Impact of VCTs threatened

Ahead of this year’s Budget the BVCA has published a study on The Economic Impact of Venture Capital Trusts that shows how they encourage job creation and company growth. Money raised by VCTs fell from £450 million in 2001 to just £125 million last year and the BVCA believes action is needed to restore fund raising levels and maintain investment in smaller UK companies. Accordingly the BVCA has renewed its request, originally made in November, that the government consider an increase, from 20 per cent to 40 per cent, in the level of income tax relief available on VCTs.

Since 1996 70 VCTs have raised over £1.5 billion, on average they invest in 100 smaller fast growth private companies each year. The survey, which is based on the responses of 123 VCT-backed companies, found that VCT-backed companies create jobs at a considerably faster rate than more established firms and those backed by mainstream private equity. Over the five years to 2001/2002, the number of people employed by VCT-backed companies increased by an average of 32 per cent p.a. This was against a national private sector employment growth rate of just over 1.5 per cent and an average of 23 per cent p.a. for companies backed by mainstream private equity.

VCT-backed companies’ sales rose by an average of 38 per cent p.a. in the five years to 2001/2002, more than three times the growth rate achieved by FTSE SmallCap companies. On the basis of a limited sample, the survey also found that exports grew by 62 per cent p.a., compared with a national growth rate of just 2.9 per cent and investment rose by 23 per cent p.a., compared with a national increase of 2.3 per cent. Of the companies surveyed, 85 per cent would not have existed or would have grown less rapidly without VCT funding. Nearly 80 per cent of the companies felt that VCT investors had made a major contribution other than the provision of money, these included financial advice, guidance on strategic matters, management recruitment as well as contacts and market information.

In the past the government has adopted a flexible approach to the VCT scheme, which was introduced in 1995. Last year it passed legislation, first announced in March 2000, making it easier for VCT investments to retain their tax relief qualification if they merge or are sold in exchange for shares. It also introduced changes allowing VCTs to retain their tax approve status if they merge or are wound up, a move designed to make life easier for trust managers and hopefully more appealing to investors.

As well as increasing income tax relief for investors who maintain their VCT investment for five years, the BVCA is also pushing for inheritance tax relief for all investors in VCTs. Other issues the BVCA is lobbying the Chancellor to include in his 2003 Budget are a rise in the Inland Revenue approved share option scheme’s ceiling and the abolition of capital gains tax (CGT) taper relief. The latter to be replaced by a flat rate of 10 per cent on business assets and 20 per cent on non-business assets.