An industry body has warned that start-up funding in the UK could be dealt a huge blow if tax incentives for venture capital trusts are not renewed.
Some £990mn in start-up funding could be put at risk if VCTs are shuttered, Wealth Club has said.
The tax efficient investment vehicles currently offer 30 per cent of tax relief in higher risk unquoted companies, if the investments are held for five years, with any dividends earned also tax free.
A survey of 1,309 VCT investors, undertaken by Wealth Club between July 3 and 8 this year, showed that 90 per cent of respondents would either stop or be less likely to continue investing in VCTs if the income tax relief was reduced to 20 per cent.
If all tax incentives were removed, less than 1 per cent of investors would still plug their money into the vehicles.
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.
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 past financial year, VCTA-backed businesses delivered £12.5bn in revenues, generating £3bn in exports.
During the inquiry, Conservative MP Kevin Hollinrake said although he believes in enterprise investment schemes and seed enterprise investment schemes, which are similar structures to VCTs, VCTs are not as necessary.
“Isn’t some of the money that attracts tax relief [in VCTs] going to companies that would attract investment anyway—maybe not those early-stage ones?
“Would some of the businesses getting the investment not get it anyway?”
Chief executive of Wealth Club, Alex Davies, said with the government signalling its willingness to cut tax relief for VCTs, there is a “very real chance” in April 2025 these schemes will be discontinued.
“Critics question whether VCTs are good value for money, if investors would continue to invest without the reliefs and whether VCT investments are sufficiently risky to justify government support.