Three reasons the government shouldn’t tinker with VCT and EIS tax relief

Possible changes are mooted in the budget for tax-efficient investments EIS and VCTs. This could include banning investment into asset-rich companies such as pubs and wedding venues as well as restricting EIS investment into the film industry. There has even been talk of restricting or reducing the tax relief available for all types of EIS and VCT.

The rumours come on the back of the Patient Capital review consultation which is looking at how we can support the development of high-growth British businesses by improving access to long-term funding. It’s perhaps ironic a review intended to support business should threaten VCTs and EIS, which over the years have proven their effectiveness at helping small businesses grow and create jobs.   

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It would be disappointing to see further tweaks to EIS and VCTs, especially as it’s been just two years since the last raft of changes. Adding yet more restrictions could make them less attractive to investors and limit the vital role they play in society and in helping UK businesses access finance’.

Here are three reasons why the government shouldn’t change the tax relief or the rules on EIS and VCTs: 

Creating Jobs - VCTs and EIS create lots of jobs. Recent research from HMRC found VCT-backed businesses averaged an increase of 60 employees per company (Source AIC). 

Contribution to the UK economy - whilst it is great to put money into companies which could be the next Facebook, don’t forget the ‘normal economy’. Down to earth activities such as building and running pubs, wedding venues, which all create lots of jobs and have a multiplier effect on the economy. Another good example is the film industry; every £1 in tax relief given to the British Film industry results in £12 in benefit to the British economy. That figure comes from the British Government itself. 

Turning investors off VCTs and EIS – if new restrictions were introduced to only allow investment in very risky assets, investors may well be put off altogether. Most investors we meet who invest in EIS and VCTs want a balanced portfolio. For example, they are more than happy to invest in some high-octane investments where the return may not be for many years, but they want to balance that out with investments such as asset rich and media EIS which should be less volatile and also more tangible, although far from being risk free. 

One final but essential point, I’m convinced there is a very concrete risk of throwing the baby out with the bathwater. The mere fact a company owns assets doesn’t mean it’s not a proper business. 

I recently visited West Berkshire Brewery, a company we are helping raise money. Yes, it owns significant assets in the form of a bottling plant with some very expensive brewing equipment. But this is only a small part of the story. West Berkshire Brewery is a proper business. It has just set up a state of the art craft brewery and visitor centre – the likes of which you won’t find anywhere else in the UK. The business has required a huge amount of vision from its staff and management team, it is far from risk free. Moreover, it is providing much needed jobs in a rural area. Without EIS relief, would investors be so keen to part with their money?

Alex Davies, is CEO and founder of Wealth Club. 

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