The Venture Capital Trust (VCT) Association has expressed surprise and disappointment at the government’s decision to reduce upfront income tax relief for VCTs, warning that the move could undermine investor confidence at a critical time for UK scale-ups. Chris Lewis, Chair of the association, acknowledged the benefits of increased VCT investment limits but stressed that the reduction in upfront incentives risks slowing near-term fundraising and limiting the flow of capital to innovative UK SMEs.
Chris Lewis, Chair, Venture Capital Trust Association said:
“We are surprised and disappointed by the government’s decision to reduce upfront income tax relief for the VCT scheme, a change that risks undermining investor confidence at a critical time for UK scale-ups.
While we welcome the increased VCT investment limits, as a reflection of the evolving capital requirements of high-growth businesses, and in recognition of the vital role that VCTs play in driving home-grown innovation and job creation, this progress risks being overshadowed by the reduction in upfront incentives.
Evidence from a 2023 Kantar survey commissioned by HMRC shows that income tax relief is the single most important motivator for investors, rated ‘very important’ by 86% of VCT investors. The survey found that the ‘number of VCT investors would likely decrease if the tax incentives were to be reduced, which was primarily associated with a change to income tax relief’.
Reducing tax relief at the point of investment may unintentionally widen the funding gap these reforms aim to close by diminishing the VCT scheme’s attractiveness to investors. This could slow near-term fundraising and limit the flow of capital to innovative UK SMEs. Treating the VCT and EIS sister schemes differently in terms of upfront tax relief also introduces additional complexity and could distort investor behaviour, weakening the coherence of the early-stage funding ecosystem.
We will continue to engage with HM Treasury and officials to ensure these reforms operate as intended and advocate for a balanced, competitive environment for growth-stage investment. The UK’s ambition to lead in scale-up funding depends on maintaining incentives that reflect investor risk appetite and encourage recurring participation.”
