Ahead of the Autumn Budget this year, there was much speculation about potential changes that might come out of the patient capital review. In line with the review’s purpose, the budget reaffirmed the Government’s commitment to supporting the next generation of UK businesses and as part of this, it recognised the important role VCTs can play in providing start-up companies with the funding they need to reach their growth potential.
Since they were launched over 20 years ago, successive governments have been very supportive of both VCTs and EIS, while making regular changes to legislation to ensure they meet their policy objectives. This Budget was no exception. The announcements made are aimed squarely at investment managers to make sure they deploy funds raised in a timely manner, and to ensure that high-growth and innovative businesses continue to benefit from investment.
This year there has been a particular focus on “knowledge-intensive” companies – a categorisation that has been part of the VCT rules for a couple of years as the Government looks to increase funding for companies with a relatively high R&D or innovation spend. The amount an investor can put into an EIS has been raised to £2m, double the previous limit, so long as the additional £1 million is into companies that meet the knowledge-intensive definition. Such companies will also now be able to raise up to £10m each year from VCTs and EIS, up from £5m at present.
As well as directing more capital to knowledge-intensive companies, this budget made clear that the tax reliefs EIS and VCTs offer go hand-in-hand with investment risk, removing relief for investments where the risk to capital is limited.
There were other technical changes, although these won’t materially affect investors or advisers. For example, from 6 April next year VCTs will have to invest at least 30 per cent of funds raised into qualifying holdings within 12 months. And from 6 April 2019, the proportion of funds that VCTs must hold in qualifying investments rises from 70 per cent to 80 per cent. This is reasonable stuff, and is consistent with the objective of VCTs, which is to drive capital to companies that can support future growth and create jobs.
A further change extends the amount of time VCTs have to reinvest or distribute gains when they sell a company. This will rise from six months to 12 months, and should mitigate the risk of investment managers acting rashly due to time pressure. Considering how huge the investment opportunity for early stage investing is in the UK and the number of opportunities we ourselves are currently looking at, 12 months should be more than enough time to reinvest funds effectively.
The Government’s commitment to supporting high-growth businesses is clear. This is good news for the UK economy, and good news for investors too. For those fund managers with VCTs that are backing UK entrepreneurs and the businesses of tomorrow, there is an exciting growth opportunity on the back of this budget.
We’re currently in the middle of the VCT fundraising season, and investor demand looks set to remain high. For those comfortable with the risk associated with investing in high growth companies, VCTs remain an attractive option to complement existing retirement planning, especially given recent changes to pensions and buy-to-let legislation. Investors need to be aware, of course, that VCTs are high risk investments. Indeed, that’s why they offer tax reliefs in the first place.
For investors looking to support UK smaller companies and take on the risks that brings with it, the Budget was great news. There are plenty of exciting investment opportunities in this country right now, and highly talented entrepreneurs they can back. The UK still lags behind the US when it comes to investing long-term capital to support these companies as they grow. By reinforcing VCTs’ role in the Government’s growth financing framework, this Budget has helped us start to close that gap and build the great businesses of tomorrow here in the UK.
Paul Latham is managing director at Octopus Investments