Landscape
Delivered by David Notley -
Impact Management Consultants
© Capitech Partners LLP

11. Sources of
Finance
• What are they?
© Capitech Partners LLP

12. Types of Finance
Borrowing
Equity Grants
© Capitech Partners LLP

13. Borrowing
• Borrowing is characterised by the following:
– The loan capital repaid to an agreed schedule.
– Interest paid at an agreed rate.
– Fees and charges paid as agreed.
– Security.
– Fixed or limited upside.
• All of which means a lender is interested
primarily in 2 key issues:
– Can the business generate sufficient cash to
pay the interest and capital?
– What security do we have if it all goes horribly
wrong?
© Capitech Partners LLP

14. Borrowing -
Some examples
• Overdraft – note lack of capital repayment
schedule.
• Term loan.
• Invoice discounting/Factoring.
• Asset Finance – HP leasing etc.
• Credit from suppliers.
• Up front payments from customers.
• Directors/shareholder loan.
• Enterprise Finance Guarantee Scheme
(EFGS).
• Crowd Sourcing.
© Capitech Partners LLP

15. Equity
• Share Capital (equity) is characterised by the
following:
– Funds completely at risk.
– Share in upside potential.
– Opportunity to influence company management.
• All of which means an investor interested
primarily in 4 key issues:
– What is the upside potential of this investment?
– Is the upside potential commensurate with the risk –
can we make 5 to 10 times our original investment?
– Is the combination of management, technology and
market dynamics capable of delivering the upside
potential?
– What is our exit route?
© Capitech Partners LLP

16. Equity – Some
Examples
• Own money – Directors loans (often quasi
equity), share capital, sweat equity.
• Family/Friends – (NB Financial Services Act)
• Other management team.
• Business Angels.
• Venture Capitalists/Venture Capital Trust (VCTs).
• Profits generated.
• Corporate Venturing e.g. EADS Foundation.
• NESTA.
• Franchising (quasi equity).
• www.bvca.co.uk
© Capitech Partners LLP

17. Grants
• Grant Funding is characterised by the following:
– Tends to be non repayable.
– Could be repayable if grant is not used correctly.
– Need to achieve non financial outputs.
• All of which means a grant giver is interested
primarily in the following key issues:
– Is the project eligible under our criteria?
– Will the project achieve the non financial outputs?
– Will the project generate positive publicity?
– Is there the potential for negative publicity?
– Do we have budget capacity available?
© Capitech Partners LLP

18. Grants – Some
Examples
• Business grants tend to be targeted at specific
non financial outputs such as:
– Innovation
– Training
– Capital expenditure
– Academia/business collaboration
– EU collaboration
• Sources include:
– Technology Strategy Board
– EU
– Local Authorities (tend to be small)
– Private Foundations e.g. Wellcome Trust
– Carbon Trust
© Capitech Partners LLP

19. • Questions?
© Capitech Partners LLP

21. Dr Andrew Jupp
Director
Smith & Williamson Limited

22. Disclaimer
This seminar is of a general nature and is not a
substitute for professional advice. No
responsibility can be accepted for the
consequences of any action taken or refrained
from as a result of what is said.

23. Tax-efficient ways of accessing finance
• Enterprise Investment Scheme (‘EIS’)
• Venture Capital Trusts (‘VCT’)
• Research and Development tax credits (‘R&D’)

24. Enterprise Investment Scheme (‘EIS’)
and Venture Capital Trusts (‘VCTs’)
• Outline of the Schemes and their importance for
tax-advantaged funding
• Significant changes from Royal Assent
(June/July)
• Seed Enterprise Investment Scheme (“SEIS”)

25. EIS and VCTs
• Under EIS, individuals invest equity directly into
qualifying companies
• Individuals subscribe for shares in VCTs (fully quoted
companies) whose managers invest debt/equity in
qualifying companies

26. Tax benefits for the individual investor
EIS VCTs
Income tax relief of subscriptions 30% (Note 1) 30%
Maximum subscriptions per tax year £1,000,000 £200,000
EIS/VCT in aggregate maximum investment per
(Note 2)
company increased to £5m (from £2m)
One year carry back of income tax relief Yes No
CGT exemption on disposal of shares Yes Yes
CGT deferral relief Yes No
Loss relief Yes No
Dividends tax free No Yes
IHT exemption Yes No
Note 1: For shares issued after 5 April
2011
Note 2: For shares issued after Royal
Assent

