The Association of Investment Companies has called on the Government to immediately reinstate the 30% upfront income tax relief on venture capital trusts in the Finance Bill.
The Government plans to reduce the relief from 30% to 20% from 6 April, alongside an increase in the maximum amount VCTs can invest in a business.
In its response to HM Treasury’s call for evidence, the AIC warned that cutting the relief will lead to a collapse in scale-up funding for high growth businesses in the UK.
Richard Stone, chief executive of the Association of Investment Companies, said: “It’s a classic case of giving with one hand and taking with the other. 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.”
Stone noted that the last time upfront tax relief was cut from 40% to 30%, fundraising fell by two thirds and did not recover for 16 years.
He continued: “Higher VCT investment limits will help support British companies for longer, enabling them to raise larger 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.
“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.”
While the Government has said that the cut to upfront income tax relief on VCTs was imposed to balance the tax incentives with those offered by the Enterprise Investment Scheme (EIS), the AIC said this ignores earlier research from HMRC which concluded that the VCT tax reliefs were proportionate and that cutting the rate of income tax relief would have a significant, negative impact on VCT fundraising.
The professional body believes that most VCT investors are unlikely to become EIS investors, with EIS investors tending to be more sophisticated and often investing in businesses founded by friends or family, or companies with which they have a personal connection.
Furthermore, the AIC said the EIS does not address the problem of ambitious businesses being founded in the UK and moving overseas in order to grow because it is not as “well suited to supporting SMEs through the scale-up phase”.
VCTs, in contrast, typically make larger investments, including follow-on investments which are critical in helping SMEs gain scale once they are established, the AIC said.
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