Why VCTs work

Comments from Chancellor George Osborne that there is a 'question mark' over the merits of VCTs have caused alarm among investors and fund managers.

Osborne’s remarks could also signal bad news for businesses. Venture capital trusts, to give them their full name, have net assets of some £2.5 billion under management, according to research from Business XL. Some £540 million of this is sitting in cash, ready to be invested in small to medium-sized companies with growth potential (like DVD rental business LoveFilm for example, backed by VCTs and recently sold to Amazon).

It is true that VCTs are not the only scheme designed to channel money into the sort of smaller, riskier enterprises that make such a large contribution to economic growth in the UK. Osborne appears more convinced of the merits of the Enterprise Investment Scheme, if you can judge from the rather informal and vague comments he made last week.

However, because of the sheer volume of risk capital VCTs bring in, and the popularity of the scheme, with more than £500 million raised over the past three years, any further attack on it needs to be very carefully considered.

I say “further attack” because VCTs have already faced, since 2005, a whole series of changes to the rules governing the kind of companies they invest in. These changes made the rules more and more restrictive, until the last government realised they had gone too far. In Alistair Darling’s last Budget, he proposed reverting to a gross asset threshold of £15 million for investee companies (it was reduced to £7 million in 2006), and increasing the limit placed on number of employees from 50 to 100.

It is unsettling, then, to see a ostensibly pro-enterprise government considering a move in the opposite direction. Whether the tax breaks offered to investors are curtailed, or the restrictions on investee companies tightened, the net effect will be to reduce the attractiveness of VCTs to investors and limit the amount of money they bring in — money which, after all, ends up inside UK SMEs.

While the amounts of money concerned are significant to growing businesses, to the Exchequer, we are talking about tax relief amounting to little more than £100 million a year, based on the fundraising haul of 2009/10. Factor in the extra tax paid by businesses that grow and hire extra staff, and it is hard to see how we can afford to do without VCTs.

The Chancellor may have convinced businesses that he is serious about dealing with the deficit. Now he needs to show he is on their side by championing growth and building on existing schemes that encourage it, rather than sacrificing pounds tomorrow to save pennies today.

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

Related Topics