Govt urged to reinstate 30% VCT income tax relief

The government should reinstate the 30 per cent upfront income tax relief on venture capital trusts (VCT) in the Finance Bill, the Association of Investment Companies (AIC) has argued.

Plans to reduce income tax relief on VCTs from 30 per cent to 20 per cent from 6 April were announced in the Autumn Budget, alongside an increase in the maximum amount VCTs can invest in a business.

In response to the Treasury’s call for evidence on tax support for entrepreneurs, the AIC warned there was a danger of a collapse in scale-up funding if the government did not reverse its decision on tax relief.

“It’s a classic case of giving with one hand and taking with the other,” said AIC chief executive, Richard Stone.

“The benefits of higher VCT investment limits will be lost if investors aren’t willing to commit their savings to VCTs.

“All the evidence suggests that the upfront tax relief is a crucial incentive and cutting it will lead to a collapse in scale-up funding for Britain’s high growth businesses.

“The last time upfront tax relief was cut, from 40 per cent to 30 per cent, fundraising fell by two thirds and did not recover for 16 years.”

Stone argued that higher VCT investment limits would help support British companies for longer, allowing them to raise greater sums further along their growth journey.

“This will lead to more companies remaining in the UK for longer, driving growth and ultimately IPOs on the London market – exactly what the government wants to achieve,” he added.

“Yet this is likely to be undone by the cut to upfront tax relief. The government needs to act now to prevent ambitious British companies losing out.”

The government previously stated that the cut in upfront income tax relief on VCTs was planned to balance the tax incentives with those offered by the Enterprise Investment Scheme (EIS).

However, the AIC highlighted research published by HMRC in 2022, which concluded that the VCT tax reliefs were proportionate and cutting the rate of income tax relief would have a negative impact on VCT fundraising.

The association argued that most VCT investors were unlikely to become EIS investors, as EIS investors tended to be more sophisticated and often invested in businesses founded by friends or family, or companies they had a personal connection with, while VCT investors did not have this knowledge or experience.

Additionally, the AIC said the EIS was not well suited to supporting SMEs through the scale-up phase, while VCTs typically made larger investments, including follow-on investments, which were “critical” to helping SMEs gain scale once established.

“VCT investors are attracted by the diversified portfolio of companies in VCTs,” the AIC continued.

“VCTs have expert managers who actively help companies grow, often placing experienced executives on the investee companies’ boards to provide valuable advice and oversight.

“This is vital to help investee companies achieve scale and reduce the chances of the company moving overseas.”

---