The House of Commons Treasury Committee’s report into venture capital investment schemes recommends better support for female-led businesses and those outside the South East of England.
The House of Commons Treasury Committee’s report into venture capital investment schemes, published on 18 July 2023, noted the success of the UK’s enterprise investment scheme (EIS) and venture capital trust (VCT) tax reliefs in supporting venture capital investment, which are due to expire in April 2025 because of sunset clauses.
However, the committee also noted that the benefit of the schemes was largely concentrated in companies with all-male, white founders based in the South East of England.
The committee highlighted other areas of diversity to address, including:
- The British Business Bank (BBB) noted that for every £1 of equity investment in the UK, all female-founder teams received just 2p.
- BBB’s 2020 data also showed that, in London, the proportion of equity value was 3.49 times its proportion of the SME population. By contrast, Northern Ireland’s is just 0.08. The Federation of Small Businesses noted that an equitable allocation across regions would, all other things being equal, be represented by a ratio of one.
- Extend Venture’s 2020 market report showed that less than 2% of venture funding went to black and ethnic minority-led businesses.
The committee made the following recommendations to address these issues:
- The government and the BBB should consult on the creation of venture capital funds with the specific purpose of promoting greater diversity in venture capital allocation.
- All relevant organisations in the venture capital industry should become signatories to the Women in Finance Charter and Investing in Women Code.
- HM Treasury should make provision of diversity statistics a requirement for eligibility to receive EIS, SEIS and VCT tax reliefs from the renewal of the sunset clauses in April 2025.
It also addressed the fact that businesses outside the golden triangle of London, Oxford and Cambridge take longer to get established due to lower available resources. The seven-year company age limit (ten years for knowledge-intensive companies) on raising initial EIS and VCT funding serves to disadvantage businesses outside this prime investment zone. The committee therefore called on the government to extend these age limits with the objective of better-supporting regional businesses.
The committee also noted that UK businesses have been relatively unsuccessful in scaling up. Lakestar (a venture capital firm) observed that none of the top ten largest UK companies were founded or scaled in the last 20 years, while seven of the top 10 in the US were created in the last 20 years. To better support upscaling of businesses, the committee recommends that HM Treasury consults on higher funding limits for the EIS and VCT schemes.
Renewal of the schemes
The report noted that EIS, VCT and the seed enterprise investment scheme (SEIS) provide a valuable draw for investors into smaller, high-potential businesses.
The report cites a recent survey of the Wealth Club which demonstrated that the tax benefits available were the main reason for 88% of individuals investing in eligible companies. Along with further evidence, this indicates the value of the schemes in supporting sales, jobs, and productivity. HMRC has carried out its own evaluation of the schemes, the results of which are expected to be published in late summer/early autumn of 2023.
The government has signalled an intention to extend EIS and VCT reliefs but has not yet said when and for how long. The Treasury Committee calls on HM Treasury to announce an extension urgently, including the length of the extension.
ICAEW is carrying out its own evaluation of the venture capital tax reliefs. What is your experience of the schemes as an investor, adviser or company raising finds under one or more of the schemes? What is working well and what could be improved? Please send your comments to Richard Jones in ICAEW’s Tax Faculty or Katerina Joannou in ICAEW’s Corporate Finance Faculty.
Read ICAEW’s response to the call for evidence:
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