It's been a long haul through the tax season this year, but I'm delighted to confirm that our Longbow VCT reached it's minimum and is in the process of alloting shares for the 2010/11 tax year. Likewise our Approved EIS fund has succesfully raised money and will have closes on 5th and 6th April - dependng on which tax year income tax relief is being sought.

It certainly didn't help having the Budget on 23rd March with press speculation that there would be changes to the EIS and VCT rules. Some journalists went so far as to speculate that any gain in EIS would be paid for by a reduction in VCT. Thankfully the changes, as I reported in my preceeding blog, were entirely supportive to VCTs and EIS.

As we turn into the new tax year we have a number of initiatives underway:

1.  We have seen a steady rise in interest in the VCT post 5th April as an pension investment. This is because the amount that an investor can put in their SIPP, and receive tax relief for has plummeted from 200k to 50k. As a consequence, making an investment into a growth-based VCT is an attractive way of gaining tax relief and tax free income as part of overall pension planning.

2.  The increase in income tax relief available to an EIS investor which is now set at 30%, up 10% from its previous level of 20% has increased interest in EIS as a tax efficient investment. Our Longbow EIS Arrowhead fund is a permanently open, or evergreen fund, designed to provide advisers and investors with a means to begin CGT deferral or IHT planning immediately, and not have to wait to the tax-year end to make an EIS investment.   

3.  More generally the interest in making venture investments is increasing as a raft of government measures are being put in place to offer support and encouragment to smaller businesses. Our chairman is heading up the new Business Growth Fund which has been widely reported and proposes to offer support to businesses with revenue around 10m pa.

I look forward to an exciting few months as we continue to build our funds and invest in life enhancement companies.

Julian

The Budget has put VCTs and EIS back where they belong and that’s at the heart of enabling private investors to get behind British innovation and allow more companies – not just start-ups -  to benefit from tax-efficient investment. Pre-Budget fears that the Chancellor would turn his back on VCTs and EIS have proved unfounded. This Budget shows the Government is seriously committed to VCTs and EISs that genuinely support British enterprise.

EIS investments will become really attractive to investors as a result of the Chancellor’s changes. Income tax relief has now been raised to be in line with VCTs, with the amount of upfront income tax relief increasing from 20% to 30%. And the amount of investment that can attract upfront tax relief will double in 2012 from £500,000 to £1 million.

The Chancellor has dealt a very generous hand to British companies involved in creating wealth through innovation. The number of businesses that will be able to benefit from EIS and VCTs will increase dramatically as a result of today’s Budget. Under existing rules, companies with no more than 50 employees and who met a £7 million pre-money gross asset test could qualify for VCT and EIS relief. But from April 2012, this will now increase to 250 employees, with gross assets to £15m. In addition, companies will also be to take up to £10m investment a year.

But the Chancellor has also fired a warning shot at companies that are operating outside the original intention of the schemes. He has indicated that over the next twelve months we will see rules emerge that will re-focus both EIS and VCTs to ensure they are targeted at genuine risk capital investments, which means the VCTs and EIS that have not invested in British-based innovation are likely to cease to exist.

Taken together, these announcements are to be welcomed. They are very good news for investors, for British businesses and the economy as whole. 

Julian

There has been a lot of speculation on whether we will see any significant changes to the rules surrounding VCTs or EISs in next week's Budget. Are VCTs about to disappear? Or perhaps change beyond recognition?

I think we will see that next week's Coalition Budget will strengthen support for these tax efficient vehicles. However, it will come with one crucial proviso - and that is that VCTs and EISs must invest more effectively into genuine venture companies. The detail will be revealed on the day, but I would suggest that tax reliefs will be enhanced and that the rules on what a VCT can invest into will be tightened. The thinking behind this is to ensure more of the money raised by VCTs and EISs actually goes to support innovative and exciting companies that will deliver strong growth to the British economy.

The background to why these changes may come isn't hard to find. It revolves around the fact that investment into real venture companies has fallen steeply over the last few years. Investment in venture capital in 2008 was £1.30bn. But within 12 months it had fallen by 48% to just £666m. Yet this was in the face of a steep increase in money raised by VCT and EIS funds. Both George Osborne and David Cameron have made speeches in the last few weeks in which they have clearly stated we need to support innovation in order to drive the economy forward. NESTA, the National Endowment for Economics, Science, Technology and the Arts reported in January that supporting high technology and innovation would be the fastest way to aid an economic recovery in this country. Small wonder then that the government is looking at ways to make this happen. 

