No News Can Be Good News: VCTs and the Budget

Sometimes the best thing that can happen in finance is nothing at all says Annabel Brodie-Smith, Communications Director at the Association of Investment Companies.

No news can be good news when it comes to Budgets.

Following the significant VCT rule changes and the government’s recognition of VCTs as effective providers of patient capital in the Autumn Budget of 2017, it was good that the VCTs were off the hook in this year’s Budget. Thankfully, there was no mention of the letters “VCT” in the Budget book.

The VCT industry needs time to digest the changes announced in 2017, a number of which do not come into effect until 2019. And of course, the 2017 came hard on the heels of the 2015 VCT rule changes. So a period of calm makes sense.

This was a message that Donald Stark, Head of Investment Tax at the Treasury, repeated at the AIC’s VCT Conference in November. He said he appreciated VCT managers needed time to adjust to the changes brought about following the Patient Capital Review but the government would continue to monitor whether the new risk to capital conditions were being met. Stark said: “The government is determined to make sure this country continues to be the best place for people to build up an idea. New and innovative companies and technologies are vital to our country’s long-term financial health. These companies provide competition and in time will provide new jobs.”

The VCT industry’s reaction to the rule changes has been very sensible. Initially, when the changes were introduced several VCTs paused or scaled back fundraisings to give them time to consider the implications of the amendments. Activity then picked up, and in the six months since the rule changes, VCTs have invested in 144 companies through a combination of first time funding and secondary funding.

Interestingly, 22 of these companies were ‘knowledgeintensive’. In case you are wondering, this means they have to invest significantly in R&D and either create intellectual property or have a high percentage of the workforce with higher education degrees. A relaxation of the rules for knowledge-intensive firms was one of the headline grabbing rule changes from the Autumn 2017 Budget. These firms benefited from a doubling of the annual investment limit from £5 million to £10 million for investments made by VCTs and EIS.

Although all was quiet for VCTs, patient capital received a number of mentions in the Budget. There was an announcement that through the British Business Bank, the government will support pension funds to invest in growing UK businesses. Several of the largest defined contribution pension providers in the UK have committed to work with the British Business Bank to explore options for pooled investment in patient capital, including Aviva, HSBC, Legal & General, Nest, The People’s Pension, and Tesco Pension Fund.

The FCA also intends to publish a discussion paper by the end of 2018 to explore how effectively the UK’s existing fund regime enables investment in patient capital. This will accompany the ongoing work of the Treasury’s Asset Management Taskforce to explore the feasibility of a new long-term asset fund.

While such ideas need fleshing out, the government seems serious about encouraging more patient capital type investing. Investment companies, with their closed-ended structure enabling genuinely long-term investments, need to be part of the solution. The private equity investment company sector has returned 290% over the last 10 years.

Although all was quiet for VCTs, patient capital received a number of mentions in the Budget.

Of course, VCTs are also recognised as effective providers of patient capital. They invest in smaller young companies or start-ups and are up 147% over the last ten years. We look forward to participating in these discussions very soon but the future for VCTs and their role in providing patient capital looks assured.

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