Investors disappointed in Reeves budget with tax cuts

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As expected, Chancellor Rachel Reeves used her Budget to pump buckets of tax increases into the UK economy.

But one of them will be of particular interest to UK start-ups and scale-up businesses.

Reeves announced the expansion of eligibility for the Enterprise Investment Scheme (EIS) and its sister scheme, the Venture Capital Trust (VCT), to “enable us to scale up and attract the talent and capital we need.”

VCTs are listed investment vehicles run by fund managers that provide investors with exposure to a portfolio of young, high-risk companies. To reflect the risks involved, the UK government offers generous incentives. Investors can invest up to £200,000 ($263,975) each tax year, but dividends paid by VCTs are tax-free and profits are not subject to capital gains tax.

In his speech, Mr Reeves pointed out that half of new jobs in the UK are created through scaling up, and proudly proclaimed his support for entrepreneurs.

He went on to say that this includes “redesigning corporate investment and venture capital trust schemes so that they not only support early-stage ideas, but are sustainable as companies grow.”

Any entrepreneur who heard these words in isolation would have been pleased.

But documents attached to her speech revealed a blow to their potential investors. Currently, the government is offering a 30% upfront tax break for investing in VCTs. Therefore, investing the maximum amount in a given tax year could save an investor £60,000 in tax. Budget documents reveal that the tax rate will drop from 30% to 20% from April, when the next tax year begins.

It’s no exaggeration to say that the industry is disappointed with this move.

Chris Lewis, chairman of the Venture Capital Trust Association, said the decision was “a change that risks undermining investor confidence at a critical time for UK business expansion”.

He pointed to a 2023 study commissioned by the UK’s tax authority, HM Revenue and Customs, which found that tax breaks were the most important motivator for investors, and that the number of VCT investors would likely fall if incentives were reduced.

He added: “Reducing point-of-investment tax relief could unintentionally widen the funding gap that these reforms aim to close by making the VCT regime less attractive to investors. This could delay short-term funding and restrict the flow of capital to innovative UK small and medium-sized businesses.”

Unfortunately, there is precedent for this.

Alex Davis, chief executive of investment platform Wealth Club, said that between 2006 and 2007, when upfront tax relief was cut from 40% to 30%, VCT funding fell by 65% ​​and took more than a decade to recover to previous levels. He said the cuts announced this year had triggered a “Black Friday rush” ahead of relief cuts for top VCT managers, with his platform seeing a 538% increase in applications the day after the Budget.

Others were less polite.

Peter Hicks, a research analyst at investment firm Chelsea Financial Services, told investment research and data platform Trustnet that the move was “absolute nonsense”, adding: “Rachel Reeves is pulling off some brilliant mental gymnastics to qualify this as a ‘pro-growth’ budget, while at the same time sucking the life out of the very companies that drive growth.”

And Callum Pickering, chief economist at investment bank Peel Hunt, called it a “stupid change”.

The Treasury’s rationale is that it plans to increase caps on VCTs and EISs to allow investors to follow companies as they grow beyond the start-up stage, and to encourage funding to support high-growth companies.

What this means in practice is that companies that qualify for an EIS or are included in a VCT’s portfolio, particularly those that the Treasury calls “knowledge-intensive companies”, will be able to raise more capital than ever before, and in some cases significantly more.

Previously, VCT portfolio companies could receive investments worth up to £5m a year and up to £12m over a lifetime (£12m and £20m for knowledge-intensive companies), but these caps will now rise to £10m and £24m (£20m and £40m for knowledge-intensive companies).

There will also be tweaks to eligibility rules that will allow for the inclusion of more established companies.

To be fair to the Treasury, the industry campaigned before the Budget to raise the cap, arguing that it had been eroded by inflation since it was last changed in 2016.

For cash-strapped governments, reducing VCT upfront tax relief can save money. The Treasury estimates that the measures will result in a £125 million boost to the economy in 2027-2028 and £95 million in each of the following two tax years, more than outweighing the cost of extending the scheme’s restrictions.

Worryingly, VCT’s popularity already appears to be declining. According to the Treasury’s latest figures, VCT issued shares worth £873m in the 2023-24 tax year, down 17% on the previous year, while VCT investors claimed tax relief on investments worth £810m, down 19% on the previous year. The number of individual investors who applied for tax relief fell by 9% to 24,085.

The Treasury will argue that raising annual and lifetime investment limits will pave the way for more capital to go to start-ups and scale-ups. The danger is that ending the upfront tax break will deter the very investors who were supposed to provide the money.

Megan Green, External Member of the Bank of England’s Monetary Policy Committee, discusses the outlook for inflation, the impact of the Autumn Budget on monetary policy and her predictions for UK economic growth.

IIF chief executive Tim Adams said Prime Minister Rachel Reeves had been badly treated in the preparations for the Budget, as she faces accusations of lying about the state of the country’s finances.

OBR Budget Responsibility Committee Member David Miles said the UK’s productivity had not recovered from the coronavirus and energy price shocks, leading to downward revisions to growth forecasts.

— Holly Ellyatt

London-listed shares have risen slightly over the past week. FTSE100 We are approaching the 10,000 point mark. If the index reaches that threshold by the end of the year, it would be the fastest move ever between 1,000-point increments.

British bank stocks — including metro bank and Lloyds Banking Group —It rose on Tuesday after the Bank of England lowered its estimate of the amount of capital banks operating in the UK need as a buffer. The central bank also said all major UK banks had passed stress tests simulating economic shocks and the potential impact on lenders.

It’s been a dramatic week for the UK bond market, with government borrowing costs seesawing after the Office for Budget Responsibility accidentally leaked information just before the autumn budget was tabled in parliament. The error, which Rachel Reeves labeled “deeply disappointing”, led to the resignation of OBR chief Richard Hughes on Monday. Benchmark yield 10 pension It added about 2 basis points on Tuesday.

The British pound was little changed against either. USD and EUR It rose about 0.3% against the dollar in the week ending Dec. 2, after rising on Tuesday.

— Chloe Taylor