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General Election: VCTs call for reforms to encourage investment in high-growth businesses

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With the General Election barely two weeks away, both the Conservatives and Labour have been promoting a pro-growth agenda, with Labour promising to prioritise “wealth creation” and the Conservatives stating that they want to cut taxes and “back businesses to invest, innovate and trade”.

The Liberal Democrats have pledged to support small businesses and startups by aiming to invest at least 3% of GDP in research and development by 2030. Reform has also set out proposals aimed at helping small businesses such as lifting the VAT threshold from £90,000 to £150,000.

But will these measures be enough to unlock the potential of high-growth businesses – and what else is needed to give UK entrepreneurs the best shot at success? The Association of Investment Companies (AIC) asked managers of venture capital trusts (VCTs), which back small, high-growth UK companies, for their wish lists from the new government.

 
 

We also asked the VCT managers to explain why the existing tax incentives should be extended or expanded by illustrating the positive impacts their own investments have on society and the wider economy.

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “The VCT scheme has demonstrably boosted growth, created jobs and provided investment opportunities for investors all over the UK, but there is still work to be done. To ensure that the scheme can continue to flourish and boost growth in regions around the country, we need certainty for long-term investors and businesses looking to scale, so they can invest with confidence.

“The top priority for the new government should be to urgently ensure that the EU ratifies the decision to extend the so-called sunset clause, which extends VCT tax reliefs until at least 2035.”

 
 

Chris Lewis, Chair of the Venture Capital Trust Association (VCTA), said: “We look forward to the next government securing the remaining EU approval of the extension to the sunset clause. The industry needs urgent clarity and confirmation on this.

“We would also want to see an increase in the age limits for companies to qualify for EIS and VCT schemes, as the government has already acknowledged that the current limits of seven and ten years for EIS and VCT support effectively discriminate against regional businesses.

“VCTA research found that, while there is significant variation between regions, our analysis clearly demonstrates a difference in age of business which are considering funding: just over five years in Greater London compared to seven years in the rest of the UK. This means that many businesses outside London are already too late for the VCT scheme by the time they are considering funding. We propose raising the age limit from seven to ten years for VCT funding, and from ten to 13 years for knowledge intensive businesses.

 
 

“Also vital is an increase in the funding limits, to help support scale up businesses. The annual and lifetime limits have remained static since 2015 despite rapidly rising inflation and therefore have not kept pace with the investment needs of fast growth companies. The VCTA believes that annual limits should be increased to £6.5m (£15.5m for knowledge intensive companies) and lifetime limits should be increased to £16m (£27m for knowledge intensive companies), with a commitment to reviewing these levels every three years.”

Will Fraser-Allen, Managing Partner at Albion Capital Group, which manages the Albion VCTs, said: “Most pertinent to Albion’s work of supporting high growth businesses are measures to address the scale-up gap, an R&D strategy that includes expanded R&D tax credits and ensuring SMEs can recruit overseas talent alongside skilled UK workers.

“Specific to VCTs, we believe that the annual and lifetime limits should be raised to align with economic circumstances so that funding can have the impact that the scheme was designed to deliver.”

 
 

Trevor Hope, CIO at Gresham House Ventures and CIO for the Baronsmead and Mobeus VCTs, said: “Historical data suggests that the UK has been successful in creating a growth ecosystem that supports early-stage enterprises. However, the UK is lagging behind other markets, such as the US, in providing innovative companies with the capital required during their intensive scale-up phase.

“In terms of solutions in this area, VCTs are well-placed to be a conduit for the required capital investment, and abolishing the VCT sunset clause and evolving the investment restrictions around the age and size of the companies that VCTs can invest in would significantly enhance their effectiveness.

“In addition, the next government should continue to support the roadmap set out in the Mansion House reforms to incentivise institutional investors to back innovative UK companies.”

 
 

Chris Hulatt, Co-Founder of Octopus Group, manager of the Octopus VCTs, said: “We believe there are two changes that could be made to legislation by the next government to bridge the funding gap. The first is to allow self-invested personal pensions (SIPPs) to invest into VCTs by giving them a 30% credit for investments they make. We would expect such a measure to have an immediate impact on the amount of capital available to early-stage UK companies, as SIPPs are already in a position to hold VCTs and the advisers to SIPP investors are already familiar with VCTs.

