VCTs can provide more support to the UK’s innovation economy

Our support for VCT policy reform

We recently chaired a well-attended roundtable at the House of Commons. The event was hosted by the VCTA and supported by Canaccord Asset Management, Gresham House, Maven Capital Partners, Octopus Investments, Peel Hunt, Unicorn Asset Management, Philip Hare & Associates and the Quoted Companies Alliance.

With growth, innovation, improved productivity and the creation of skilled employment all areas of focus for the government, we wanted to highlight how a limited number of adaptations to existing VCT legislation, in many cases simply reversing the impact of inflation, would allow VCTs to significantly expand their support for the UK’s innovation economy. As John Grady MP, Glasgow East commented, “We won’t grow the economy unless we back growing UK companies.”

How VCTs support UK growth

Venture Capital Trusts (VCTs) are listed investment funds that enable individuals to invest in early-stage UK companies. Oliver Bedford, Lead Manager at Hargreave Hale AIM VCT commented, “VCTs back innovation and ambition with capital and support and through that, create skilled employment and contribute to the UK’s innovation economy. They aim to connect investors with exceptional companies as they turn today’s ideas into tomorrow’s successes”.

These companies often have high growth potential but are considered higher risk. Through legislation, VCTs are directed to address areas of market failure with tax incentives calibrated to compensate investors for the additional risk that comes with backing early-stage growth companies. By using tax reliefs to crowd in private sector capital Oliver notes, “the VCT scheme is inherently set up to focus managers on successful outcomes, ensuring that taxpayer funding is deployed judiciously in support of their policy objectives.”

Since their launch in 1995, VCTs have become a UK success story. They now manage over £6.5bn across more than 1,000 startups and scale-ups, supporting over 100,000 jobs[1]. Crucially, VCTs provide consistent funding even during economic downturns, as seen during the financial crisis, the global pandemic and more recently, when other investors withdrew from the UK’s capital markets.

The problem: Outdated and complex VCT policy rules

With the passage of time and as a consequence of inflation, the rules that govern how VCTs deploy capital have become increasingly restrictive, making it more difficult for companies to access support, particularly those outside of London and the South East.

VCTs must invest at least 80% of their funds into ‘VCT qualifying companies’. These companies must be UK-based, unquoted, early-stage (less than seven-years of commercial activity) and small (less than £15m in gross assets, fewer than 250 employees[2] ). But there are other rules and limits that add complexity and restrict the scheme, most obviously those around the amount of funding that companies can access from VCTs and other state-aided investors.

Mark Symington, Fund Manager at Octopus Investments noted, “There’s a huge disconnect between investor demand and the supply of qualifying companies. Demand is strong as this is a good way for investors to get access to growth businesses. But the number of companies that can qualify for investment is limited.”

Restore access to capital through VCT policy reform

Inflation has eroded the real value of funding limits since they were last set more than 10 years ago.

With the cost of doing business increasing with each year, capital intensive industries such as engineering, life sciences and technology are finding it more difficult to access a scheme that was created to support their growth. As a result, companies have to row back on their business objectives, defer investment and job creation and, in extremis, look for overseas buyers.

Intelligent Ultrasound plc is one such example. The company was commercialising an AI-powered healthcare application that was built around technology developed at Oxford University. The company ran up against the limits of the VCT regulation whilst still considered too high risk by non-state aided investors. With VCT investors unable to support the company and non-VCT investors unwilling to support the company, Intelligent Ultrasound sought a premature sale of its technology to GE Healthcare. It is one of many examples of the UK failing to support its future successes.

As another roundtable attendee commented, “The gross assets test is a cliff edge as it blocks follow-on funding and pushes companies into open-ended funds with no capital.”

Age limits: Arbitrary and exclusionary

The age limit rule for qualifying companies was widely criticised during the roundtable. Philip Hare of Philip Hare & Associates noted that, “78% of companies that would otherwise qualify do not, simply because of the age limit”.

The UK’s Treasury Select Committee has previously expressed concern about the availability of growth capital to companies outside of London and the South East, along with those led by female founders. Research has established that the age limit is a limiting factor that disproportionately impacts both groups.  

A call for change

The VCTA’s Growth Beyond Limits campaign outlines essential policy reforms to unlock the full potential of VCTs. The campaign has been supported by policy proposals submitted to HM Treasury.

To maintain the UK’s position as a global leader in innovation, VCT policy must reflect today’s economic realities, allowing VCTs to support growth and innovation in the way that was envisaged when these thresholds were last set, more than 10 years ago.

The UK is brimming with innovation. These simple fixes will release a handbrake on growth, fund research and development and create more skilled employment throughout the United Kingdom.

Further reading

Growth Beyond Limits campaign open letter to the Chancellor and Business Secretary
AIM: Looking forward with optimism
Meet the founder: Dr. Muhunthan Thillai, Qureight
Our VCT - find out more about the Hargreave Hale AIM VCT

The VCT invests in small, high risk companies, which are mostly listed on AIM. These companies may have volatile share prices and the investments may be difficult to realise. VCT investors are also exposed to changes in legislation that may adversely affect the company’s status as a VCT and its ability to meet the investment objectives and/or reduce the level of achievable return. There can be no guarantee that the VCT will meet its objectives or that suitable investment opportunities will be identified. A failure to maintain the qualifying status could result in the VCT losing the tax reliefs previously obtained, resulting in adverse tax consequences for investors.

[1] VCTA – 30th anniversary report
[2] Less than 500 if the company qualifies as Knowledge Intensive.