27. EIS/VCT qualifying companies
• Must be unquoted (AIM is OK)
• Must carry on a qualifying trade within two years
of share issue (see list of excluded activities) or
carry on qualifying R&D activities leading to a
qualifying trade
• Must not be under the control of another
company
• Company issuing the shares must have a
‘permanent establishment’ in the UK

28. EIS/VCT qualifying companies (cont’d)
• Book value of gross assets must not exceed £15m
immediately before the investment and £16m
immediately afterwards
• Fewer than 250 full-time employees
• Cannot raise more than £2m in aggregate under EIS and
from VCTs in any 12 month period (Rising to £5m on
Royal Assent)
• Removal of £500 minimum subscription for EIS
• Removal of £1m limit on investment by a VCT in a single
company

29. EIS/VCT disqualifying trades
• Dealing in property, shares, commodities and other financial
instruments
• Property investment and development
• Insurance and banking (though not insurance broking)
• Leasing
• Legal and accounting services
• Farming, market gardening and forestry activities
• Hotels and nursing homes
• Exploitation of intellectual property rights (not created by the
company)
• Ship building
• Coal and steel production

30. SEED EIS (‘SEIS’)
Legislation included in 2012 Finance Bill published on 29 March 2012
The following applies to qualifying shares issued after 5 April 2012
• Income tax relief at 50% on maximum annual equity subscriptions
per individual (across all qualifying companies) of £100,000
• CGT exemption on sale of SEIS shares if held for at least 3 years
provided income tax relief was claimed and not subsequently
withdrawn
• Relief available for owner managers if they own less than 30% of
the equity
• Investors will be able to reinvest 2012/13 chargeable gains into
Seed EIS shares in 2012/13, with the CGT on those gains totally
falling out of charge

31. SEED EIS (‘SEIS’)
Legislation included in 2012 Finance Bill published on 29 March 2012
• SEIS money must be utilised within 3 years
• A company may only raise EIS and VCT funds once 75% of the
SEIS money has been utilised
• A company cannot raise SEIS money if it has already raised any
EIS/VCT funds
• Maximum amount of SEIS money a company can raise is £150,000
(cumulative, not per year)
• A SEIS company cannot be a subsidiary, or have subsidiaries

32. R&D tax credits – a reminder
• Enhanced tax deductions for qualifying R&D costs to
reduce taxable profits or increase tax losses
– For SMEs, tax relief on 225% of original cost
– For large companies, on 130% of original cost (but see new
proposed rules)
• Loss-making SMEs can claim payable tax credit, on 11%
of enhanced deduction
• PAYE/NIC restriction abolished for APs ending after 1
April 2012
• Consultation on an “above the line” tax credit for large
companies

33. SMEs
• Defined by EC
• Fewer than 500 employees, AND
• Turnover up to €100m, OR
• Gross assets up to € 86m
• Watch changes in status/years of grace

34. What is R&D?
“a project seeks to achieve an advance
in science or technology…through
the resolution of scientific or
technological uncertainty”_
- 2004 DTI Guidelines on
R&D

35. What is R&D?
• The project may:
– extend overall knowledge or capability
– Create a process, material, device, product or service
that incorporates or represents an advancement
– Make an appreciable improvement to an existing
process, material, device, product or service through
scientific or technological changes
– Use science or technology to duplicate the effect of
an existing process, material, device, product or
service in a new or appreciably improved way

36. What is R&D?
• Focus is entirely on science or technology, not
commerce, but commercial companies may
carry out R&D
• Not known if scientifically or technologically
feasible, or
• Uncertain how to achieve something in practice
• Test is based on judgement of the ‘competent
professional in the field’

37. What is R&D?
• Still qualifies for R&D relief even if uncertainty is
not overcome on advance is not fully realised
• R&D starts when ‘work to resolve scientific or
technological uncertainty starts’
• R&D ends when ‘knowledge is codified in a form
usable by a competent professional working in
the field, or when a prototype with all the
functional characteristics of the final product or
service is produced’

38. Examples
• Gaming machine hardware including software
• Hosting/software for mobile phone access to lotteries
• Mobile phone mast trees
• Semiconductors
• Internet games/auctions/security
• Software for securities/carbon trading/asset security/brand
control/calendars/engineering structures
• Integration/extension to internet use/client adaptation
• Geothermal energy plant
• Decontamination of nuclear power stations
• Control of emissions from buses

39. Which costs can be claimed?
• Staff costs
– Staff engaged directly in R&D, in full or in part
– Includes employer’s NICs and pension contributions
– Excludes benefits in kind
– Sub-contractor costs for SMEs
– Unconnected - claim restricted to 65% of cost
– Connected - 100% of the actual R&D expenditure of
the subcontractor
– Joint election for ‘connected’ treatment
• PAYE/NIC restriction now removed