“The second is to extend the maximum age at which a company can qualify for VCT and EIS funding. This would enable VCTs and EIS to fill the gap that has been left by larger-scale and later-stage VC funding.”

Peter Dines, Managing Director of Mercia Ventures, which manages the Northern VCTs, said: “To support high growth businesses, my wish list for the next government includes raising the age limits for investments to ten years for general businesses and 13 years for knowledge intensive companies to recognise scaling a business takes significant time. In terms of the annual investment limits, these need to be adjusted to reflect the inflationary impact since these limits were first set. We now operate in a vastly different environment.”

 
 

Mark Brownridge, Strategic Relations Director at Blackfinch Group, which manages the Blackfinch Spring VCT, said: “We advocate for maintaining and potentially expanding tax reliefs available through schemes like EIS and VCTs. Many retail investors want to play a role in the exciting opportunities that technology and AI provide, but don’t have the ability to access these sectors through their own means.

“Simplifying compliance requirements for startups and high growth businesses to reduce administrative burdens and costs is also vital. Streamlining regulatory processes can help businesses focus more on growth and less on bureaucratic hurdles, while increasing R&D tax credits and grants can drive innovation. Encouraging collaboration between businesses, universities and research institutions can also create an environment where new ideas and technologies can flourish.”

VCTs’ impact on the wider economy and society

 
 

Will Fraser-Allen, Managing Partner at Albion Capital Group, said: “Over the last three years alone, our VCTs have supported 74 companies with £168m in funding (£81m into new companies and £87m in follow-ons). This has translated to employment growth across the portfolio from 3,490 employees in 2020 to over 4,700 in 2023 whilst delivering innovative solutions to meet their customers’ needs.

“An example is Quantexa, a decision intelligence platform that was established in 2016 and is the largest investment in our portfolio. In just seven years, Quantexa has grown from 30 people in the UK to around 650 globally and became the first British unicorn of 2023 having received £100m investment at a valuation of around £1.4bn. The business is investing £80m over the next three years to support the government’s plan to make the UK an AI hub, an investment that will create over 170 new jobs.”

Stuart Veale, Managing Partner of Beringea, which manages the ProVen VCTs, said: “VCTs play a vital role in directing investment into scaling companies that have an outsized impact on job creation. For example, the companies currently backed by the ProVen VCTs have created more than 1,200 jobs since receiving their initial investment.

 
 

“VCTs also back innovative companies that are often tackling significant societal challenges. Moonshot, for example, first received funding from the ProVen VCTs in 2021 – its technology is used by US and UK government bodies to spot and tackle online harms, from terrorism to trafficking and abuse. For this work, it has been featured among the world’s most innovative companies by Fast Company for two years running.”

Mark Brownridge, Strategic Relations Director at Blackfinch Group, which manages the Blackfinch Spring VCT, said: “Through our VCT and EIS funds, we have invested in numerous innovative startups across various sectors, including technology, healthcare and sustainable materials. These investments have not only supported the growth of these businesses but have also created jobs and contributed to economic development. One example is East Midlands-based Tended, which is transforming workplace safety with its wearable technology designed to prevent accidents in high risk environments. Recognised by Time Magazine as one of the best inventions of 2023, Tended has secured significant contracts, including a framework agreement with Siemens worth up to £7m. With £2.8m EIS and £1.1m VCT investment since joining the Blackfinch Ventures portfolio, Tended is set to expand its impact, rolling out over 400 devices in the coming months.”

Trevor Hope, CIO at Gresham House Ventures and CIO for the Baronsmead and Mobeus VCTs, said: “We believe the future of national health care includes the NHS outsourcing areas of innovation and expertise where private companies can provide an efficient and specialised service with greater value for money outcomes.

 
 

“At Gresham House Ventures we are investing in companies that are driving digital innovation in the healthcare sectors. This includes our investment in Mable Therapy, a digital healthcare platform that offers speech and language therapy to children. Its work has greatly enhanced the efficiency of therapeutic outcomes and is helping to clear the significant backlog in cases that the NHS is unable to resolve through traditional pathways.

“Our portfolio also includes Orri, aspecialised eating disorder clinic. Offering both in-person and virtual services, Orri supports individuals with eating disorders transition back to daily life. This innovative approach fills a critical gap in a growing area where traditional NHS services struggle to meet rising demand due to budget constraints.”

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