AIC: How to make a British success story even better

In more than a year since the election, fully-fledged pro-growth policies have been thin on the ground, despite an election campaign that emphasised the importance of boosting Britain’s economic expansion.   

But with the November Budget looming, this is a perfect opportunity to implement some genuine pro-growth policies. The Chancellor should not forget the venture capital industry, in particular venture capital trusts (VCTs), which support fast-growing British companies with the potential to become household names and prolific generators of jobs and wealth.   

Last September, the government showed its commitment to the VCT scheme by announcing a welcome extension of VCT tax reliefs until 2035. While this fell short of permanently removing the so-called “sunset clause”, it provided valuable certainty for investors and investee companies making plans for growth. 

More recently, the Association of Investment Companies (AIC) proposed a series of measures that would improve the ability of VCTs to support the fundraising ambition and needs of promising, high-growth companies. Too many companies fail before they can raise the money they need to fund their development. Overcoming this funding gap, the so-called “valley of death”, is the key to creating more successful growth businesses.   

VCTs already invest hundreds of millions of pounds in growing businesses every year, and our analysis shows that this investment is having an impact. According to the Office for National Statistics, companies that have received VCT investment since 2018 employ 44,244 staff, with the average number of employees per company at 68. For some context, only 2% of companies in the broader UK economy employ more than 50 people.   

These statistics suggest that boosting the VCT sector would give the government more bang for its buck in terms of employment and growth than investing in other areas.  

The AIC has recommended altering the VCT investment rules to allow the scheme to provide more support to ambitious UK businesses.   

The recommendations include increasing the annual investment limit to £10 million for all VCT investee companies and £20 million for knowledge-intensive companies or KICs (a subset of VCT investee companies involved in groundbreaking innovations). If a business needs money, the rules should not delay the flow of development capital into that company. 

We have also proposed that the lifetime limits for VCT investee companies are increased to £20 million, and £30 million for KICs. These new limits better reflect the capital demands of small businesses that face a finance gap.  The so-called “gross assets test” means that VCTs cannot invest in businesses with assets of more than £15 million at the time of investment. We propose increasing this limit to £20 million, or £25 million for KICs.  

Finally, we believe the ‘age limit’ on VCT investments should be abolished. Currently, an investee company must receive its first VCT investment no later than seven years after its first sale, rising to ten years for knowledge-intensive companies. The government should want entrepreneurial SMEs to thrive irrespective of how long they have been striving for success.   

Changes would cost government nothing   

Research by the AIC shows that the proposals are unlikely to cost the government any extra money. Previous changes to the VCT investment rules have not materially altered demand (and therefore not increased the cost to the Exchequer). 

It is true that when there have been changes to tax breaks, demand for VCTs has changed. For example, as tax breaks on pensions have become less generous, investment into VCTs has increased as investors look for more tax-efficient homes for their money.   

On the other hand, changes to VCTs’ investment criteria have not appeared to bring about any change in demand. We expect this to be the case if our proposals are adopted. And even if we are wrong, and demand for VCTs from investors were to increase, the money granted in tax relief will be directly supporting companies at the forefront of driving growth, delivering returns to the economy and the public purse. 

It is worth remembering that VCT investment can transform businesses. Quantexa is just one example. It received its first VCT investment in 2016 from Albion VC and Dawn Capital. The AI pioneer now has a valuation of $1.8 billion with annual recurring revenue exceeding $100m, giving it so-called Centaur status.  

Another flourishing recipient of VC finance is Karen Barrett, founder of Unbiased, the matching service for financial advisers and those in need of advice. Not only does her firm now match advisers and clients in less than 60 seconds, her service generates £20 billion in assets under management to her clients every year, helping her win the Great British Entrepreneur of the Year award and the Equity-Backed Entrepreneur of the Year award at Allica Bank’s Great British Entrepreneur Awards. 

Referring to her initial investment, support and advice from YFM Equity Partners, she said the YFM investors offered more than just finance: “They were great at giving me independence but also being there for advice at the right time. They introduced me to other founders and a variety of networks that helped with suppliers and planning for different scenarios. In short, our growth would not have been anything like it has without their support, financial and otherwise.”  

If we want the VCT scheme to support more people like Karen, it needs to be brought up to date. The investment limits have not been changed for many years while inflation has whittled away their real value. If nothing is done, this risks starving promising businesses of capital when they need it most. We hope the Chancellor will put this right in her Autumn Budget – and the good news is, it won’t her cost a penny.   

The AIC’s report, ‘Giving great companies a flying start’, contains more information about how VCTs power economic growth, including case studies of successful VCT-backed companies.   

By Richard Stone, Chief Executive of the Association of Investment Companies (AIC) 

Richard Stone is a chartered accountant with over 20 years of leadership experience in financial services. Since joining the AIC in 2021, Richard has been a champion for the investment company sector. He regularly appears in the media, has given evidence to the Treasury Select Committee and established the Investment Company Showcase, which is now one of the UK’s largest annual retail investor conferences.