Which brings me back to VCTs and EISs and the deduction that the government needs to do something to make them more attractive to investors. Then make sure that enough of the money raised is going to companies that need it. 

To return to the original question - are VCTs about to disappear? I don't think so. The VCT is the primary vehicle for investors to support British innovation and right now, investors and the economy need more, not less of this.

Julian     

We have had a number of requests in recent days from advisers and investors asking about the tax breaks available to investors in a VCT. I thought it might be helpful if I ran through the main elements of income tax and capital gains tax relief available in a VCT.

Income tax

Relief on subscription

An investor subscribing for shares in a VCT will be entitled to claim income tax relief on amounts subscribed up to a maximum of £200,000 in any tax year. The relief is given at the rate of up to 30%  on the amount subscribed, subject to an amount which reduces the investor’s income tax liability to nil. Relief may not be available where the investment is used as security for, or financed by, a loan.

Dividend relief

An investor who acquires, in any tax year, VCT shares up to a maximum of £200,000 will not be liable to income tax on dividends paid by the VCT on those shares whilst the Company qualifies as a VCT.

Withdrawal of relief

All or some of the income tax relief on subscription for shares in a VCT is withdrawn if the shares are disposed of (other than between spouses) within five years of issue or if the VCT loses its approval within this period.

Capital gains tax

Relief from capital gains tax on the disposal of shares

Any gains made on VCT shares are not subject to capital gains tax. Similarly, any losses on shares held in a VCT will not be treated as an allowable loss. Both of the above apply to the extent that the shares have been acquired within the limit of £200,000 for any tax year.

Purchasers in the market

An individual purchaser of existing shares in the market will be entitled to claim relief from capital gains tax on disposal (as described above) while the Company is still a VCT.

Withdrawal of relief

If a VCT which has been granted approval subsequently fails to comply with the conditions for approval, any gains on the shares after the date on which loss of VCT status takes effect will be taxable. Where VCT status is treated as never having been given, all gains are taxable.

Obtaining tax reliefs

Income tax relief

The VCT will issue each investor with a certificate which should be used to claim the income tax relief, either by obtaining from HMRC an adjustment to his/her tax coding under the PAYE system, or by waiting until the end of the tax year and using his/her Self Assessment Tax Return to claim relief.

Investors not resident in the UK

Investors not resident in the UK should seek their own professional advice as to the consequences of making an investment in a VCT as they may be subject to tax in other jurisdictions as well as in the UK.

Loans and VCT reliefs

VCT reliefs may not be available if the investor takes out a loan specifically to subscribe in the VCT.

If you have any questions relating to tax relief in VCTs, or any other aspects of VCT investing, please do let me know. 

Julian 

0207 332 5664 or jhickman@longbow.co.uk

Repregen's CSO Prof. Molly Stevens was interviewed by Radio 4 this morning regarding regenerative medicine.

Repregen, a Longbow investment, is a developer of smart materials that accelerate bone tissue growth.

Click here to listen to the discussion on BBC 4 News Today.

Other recent news from Repregen:

Molly Stevens: Getting the body to grow spare parts - Guardian Online

For more information please visit www.repregen.com

Budget Update

The budget statement this week regarding EIS and VCT was very straightforward, with little that was new. However, it could have been much worse.

Although CGT has gone up, nearly all other reliefs have been preserved. This is particularly helpful for investors looking to reduce inheritance tax (IHT) liability and to make allocations to venture within their pension.

With the immediate rise in CGT rate to 28%, we anticipate a swift increase in interest in the Enterprise Investment Scheme as the higher CGT rate now enhances the value of investing under EIS. Investors will be keen to know how they can defer their CGT bill, whilst at the same time contributing to driving innovative British companies forward with an investment that will be free of CGT. By combining 20% income tax relief with 28% CGT deferral relief, investors can now make a tax saving of up to 48p for every £1 invested. Furthermore, once the investment has been held for 2 years it qualifies for 100% BPR, effectively delivering a further 40p of tax relief for every £1 invested in IHT relief.

The coalition Government has acknowledged the need to reduce the structural deficits through raising tax rates on individuals. However it has at the same time, determined measures to help stimulate economic growth and reduce the tax burden on businesses. This should act as the main driver to improve the longer term economic prospects of the UK economy.

