Business Expansion Scheme

3 key takeaways

• The BES was introduced to stimulate investment in small, unlisted UK companies.
• It provided tax relief to individual investors who purchased shares in qualifying companies.
• The scheme aimed to promote business growth and job creation within the UK.

What is the Business Expansion Scheme

The Business Expansion Scheme (BES) was a UK government program launched in 1983 and running until 1993. It aimed to stimulate private investment in smaller, unlisted companies by offering significant tax incentives to individual investors. Under the BES, investors received income tax relief on their investments and were exempt from capital gains tax on profits earned from shares held for a minimum period. This scheme was designed to support the growth and development of small businesses by making it easier for them to raise capital.

Importance of the Business Expansion Scheme

• Capital Attraction: Helped small businesses attract much-needed investment.
• Tax Incentives: Provided substantial tax relief to investors, encouraging more individuals to invest in small companies.
• Economic Growth: Promoted overall economic growth by supporting small business expansion.
• Job Creation: Aided in creating new jobs through business growth and development.

How the Business Expansion Scheme works

Investment Criteria

Investors could purchase shares in qualifying companies, which were typically smaller, unlisted businesses. These companies had to meet specific criteria set by the government to be eligible for the scheme.

Tax Relief

Investors received income tax relief on their investment, typically up to a certain percentage of the amount invested. Additionally, profits made from the sale of shares, if held for at least five years, were exempt from capital gains tax.

Holding Period

To qualify for the full tax benefits, investors were required to hold their shares for a minimum period, usually five years. Selling the shares before this period would result in the loss of some or all tax relief benefits.

Application and Compliance

Businesses had to apply and be approved as qualifying companies under the BES. They had to comply with ongoing reporting and operational requirements to maintain their status and ensure investors continued to receive tax benefits.

Examples of the Business Expansion Scheme

• Tech Start-ups: A tech start-up in the UK could use the BES to attract individual investors by offering them tax relief, helping the company to raise capital for product development and market expansion.
• Manufacturing Firms: Small manufacturing firms looking to upgrade their machinery or expand their facilities could benefit from the BES by making their shares more attractive to potential investors.
• Retail Businesses: New retail businesses could utilize the scheme to gather the necessary funds to open new locations, hire staff, and increase their market presence.

Real world application

The Business Expansion Scheme was instrumental in the growth of many small and medium-sized enterprises (SMEs) across the UK during its operation. For example, a small tech company developing innovative software solutions could attract substantial investment through the BES. Individual investors, enticed by the tax incentives, provided the necessary capital for the company to develop its product, enter new markets, and scale operations. This influx of capital not only enabled the company to grow rapidly but also contributed to job creation and technological advancement in the UK.

In the retail sector, a new clothing brand looking to expand its presence by opening additional stores could benefit from the BES. The scheme made it easier for the brand to attract individual investors who were looking to take advantage of the tax relief offered. The investment obtained through the BES allowed the brand to establish new retail outlets, hire more staff, and increase its inventory. This expansion helped the business reach a wider customer base and significantly boost its revenue, demonstrating the practical benefits of the scheme for small businesses seeking growth.