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Is government really aiding the growth of startups, SMEs and entrepreneurs?

Written by Jon Card on Tuesday, 06 May 2014. Posted in Growth, Finance

The government wants more entrepreneurs and private sector jobs and it appears targets are being hit. But how much of this is down to its own support for businesses?

Is government really aiding the growth of startups, SMEs and entrepreneurs?

If there’s anything the current government wants, it’s more enterprise and private sector jobs. George Osborne says he’s determined to end the UK’s addiction to public sector employment. To be sure, the coalition made a rapid and decisive break with the previous administration’s policies early on by closing Business Link and abolishing the Regional Development Agencies (RDAs).

Recently released data suggests the chancellor is getting his wish. The number of self-employed individuals has risen sharply since 2010, and there are now nearly 4.2 million people registered as sole traders, according to the ONS. It is hoped these people will drive much-needed job creation in the future. 

New start-ups also appear to be on the increase, with 526,446 registering with Companies House in 2013 compared with 484,224 in 2012 and 440,600 in 2011. Private sector employment is rising too and, as of March 2013, accounted for 80.9% of UK employment compared to 78.7% percent in March 2010, the Department for Work and Pensions says.

But how much credit can the government really claim for the improvements in fortunes of UK plc? Also, exactly what is on offer for entrepreneurs new and old from the current government? Here we look at some of the main schemes and incentives the government has brought in since 2010.

 

Start Up Loans

Start Up Loans was launched in 2012 and has supplied finance to over 16,000 firms, with overall lending surpassing the £82m mark. Spearheaded by the high profile Dragons’ Den panellist James Caan, the scheme has avoided the fate of so many government schemes of going unnoticed. Initially aimed at young people, the age restrictions have now been lifted and any UK resident over 18 is theoretically eligible. The average loan is about £6,000, but larger amounts can be accessed if the business plan justifies it. Businesses need to complete a simple online form and then await a first contact from a delivery partner.

Pros: The interest rate on loans is 6% and the application relatively painless and speedy.

Cons: Primarily for micro-businesses and start-ups, the scheme’s scope is limited.

 

The Seed Enterprise Investment Scheme (SEIS)

Designed to de-risk investments in new businesses, SEIS allows individuals to back companies up to £100,000 and provides them with 50% tax relief. Furthermore, profits made from the sale of equity are exempt from capital gains tax, whereas losses can be potentially offset against it. Judging by the restrictions, it is clear the scheme is designed for those looking to invest in new tech start-ups and other higher risk categories. Investors can take no more than 30% of the business and the companies must be unquoted, have less than 25 employees and assets worth no more than £200,000.

Pros: For investors in early-stage businesses and tech start-ups, SEIS is something of a no-brainer, as it maximises gains and offers tax incentives to mitigate the risk.

Cons: The restrictions are clear and prevent investment in medium-sized enterprises, or those with significant assets.

 

Enterprise Zones

Enterprise Zones (EZ) are one of the government’s big strategies to encourage investment outside London. There are 25 EZs in England and seven in Wales. Businesses that choose to locate in these areas get relief from business rates and enhanced capital allowances as well as other incentives such as access to incubators and infrastructure advantages. EZs are typically sector-specific and tend to focus on industry and technology. However, some are quite broad; for instance, Birmingham City Centre has been designated as an EZ with 26 sites earmarked, covering a range of industries. Scotland has its own scheme, with 15 areas focused on life sciences, low carbon and manufacturing, with similar incentives to the English scheme.

Pros: Obvious financial benefits and the prospect of clustering or agglomeration.

Cons: No EZs in London and just one in the South East. Uptake has also been lower than predicted, with some EZs doing well but others struggling to get off the starting blocks.

 

The Regional Growth Fund

The Regional Growth Fund (RGF) was launched in 2010 to help ‘rebalance’ the economy. The fund is designed to help boost jobs and investment in areas such as manufacturing and engineering and in regions that, in the government’s view, have become over-reliant on public sector employment. The overall pot of £3.2bn provides grants to businesses often in excess of £1m. However, recipients need to find match-funding as well. In a 2013 report, the government claimed to have allocated £1.2bn and created 58,000 jobs. Typically, the funding is administered by a local partner and interested businesses should find theirs’ via the gov.uk website.

Pros: A large pot providing significant sums.

Cons: Some businesses have struggled to meet the criteria and government information on the scheme is considered to be somewhat opaque.

 

Local Enterprise Partnerships (LEPs)

LEPs were introduced to replace RDAs but, initially launched with no funding, they looked set to become talking shops involving business leaders and local authorities. LEPs have since evolved and were involved in the bids to create Enterprise Zones. A number have also been able to access funding via schemes such as the RGF. Some high-profile names such as John Lewis managing director Andy Street have joined LEPs and they have produced good ideas and results since in some regions.

Pros: A business-focused, local network for entrepreneurs to liaise with.

Cons: Significant regional differences regarding effectiveness and organisation.

 

Conclusions

The government made a distinct break with the previous administration when it came to power and its emphasis on stimulating enterprise is welcome. Programmes for start-ups appear to be working well with Start Up Loans backing many small businesses, and SEIS offering investors clear incentives to support riskier tech start-ups. But other programmes have had mixed results and, according to the National Audit Office (NAO), it has not yet been demonstrated that EZs, the RGF or the LEPs can demonstrate value for money. This is not to say there aren’t any successes, but performance is patchy, with some areas of the country doing well and others not. It appears that some of the government’s initiatives have fallen into the age-old trap of being well-intentioned, but failing to capture the full attention of business. Furthermore, it might well be argued that many people are setting up businesses not because of government incentives, but due to public sector cuts and lack of opportunities elsewhere.

Can the government take the credit for boosting start-ups? The jury’s still out. 

About the Author

Jon Card

Jon Card

Jon Card is a writer and journalist specialising in small business and enterprise. He works as a freelancer for The Guardian and was previously editor of Birmingham Living magazine. He is a proud father of a gorgeous little boy and a big fan of the USA. 

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