Julian Hickman writes in this week's Professional Advisor:

"VCT and EIS funds offer a good route into enterprise investing and have the added attraction of offering tax relief, writes Julian Hickman, partner, Longbow Capital LLP.

Investing in early stage, dynamic, innovative British companies is something all investors should give serious consideration to. The life science, well being and healthcare sectors are typical examples of the British investment opportunities available.

However, not all openings are equal, and investors need to consider carefully how they can access such opportunities. One such way is to invest through Venture Capital Trusts (VCT) and Enterprise Investment Scheme (EIS) funds, both of which offer a range of tax reliefs for investing in innovation and reflect the risk and rewards available...." > Read More of Julian's article 'Reaping the rewards of British innovation at ifaonline.co.uk.

On 3rd June Biotronics 3D launched the latest version of its medical imaging technology; '3DNet Medical'. This technology is delivered through 'the cloud' offering freedom to clinicians and patients to access and interact with medical imaging from any location and any computer connected to the internet. Please click on the screen below to see a video of the launch presentation

Over the next few weeks I will be publishing a series of blog posts explaining the rationale behind the investments in the Longbow portfolio.  As some of the investments were first made several years ago, I thought that it would be interesting to illustrate the developments and changes which have occurred since investment measured against our intial assessments and the company's own milestones. There is no better place to start than at the beginning, our first investment; CyDen Ltd a developer of light based aesthetic products.

CyDen develops and markets a range of devices for aesthetic and medical treatments based on 'Intense Pulsed Light', or IPL.  Rather than use up this post describing this in more detail, check out this brief summary.

So what made us invest in CyDen? 

Let's start with a high level view.  At the time of investment in 2005, the market for aesthetic procedures had been growing strongly over the previous few years.  Technology emerged in the 90s to take advantage of our better understanding of the ageing process, for treatments such as permanent hair removal and wrinkle and cellulite reduction.  However such 'professional' treatments performed in spas or doctor's surgeries are expensive.  CyDen's technology promised to reduce the cost of professional equipment significantly and thereby reduce the cost to the consumer.  We felt that it could drive mass adoption of these procedures.  Furthermore, they had a roadmap that promised consumer products. 

Even in 2005, an affordable consumer product was considered something of a holy grail.  Large companies such as P&G and J&J were partnering with professional aesthetic equipment manufacturers to develop home-use devices.  Our view at the time was that if they struggled to make salon equipment more affordable ($10,000s) then they were a long way from making home use equipment affordable (low $100s).

To summarise, CyDen had developed technology that would make products affordable for the mass market when others were struggling to achieve this, while many of the relevant consumer product companies had declared their interest.

As with all early stage investments, we need to believe that we are backing the right team.  Cyden was founded in Swansea, which for those that don't know, is a world renowned centre of expertise in the use of lasers and light for medical and aesthetic treatment.  The primary reason for this is the presence of the charming and energetic Professor Marc Clement of Swansea University (now Vice Chancellor of the University of Wales).  He and a number of his students have pioneered this field and a cluster of businesses sprung up there as a result.  Marc joined forces with a talented electrical engineer, the late Jan Simonsen, regulatory expert Mike Kiernan and Kevin Smith.  

The plan was to develop a low cost professional product and leverage the income and brand into launching a consumer product.  Ron Petersen, a Longbow partner was recruited as CEO to make this happen.

After four years, how did our investment thesis hold up?

There have been successes and disappointments.  The disappointments first.

• There were too many vested interests downstream in the supply chain so that it proved too difficult to deliver a substantially cheaper product to the professional end user.  Despite a technology advantage, it was therefore coming from behind established competitors without any significant price advantage.  Sales grew rapidly to over £2.5m per annum but never scaled much higher.  In 2009 CyDen licensed its technology to a competitor in return for a sales royalty.  As a consequence, the consumer product was developed more out of investment funds than surplus cash flow.
• Jan Simonsen, the genius behind the iPulse technology sadly died.  Although he had already achieved a working home-use product as well as a further pipeline of new technology for successor products, his absence is keenly felt.

Despite these setbacks, our projections of the market potential were correct and CyDen has achieved some significant successes.

