Taking centre stage

Wow. With many venture capital trust (VCT) share issues selling out in days during the 2021-22 tax year, it was obvious that the sector was having a bumper year of fundraising. But the final numbers are quite something: VCTs raised £1.13bn over 2021-22, the AIC’s count reveals, the largest amount ever. That was 65% up on the previous year – and 45% up on 2005-06, the previous record year.

Let’s hope Chancellor of the Exchequer Rishi Sunak has been busy thinking about his wife’s tax affairs in recent days. Back in 2005-06, VCTs’ success prompted the Treasury to reduce some of the tax benefits that the funds offer, undermining their ability to raise cash in subsequent years.

Still, there are two ways to look at record-busting sales of VCTs. Certainly, the demand story is strong. Savers and investors, particularly higher earners, have seen their ability to use other tax-efficient vehicles such as private pensions curtailed in recent times. VCTs, with an annual investment allowance of £200,000, are an obvious alternative, particularly for those who have used up their £20,000 annual ISA allowance.

Equally, however, there is plenty of VCT supply, reflecting the sector’s increasingly important role in funding a new generation of entrepreneurs. The £1bn plus of funds raised over the past 12 months will give many more early-stage businesses access to the capital they need to pursue their growth ambitions.

VCTs offer a route through what has traditionally been difficult territory. Early-stage businesses desperately need funding and investors are keen to provide it, partly for altruistic reasons, but also because backing a successful company at the beginning of its growth trajectory offers the potential for outsized returns. But investors also know that the failure rate of these businesses is high. The diversification benefits that VCTs offer – plus the tax incentives that reduce the cost of investment – are therefore crucial in getting past that risk.

If the Chancellor is worried by the rising cost of VCT tax reliefs, he would do well to look at a study produced last year by Wealth Club, one specialist in this area. It pointed out that no fewer than seven of the UK’s 100 technology sector unicorns – start-ups that have achieved a $1bn valuation – had benefited from VCT support early on in their life. That helped the UK become only the third country in the world, after the US and China, to make it to 100 unicorns.

Nor is it only technology start-ups that have prospered with backing from VCTs. The list of household name companies that started out this way continues to lengthen, from meal delivery kit provider Gousto to the online estate agency Zoopla. Gousto, by the way, was once turned down for finance on Dragon’s Den, a good example of the hit-and-miss search for funding that entrepreneurs in the UK must go through.

Indeed, that we do not always give start-ups the support they need has been a longstanding criticism of the UK. VCTs are playing their part in addressing that criticism – and helping the country’s entrepreneurs to compete on the world stage.

As for investors in VCTs, why shouldn’t they be rewarded for providing this support? After all, these are not sure things; not every VCT has been a success – there are certainly instances where investors would have been better off putting their money elsewhere, even without the support of tax incentives.

We shall see. Rishi Sunak is promising a wide-ranging review of the tax system later this year, which may include new thinking on tax incentives for saving and investing across the board. But a raid on VCTs would be unfortunate. The best funds offer a win for all – for investors, certainly, and the companies they back, but also for taxpayers as the success of those businesses creates jobs, supports growth and, ultimately, drives higher tax revenues.