Finance Act 1986: Section 75 - A Deep Dive into Business Expansion Schemes

Section 75 of the Finance Act 1986 is a crucial piece of legislation that introduced the Business Expansion Scheme (BES) in the United Kingdom. This scheme, designed to stimulate investment in unquoted trading companies, offered significant tax reliefs to individuals investing in eligible businesses. Understanding Section 75 requires examining its core purpose, eligibility criteria, permitted investments, and the overall impact it had on the UK's economic landscape.

Purpose of the Business Expansion Scheme

The primary aim of the BES, enabled by Section 75, was to encourage individuals to provide capital to smaller, riskier companies that often struggled to access traditional funding sources like banks. The government recognized that these companies were vital for economic growth, job creation, and innovation. By providing attractive tax incentives, the BES sought to bridge the funding gap and foster a more vibrant entrepreneurial environment.

Eligibility Criteria for Companies

To qualify for BES investments under Section 75, companies had to meet specific criteria. These included being unquoted trading companies, meaning they weren't listed on a recognized stock exchange. Furthermore, the company's primary activity had to be a qualifying trade, which excluded certain sectors like dealing in land, financial services, and property development. The company also had to be resident in the UK and not under the control of another company. The strict eligibility criteria were in place to ensure that the scheme targeted genuine, growth-oriented businesses that needed financial support.

Investor Eligibility and Tax Relief

Individuals investing in eligible companies under the BES were eligible for significant income tax relief. Section 75 outlined the conditions for this relief, including a minimum holding period for the shares. Investors typically had to hold their shares for at least five years to retain the tax benefits. The amount of tax relief available was capped at a certain level annually, preventing the scheme from being overly exploited. To qualify, investors had to be UK residents and unconnected with the company in which they were investing (e.g., not an employee or director). The tax relief effectively reduced the investor's risk by providing a partial offset against potential losses.

Permitted Investments

Section 75 clearly defined the types of investments that qualified for BES relief. Generally, investments had to be in ordinary shares of the eligible company. Loan stock and preference shares were typically excluded. This focus on ordinary shares ensured that investors had a genuine stake in the company's performance and shared in its upside potential. The funds raised through BES investments had to be used for qualifying business activities, further preventing misuse of the scheme.

Impact and Legacy

The Business Expansion Scheme, established through Section 75, had a notable impact on the UK economy. It provided crucial funding to many small and medium-sized enterprises (SMEs), enabling them to expand, innovate, and create jobs. While the BES has evolved over time and been replaced by other schemes like the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), its fundamental principles remain relevant. These later schemes built upon the foundation laid by Section 75, refining the eligibility criteria and tax incentives to further promote investment in early-stage companies. Section 75's legacy lies in its recognition of the importance of supporting small businesses and the effectiveness of tax incentives in encouraging private investment.