Investment companies and advisers have welcomed new investment and tax relief rules offered for venture capital trusts in last week’s Budget and believe the sector may boom in the last few days of the tax year.
Chancellor George Osborne set out more favourable rules for VCTs and enterprise investment schemes, with some changes bringing both investments in line with one another.
Among the dual changes is the rise in qualifying company limits from 50 to 250 employees and gross assets from £7m to £15m for both vehicles.
The move was a surprise after fears of a crackdown following comments from Osborne last month questioning VCTs. Feed-in tariff businesses, such as solar companies, have been put on the excluded activities list for VCTs and EISs from April 2012.
VCT fund-raising has fallen sharply in recent years from £508m in 2006 to £318m in 2010 and only £25m has been raised so far this year amid concerns over a clampdown.
Chelsea Financial Services head of investment products Matthew Woodbridge says the move could even breathe new life into Aim VCTs, which have suffered under the restrictions.
He says another key improvement will be allowing companies to receive up to £10m of assisted funding in a year – a fivefold increase from £2m.
Woodbridge says: “VCTs and EIS have played an important part in bridging the finance gap faced by SMEs but particularly in the current conditions where banks are more concerned with improving their balance sheets than lending money to small businesses. This means they will continue to help bridge that gap.”
Hargreaves Lansdown investment manager Ben Yearsley says Osborne has secured the long-term future of VCTs. He says: “Sales will improve in the long term but the important thing to recognise is the advantages are being made for the genuine growth-orientated companies. I do not think we will go back to the times of £750m in sales simply because tax relief was at 40 per cent.”
Experts suggest the favourable treatment of EISs, notably raising the level of income tax relief from 20 to 30 per cent in April 2011 and doubling the annual EIS investment limit to £1m from April 2012 – compared with £200,000 for VCTs – may see them heavily outsell VCTs. There are fears that EIS may now attract the wrong type of investor.
Oxford Capital Partners investment director David Mott expects EIS investment volumes to soar by 300 per cent. Since 1994, EISs have raised £7bn, averaging around £388m a year.
MAC Consulting chief executive Mark Chilton agrees that EISs will see a surge in sales due to the increase in tax relief but warns that they are usually a riskier investment vehicle than VCTs.
He says: “Quite how this increased incentive for risk sits with the FSA’s concern over IFAs’ risk-profiling of clients is an interesting conundrum.
“I expect a wall of money to flow into VCTs until the deadline now that the existing regime has been supported in the Budget.”
As for the refocusing of VCTs, Albion Ventures managing director Patrick Reeve says it is a sensible move as a number of VCTs have been targeting investments that do not fill a policy need – essentially a business that could be covered by bank finance.
Reeve says there are some companies that could do with the help in this area. He says: “An example would be anaerobic digestion – the changing of waste food into energy – because that is a complex process that is also expensive. The banks are not lending but VCTs are beginning to.”