Tax change hits funding for high risk start-ups

Smaller ventures in high-risk industries, which rely on start-up funding from individual wealthy investors, are likely to be hit by an immediate change to the tax regime, Peter Penneycard, Tax Partner at PKF Accountants & business advisers has warned.

HM Revenue & Customs has announced that it is ending 'sideways loss reliefs' for capital contributions made by individuals who are non-active partners in a business. Where the "main purpose or one of the main purposes" of the investment was to access trading losses, tax relief can no longer be claimed on those losses.

'Sideways loss relief' encouraged individuals to invest in high-risk ventures by allowing them to write off initial losses against their tax bill while opening up the opportunity for (taxable) profits if the venture succeeded. The UK film industry, bio-tech and "green" research businesses have been particular beneficiaries of the practice in recent years.

Peter Penneycard said: "The BBC's Dragon's Den program has shown us all how hard it can be to raise finance for a start-up business. Loss relief has been a feature of investment partnerships for many years and reduced the initial risk for individual investors - making it easier for businesses operating in high-risk sectors to secure start-up funding."

"Today's announcement has effectively cut off a ready source of investment capital to such businesses. Many prospective businesses will have to look much harder to find alternative funding. It is going to be particularly difficult for those operating in sectors like biotech or film where returns can be high but the chance of failure is equally great."