Political and regulatory news

Red tape reduction in prospect for VCTs

In a positive development the Chancellor has announced that VCTs will be allowed to invest greater amounts in smaller businesses. 

Currently the VCT rules limit any one VCT to investing no more than £1million in a single company in any 12 month period.  This restriction has created significant administrative burdens for VCTs. It prevents a single VCT from providing all the funds a small company might require even where the amount it is looking for is well within the overall limits set by the scheme.  This means that a company seeking, say, £2million of investment has to reach agreements with 2 VCTs rather than one. 

The burden of agreeing investment terms with multiple funding partners increases the cost of VCT investment.  Removing this cap will allow VCTs to invest more efficiently, grow in size and secure economies of scale.  At the same time, SMEs will be better able to identify a one-stop-shop partner able to meet their funding needs.  The impact of this change should not be underestimated – it could transform the VCT sector.

Draft legislation published in advance of next year’s Finance Bill also reconfirmed the Government’s desire to increase the range of companies eligible for VCT investment.  This includes SMEs with: 

• assets of up to £15million before investment (up from the current ceiling of £7million),
• up to 250 employees (up from the current limit of 50), and,
• increasing the amount an individual SME can receive from £2million to £10million.

These rules have to be agreed with the European Commission before they can be adopted but the AIC is encouraged that they form part of the proposed VCT legislation.  Taken together all these measures could deliver significant benefits for the VCT sector and its investors.

Less welcome are possible restrictions on VCT involvement in ‘buy-outs’, where VCT investment is used as part of a funding package designed to replace existing shareholders and drive a company onto its next stage in commercial development.  These deals are invaluable in revitalising the commercial prospects of an SME when existing owners find themselves unwilling or unable to develop a business.  In these situations a VCT works with a new or existing management team to deploy new ideas, skills and enthusiasm to achieve the commercial potential of a company.  This is a natural and important part of the cycle of business development and can make a significant contribution to achieving the UK’s economic potential. 

Such a restriction on VCT investment would be inappropriate but it seems that the Government’s proposals are driven by EU requirements.  The changes to be introduced temper what is otherwise expected to be significant enhancements of the scheme and the AIC will engage with the Government to achieve the best possible outcome for VCTs and their investors.

Next article: EU to change share dealing rules

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Back to Issue 5 - 12 Dec 2011