VCT review “could put £990m of start-up funding at risk”

With the Treasury Select Committee inquiry into the UK’s venture capital market currently looking at the efficacy of venture capital trust (VCT) reliefs, research by investment service Wealth Club suggests that changes to the current regime could put £990m of start-up funding at risk.

VCTs, EIS and SEIS will be discontinued in 2025 unless the relevant legislation is renewed by the Treasury. Ahead of this sunset clause, the Treasury Select Committee has launched an inquiry into the venture capital market, including the effectiveness of tax incentives. With the government signalling its willingness to cut tax relief for VCTs, broker Wealth Club polled 1,300 VCT investors on the effect that possible changes to VCT reliefs would have on their behaviour.

It found that 90% of VCT investors would either stop or be less likely to continue investing in VCTs if the income tax relief was reduced to 20% from the current 30%; 91% of investors also stated that if the income tax relief was reduced to 20%, they would invest “less” or “significantly less” into VCTs. Less than 1% of investors would definitely still invest in VCTs if all tax incentives were removed, with a marginally higher percentage (3%) saying they might or probably would.

Wealth Club said in a statement that reducing the tax relief to 20% would effectively threaten to cut off £990m in funding for UK start-ups, seeing as VCTs raised £1.1 billion for UK start-ups in the last tax year.

“With high inflation and a spiralling cost of living, the last thing this country needs is to cut off funding for the next generation of successful British businesses,” said Wealth Club CEO and founder Alex Davies. “Scalable start-ups are the engines that drive economic growth and job creation around the world. Policymakers should take a longer-term view on any such decisions, as years of good work could be quickly undone and the UK could lose its status as the start-up capital of Europe.”

Conversely, 83% of respondents would invest “more” or “significantly more” into VCTs if the income tax relief was increased to 40%. “We don’t believe that reliefs need to be increased, although our research suggests the funding available through VCTs would increase substantially if they were,” Davies added. “But the industry needs reassurance that the status quo will continue past the April 2025 deadline.”