Venture capital bodies have today warned MPs that the withdrawal of tax incentives for investors could choke off the flow of capital into UK start-ups and restrict the growth of the country’s tech sector.
Retail investors have been tempted into investing in early stage startups by schemes like the Enterprise Investment Scheme (EIS) and Venture capital trust (VCT) regime, which allow them to claim back hefty tax relief on their investments.
But a ‘sunset clause’ for EIS and VCT has been introduced by the Treasury, shutting out relief to subscriptions made on or after 6 April 2025.
Speaking at a Treasury select committee hearing today, chiefs of UK venture capital bodies sounded the alarm over the closure of the schemes, which they said would deter investors.
“There is an absolute recognition that what we do is high risk. We’re backing young companies without track records and a significant number will fail,” said Will Fraser-Allen, Chair designate at The Venture Capital Trust Association (VCTA).
“But what the tax incentives are designed to do is to unlock the pool of capital from retail investors, and whenever we have surveyed our shareholders we always comes back with absolute resounding confirmation that it is because of those tax incentives.”
Fraser-Allen said the schemes played a central role in unlocking investment for companies at an early stage that “grow to be of both scale and importance”.
The relief offered by venture capital trusts have been a draw to investors so far, with the schemes raising £1.13bn in the year to April 2022, up 63 per cent on 2021, according to Data from the Association of Investment Companies.
The EIS scheme meanwhile saw 3,755 companies raise a total of £1.66bn between 2021 and 2022, while 4,165 firms raised £1.89bn the year prior, according to data from HM Revenue & Customs.
Christiana Stewart-Lockhart, Director General at Enterprise Investment Scheme Association, said the withdrawal of the enterprise investment scheme could be damaging and called on the Treasury to provide clarity on whether it would continue “as soon as possible”.
“It is crucial, particularly when we’ve been talking about so much economic uncertainty, for the government to give some clarity on this as to the long term,” she told the Treasury Select Committee.
The Treasury has been contacted for comment.