• A recent report forecasts that home-use aesthetic devices will grow to a retail value of $1.3bn per annum by 2013. 
• Large FMCG companies remain interested in this space.  Unilever Ventures saw the potential and invested into CyDen during 2008 and 2009.  Those early development deals that I mentioned above are yet to produce anything viable.
• CyDen was the first company to achieve the holy grail of an affordable, effective and safe consumer hair removal device.  It was first to market in February 2009, sold exclusively under a Boots brand as 'Smooth Skin' iPulse in the UK.  Despite no sales and marketing spend, sales significantly exceeded Boots' expectations.
• The product achieves permanent hair removal after a regime of treatment over 3 to 4 months.  Neither Philips nor Remington, who have subsequently launched consumer IPL products, can make that claim as their products require a continuous treatment to suppress hair growth rather than eliminate it.
• iPulse is available in leading retailers in the UK (Boots), Spain (El Corte Ingles), Germany (Schlecker) and Japan
• CyDen is expecting to be ready to launch a new skin rejuvenation product during 2011. The skin rejuvenation market is substantially bigger than the hair removal market.

What is the future for CyDen?

CyDen has recently received further investment to enable it to proactively raise consumer awareness and promote its products.  Competition is hotting up with Philips and Remington launching products; albeit at a higher price point.  We believe that they are inferior products but we cannot underestimate the power of the brands.  As it stands, CyDen is the market leader in the UK as it is ahead in terms of sales through Boots, but there is much more to do.

Marc now heads up the CyDen Institute of Light Technology and has stepped down as Chairman to be replaced by Chris Outram, an experienced executive and founder of OC&C, a leading management consultancy business.  These moves reflect the changed nature of the business.  It is no longer a company in development, it is a company in a rapid growth phase.

FDA regulatory approval is awaited, which will permit iPulse sales into the vast US market.  Mike Kiernan, one of the original founders and highly experienced regulatory clinician, has done an excellent job navigating the FDA and we are certification is expected later this year.  With FDA approval, we know that the large global personal care companies will be taking a closer look at CyDen and this is expected to produce a range of exciting opportunities for the Company.

For the next instalment of the 'Why we invested..." Blog series I will be reviewing Ambicare Ltd, a developer of a range of light emitting devices for the treatment of skin conditions such as acne and skin cancer.

Join the Discussion - Our blog is not designed to be a one way street. We encourage our readers to comment on posts they are interested in, ask questions and suggest topics for upcoming blogs.

Don't want to post a comment? Feel free to email any questions you have on this blog or the blog series please email them to erudd@longbow.co.uk.

CyDen’s marketing strategy is to be the most recommended brand in the category, and as such identified ‘Winning on the web’ as a key strand for communications. To achieve this, CyDen is running an ambitious social media campaign for iPulse through Grappa PR and Communications.

Starting at the beginning of April, the campaign has already generated impressive results in a short space of time, with many of the most influential beauty bloggers and vloggers (video bloggers) reviewing Boots Smooth Skin, powered by CyDen’s iPulse technology. This in turn is generating buzz, word of mouth and recommendations about the product among consumers online, increasing brand awareness and driving sales in-store and via http://www.boots.com/en/Boots-Smooth-Skin/.

Some of these influential blog sites for beauty and fashion-conscious females have active subscriber numbers close to 90,000 people. That’s a bigger audience than many mainstream women’s magazines. Factor in the high levels of interactivity that exist among subscribers and site visitors – many of whom are actively seeking out information and advice - then it is easy to see why authentic endorsements of Boots Smooth Skin are proving so valuable. For example,Tacky Blue Eyeshadow is currently charting her progress with Boots Smooth Skin. Beauty Scribbler and Lollipop 26 are equally as enthusiastic – and they are just the tip of the iceberg.

See Left: Screen shots of Tacky Blue Eyeshadow, Twitter and Facebook.

Key beauty websites are also being targeted. Editorial coverage has been confirmed on leading sites such as handbag.com and sofeminine.co.uk, which each have audiences in excess of 1.5million. Grappa’s social media campaign also includes Twitter, Facebook and online forums, which together are successfully delivering an audience of 25-45 year old women. Mainstream press interest is also being carefully managed. Influential titles such as the Daily Mail and Grazia have been primed to encourage their readers to make Boots Smooth Skin an essential part of their beauty regime. And who can blame them? iPulse technology is the only safe, painless and effective way to achieve permanent unwanted hair removal.

The social media campaign will gather pace in the UK - while after dipping its toes into the digital waters of Spain earlier this year, CyDen is planning a bigger splash. You can find out more by contacting Allisyn James at CyDen.