InvestmentsFeb 16 2017

Brexit may benefit venture capital trust schemes

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Brexit may benefit venture capital trust schemes

Brexit may be good for venture capital trust schemes in the UK, the managing director of YFM Equity Partners has suggested.

David Hall claimed the rules governing how venture capital trusts (VCTs) operate have, "in large part" been "significantly influenced by Brussels" over the recent years.

He said: "The UK regulator has been responding to that. These rule changes have not been inspired by the UK, where VCTs were developed, but by the European Union. And investors in the eurozone does not, generally, use VCTs."

For example, the recent set of rule changes announced in the 2015 Budget, which related to the amount invested, the age of qualifying companies and the use of investment funds, had been laid down by Brussels but have affected UK businesses and the schemes which have invested into them.

Mr Hall said: "The scheme was designed in the UK for the UK, and these changes were not designed for the UK or by the UK. So in that sense, one of the opportunities that Brexit might bring is a change in these decisions, so there may be greater freedom and a relaxation of the rules."

It has been described to me as being like the Belgians trying to explain to a UK cricket captain as to why they think a match should go to a 10-ball over. David Hall

In 2015, the changes made by the European Union to VCTs affected how much a venture capital trust-qualifying company can receive over its lifetime. It was limited to £12m, or £20m for knowledge intensive companies.

Moreover, to be eligible for VCT investment, the new rules said companies will normally have to have made their first commercial sale in the past seven years, or 10 years for ‘knowledge intensive’ companies.

But according to Mr Hall: "It is important to allow investment into a broader cross-section of UK entrepreneurial businesses. Does it matter how old a company is? For example, does the fact that a blue-chip company sets a 25 per cent target have anything to do with the fact it is 100 years old? 

"No. The speed of your growth as a business has nothing to do with its age. So this age rule set by the EU should be taken away, which would be good for the UK and investors."

Also, the EU stated that ‘state aided’ money, such as investments that qualify for tax reliefs, should be used where companies require funds for new growth, rather than to acquire existing shares or businesses. Therefore, the 2015 Finance Bill proposed VCT money could not be used to fund management buyouts and acquisitions.

Mr Hall added such rules served to constrict the growth of entrepreneurial businesses, choke the amount of money that VCTs could invest in UK businesses, and provide less choice for investors.

He commented: "UK VCT schemes predate most of the EU departments which are now telling them what the rules should be. 

"It has been described to me as being like the Belgians trying to explain to a UK cricket captain as to why they think a match should go to a 10-ball over.

"Therefore, a relaxation of the rules so more businesses can be eligible for VCT investment post-Brexit than now would be a good thing."

Background

VCTs started life in 1995, when the then Conservative government offered tax breaks to encourage people to invest in early-stage UK companies.

According to the Association of Investment Companies (AIC), which covers VCTs, there are three main types of VCT, although the management styles of each can vary. The three types are:

  • Generalist (which covers private equity including development capital). 
  • Alternative Investment Market.
  • Specialist sectors, for example technology or healthcare.

For more on the various tax changes to VCTs, read FTAdviser's Guide to EIS and VCT investment, which qualifies for 60 minutes' worth of CPD.

simoney.kyriakou@ft.com