40. Which costs can be claimed?
• Externally-provided workers (i.e. through an agency)
– Unconnected – claim restricted to 65% of cost
– Connected – 100% of the actual cost of worker to the agency
– Joint election for ‘connected’ treatment
• Consumable and transformable items
– Any materials consumed in the R&D process
– Can include fuel, power and water
• Software
• Other qualifying indirect costs
• Large companies can claim contributions to qualifying
research bodies

41. General conditions to claim R&D
• Company within charge to corporation tax
• Relevant to the company’s trade
• Revenue expenditure not capital (watch accounting treatment)
• Restrictions where expenditure is subsidised or grant received by
SMEs
• R&D must not be subcontracted in for SME rates
• Maximum of €7.5m R&D per project for SME rates
• For SMEs, IPR need no longer vest in the claimant company (only
APs ending before December 2009)
• Minimal annual spend of £10,000 gone

42. Subsidies and grants – SMEs only
• No SME rate of R&D tax relief on any project
subject to the receipt of (EU) notifiable State Aid
• Speak to provider of grant to find out if it falls to
be notifiable State Aid
• No SME rate of R&D tax relief on any qualifying
expenditure that is grant funded or funded
externally to the company
• Can claim under large company scheme instead

43. Maximising claims
• Claim can be made annually as part of company tax
return
• Claim can also be made within two years of the end of
the accounting period
• Letter/report should clearly demonstrate that all
conditions are met
• Reduces/eliminates HMRC queries and should avoid
penalties
• Claim reviewed by HMRC in Specialist R&D units

44. Latest developments
• Production costs – improved guidance
• Voluntary assurance pilot – conclusions awaited
• Updated guidance on software R&D expected

45. Common pitfalls
• R&D lost in accounts
• Capitalised R&D
• Employees/externally provided
workers/subcontractors
• R&D subcontracted in
• Two year time limit missed
• Poor presentation to HMRC

46. Conclusions
• CT reductions worth up to 34% of cost
• Repayments worth up to 25% of cost
• R&D widely defined, and not industry specific
• Two year time limit
• Maximise claims and presentation

47. These notes have been produced for the guidance of
delegates at the conference for which they were prepared
and are not a substitute for detailed professional advice.
No responsibility can be accepted for the consequences of
any action taken or refrained from as a result of these
notes or the talk for which they were prepared.

48. Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales
for a range of investment business activities
A member of Nexia International
Portwall Place
Portwall Lane
Bristol BS1 6NA
Tel: 0117 376 2000 Fax: 0117 376 2001
www.smith.williamson.co.uk

49. Dr Andrew Jupp
Director
Smith & Williamson Limited

51. Darren Westlake
BEN - Raising Finance in Difficult Times

52. The Status Quo
A wealth of entrepreneurial talent
• UK has lots of great ideas
• Need to cultivate ideas into the next Google/Twitter/
GroupOn Google says searches for
• Often stifled by access to Money "business plan UK"over the
increased by 60%
have
past year and searches for
"small business loan" are up
by 34%

53. The Status Quo
The Status Quo
• Venture capital difficult to find for smaller
requirements
• Debt finance hard to come by
• Business angels – limited investments
• Typically a syndicate each investing £10k - £100k
• What if there was a way to have say 5000 angels
each investing £10?
• What if anyone could become a business angel?

54. Crowdcube and Crowdfunding
What is Crowdcube?
• Crowdcube provides a web-based central hub for entrepreneurs to meet
micro-investors. It uses the power of Crowdfunding to provide a unique
service to two types of people:
• for entrepreneurs to source funding more accessibly than
conventional routes
• for smaller investors to have the opportunity to invest in exciting
high-potential businesses
“$100 invested in Microsoft at their IPO would now
be worth approximately $35k.”

55. Crowdfunding
Crowdfunding
• Crowdfunding is an approach to raising the capital required for a new
project or enterprise by appealing to large numbers of ordinary people for
small donations
• Social Media
• Crowdfunding examples
• Kiva.org - $212m funding raised, >800,000 lenders, ~500,000
entrepreneurs
• Kickstarter.com – 7,496 projects funded, $27m pledged in 2010,
runrate $7m/mth

57. How it works

58. How it works

59. How it works

60. Benefits
Benefits

61. Successes

62. Successes

63. Thanks
www.crowdcube.com