Chancellor Rachel Reeves loosened the rules around how much money early-stage companies can receive from venture capital schemes in today’s Budget.
Venture capital trusts (VCTs) and Enterprise Investment Scheme (EIS) funds will be allowed to back larger, more developed businesses than before, with higher caps on how much they can invest in a single company and over its lifetime. The limits will roughly double for the fastest-growing firms and the size threshold for eligible companies will also rise from next year.
Yet the headline for many investors is the cut in upfront VCT income tax relief from 30% to 20%, which has sparked sharp criticism across the financial community.
The move was described as “the sting in the tail” of the Budget by Jason Hollands, managing director at Evelyn Partners.
“While the chancellor has trumpeted measures to support growth companies, the tax credits for investing in new shares issued by VCTs are to be reduced, which will materially reduce the incentives for investing in what will remain illiquid and higher risk investments,” he said.
The cut is likely to deter investors, particularly when mainstream, lower-risk investments such as pensions still offer income tax relief of up to 45%. Hollands also cited the historical impact: when VCT tax relief fell from 40% to 30% in 2006, fund raising dropped by two-thirds and did not recover for more than a decade.
“Widening the amount of cash VCTs can deploy to slightly more mature – but nevertheless still small and illiquid companies – is welcome, but this move frankly should have been accompanied by an increase in the level of tax relief available to investors,” he said.
Peter Hicks, research analyst at Chelsea Financial Services, criticised the change even more bluntly.
“Rachel Reeves is performing impressive mental gymnastics to badge this as a ‘pro-growth’ Budget, while simultaneously draining the lifeblood from the very companies that drive growth,” he said.
“Widening what VCTs can invest in is welcome, but cutting tax relief to 20% is an appalling blow to a sector that promotes growth and risks reducing the overall funding to smaller UK companies.” He added that the Treasury expects the measure to raise just £125m by 2027/28, calling it “utterly nonsensical” to damage growth for such a paltry sum.
The Association of Investment Companies (AIC) echoed these concerns, urging the chancellor to reconsider.
Richard Stone, chief executive at the trade body, 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.”
Kallum Pickering, chief economist at Peel Hunt, delivered perhaps the bluntest verdict, calling it “a stupid change”, given the importance of the tax relief in these schemes and the one “major negative” in an otherwise “tolerable” Budget.
Despite the criticism, experts welcomed the broader expansion of investment limits, which will allow VCTs and EIS funds to support companies beyond the start-up stage. But as Hollands noted, these measures “will all be in vain if VCTs can’t raise funds from investors and advisers”.
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