Venture Capital Trusts  

Govt urged to extend VCT tax breaks as sunset clause looms

Govt urged to extend VCT tax breaks as sunset clause looms
(Pexels/Nataliya Vaitkevich)

The government needs to send an “early signal” to the venture capital trust industry that the tax breaks will be extended beyond 2025, the industry body has said.

In its response to a Treasury select committee inquiry, the Venture Capital Trust Association said VCTs played a “vital role” in the UK funding ecosystem, and the scheme was working exceptionally well.

However, chair of the public policy committee at the VCTA, Will Fraser-Allen, urged the government to ensure investors can continue to benefit from the tax breaks awarded to them beyond 2025.

VCTs invest in higher risk unquoted companies and come with a 30 per cent tax relief if the investments are held for five years, with any dividends earned also tax free.

But a sunset clause created as part of European Union state aid rules means VCT relief is only available to subscribers in the VCT for shares issued before April 6, 2025.

The government has the power to extend or remove the sunset clause through secondary legislation, which would allow the VCT scheme to operate in its current form beyond the current expiry date of the scheme.

“Entrepreneurs are currently seeking support from VCT funds without knowing if they will be able to continue to receive funding beyond April 2025, due to existence of a sunset clause which would see the scheme expire,” Fraser-Allen said. 

“We believe that the government should send an early signal to the industry and entrepreneurs to reassure these high-growth, small businesses that VCTs will continue to be backed by the UK government with the scheme made permanent or the clause extended, so that it can continue beyond 2025.”

 Data from the AIC showed that a record £1.13bn was invested into the vehicles in the 2021/22 tax year, a 63 per cent increase on the previous year.

The Treasury committee is currently holding an inquiry into VCTs, exploring the state of the UK’s venture capital industry, including the ability of firms to source financing to scale up, the extent to which start-ups and established industry cooperate, and the effectiveness of tax incentives.

It has asked for feedback on a range of topics including the effectiveness of current tax incentives and the level of co-operation and integration between start-ups and the industry.

Data from the VCTA, which represents 90 per cent of the industry, showed that over the last financial year, VCTA-backed businesses delivered £12.5bn in revenues, generating £3bn in exports. 

Fraser-Allen added: “Equity capital has been crucial in enabling businesses to continue to grow and drive the creation of high-value jobs, and it will continue to be essential as the economy faces an uncertain future with the challenges of the invasion of Ukraine, the cost-of-living crisis and accompanying inflation.”