The Budget announced changes to the Venture Capital Trust (VCT) rules with VCT annual and lifetime limits to be reviewed but has also cut tax relief from 30% to 20%.
The Association of Investment Companies (AIC) has strongly criticised the Chancellor’s move to cut upfront income tax relief on venture capital trusts (VCTs) from 30% to 20%, saying that the increase to VCT investment limits will be in vain if fundraising dries up and the last time tax relief was cut, VCT fundraising fell by two-thirds.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “The VCT scheme invests billions of pounds in up-and-coming UK companies. Cutting upfront tax relief on VCT shares from 30% to 20% undermines the incentive to invest in VCTs. Individuals and advisers will be less willing to support high-risk young companies that will struggle to find funding from other sources. Far from nurturing economic growth as the Chancellor wants, it will cut off vital funding for ambitious, growing companies.
Stone said the Association welcomed the Chancellor’s decision to expand the VCT investment limits and increase the size of companies that VCTs can invest in. But this will all be in vain if VCTs can’t raise funds from investors and advisers.
“Last time the amount of upfront tax relief was cut, from 40% to 30%, the amount of money raised fell by two-thirds, and it did not recover to its previous levels for another 16 years. We urge the Chancellor to reconsider her decision without delay.”
Richard Power, Head of Quoted Companies at Octopus Investments, said some of the changes, such as giving AIM VCTs the ability to support UK smaller companies for longer in their growth journey, were to be welcomed.
“These reforms mean a larger number of innovative AIM‑listed companies will now be eligible for long-term, scale-up capital. At the same time, it enables businesses like Octopus Investments to back these smaller companies more effectively, and in a way that closely aligns with the UK Government’s growth agenda.
But he also raised the issue of a reduction in the tax reliefs as ” likely to slow down the impact on the growth of this market.”
Emma Wall, Chief Investment Strategist, Hargreaves Lansdown said the tax relief change “hidden in the small print” of the Budget document “delivered a blow to investor and early-stage businesses alike” only giving investors until the end of the tax year before the changes come into force.
Wall added: “The tax relief on VCTs has provided many investors with the incentive to support early-stage UK businesses, which in turn support the domestic economy – just the sort of growth this Government is championing. This tax change seems counter to that agenda.”
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