The steady decline in venture capital trust (VCT) fundraising will have a dramatic impact on the future of the UK economy, according to a report published by the British Venture Capital Association.
Fundraising for VCTs, which offer tax advantages for investors in unquoted companies, fell from £450m in 2001 to £125m in 2002, with the association anticipating further falls in 2003. BVCA chairman John Mackie has written to the UK Chancellor of the Exchequer Gordon Brown to highlight the difficulties for VCTs in attracting investment.
The BVCA is recommending an increase in income tax relief from 20 to 40 per cent in order to provide greater funding for small and early-stage companies. In addition the association asks for a higher ceiling on the market value of Inland Revenue-approved share option schemes from £30,000 to £100,000 per individual. It is also calling for the current taper relief to be replaced by a flat rate capital gains tax of ten per cent on business assets and 20 per cent on non-business assets, which it says will simplify current legislation and ‘add stimulus’ to the economy.
The report highlights the role played by VCTs in supporting the UK economy. Over the five years to 2001/2, the number of people employed by VCT backed companies increased by an average of 32 per cent per annum against a national private sector employment growth rate of just over 1.5 per cent and an average of 23 per cent for companies backed by mainstream private equity.
The survey, based on 123 responses to a survey of 358 VCT-backed companies backed by 13 VCT managers, also found that 85 per cent of the companies would not have existed or would have grown less rapidly without VCT funding.
The decline in VCTs reflects a broader depression in the venture capital sector. Although the UK remains the primary destination in Europe for venture capital fundraising and investment, the level of UK VC investment last year fell by half to E1.5bn.