The UK’s second 2021 budget delivered on 27 October in the House of Commons yielded surprisingly few surprises, leaving many in the tax-advantaged investment sector with mixed feelings.

“No news can be good news. There were no specific changes relating to Venture Capital Trusts (VCTs) in the budget but the government announced an ambitious programme for levelling up the country,” said Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC).  

She reminded that “VCTs play a vital role in levelling up by investing in SMEs around the UK. They invested £695 million in SMEs through the first six months of 2020, supporting these companies through the pandemic.”

However, the budget was lambasted for the things it did not tackle. It addressed neither VCTs nor the Enterprise Investment Scheme (EIS) directly. The Enterprise Investment Scheme Association (EISA) has denounced “the failure to acknowledge private investment.” 

While welcoming the Chancellor’s statements “on boosting innovation in the UK,” the official trade body for the EIS expressed disappointment that “he has failed to recognise that much of the initial investment that supports the early stages of new innovative businesses comes from the private sector, making use of the Enterprise Investment Scheme.”

Director General of the EISA, Mark Brownridge commented: “The investment gap for early-stage growth businesses that are unable to attract funding through the banking sector, whether supported by government schemes or not, sits at in excess of £2.5 billion. 

“Giving reassurance to the private investors who provide this much needed capital that the scheme will continue beyond the current sunset date of 2025 is critical.”

He said his organisation would continue to lobby the government to recognise the part that private investors play in starting and driving innovative businesses, “underpinning the positive projections that the Chancellor has cited”.

Business rates cuts, R&D incentives, green investment, and draught relief

The clue, for attentive listeners, that the budget would not have much of an impact on the sector came halfway through the speech when Sunak said, “Now is not the time to remove tax breaks on investment,” a positive endorsement of the important role of tax reliefs in driving funding. That hunch proved accurate for the most part.

Nonetheless, a few of the changes will likely have an indirect impact on the sector. For example, the government will not be abolishing business rates, choosing instead to ‘make the business rates system fairer and timelier’. 

“We on this side of the House are clear that reckless, unfunded promises to abolish a tax which raises £25 billion every year are completely irresponsible. It would be wrong to find £25 billion in extra borrowing, cuts to public services, or tax rises elsewhere, so we will retain business rates. But with key reforms to ease the burden and create stronger high streets.”

The improvements include more regular revaluations, with additional temporary measures such as the cancellation of the previously announced business rate multiplier for 2022 and a 50% deduction for businesses in the Covid-hit retail, hospitality and leisure sectors in 2022/23 up to a maximum of £110,000.

This decision is in contrast to Labour’s, which has pledged to scrap business rates and close tax relief schemes that “do not benefit the taxpayer or the economy.”

“We will look at every single tax break. If it doesn’t deliver for the taxpayer or for the economy then we will scrap it,” Shadow Chancellor Rachel Reeves said last month.

Another change to business rates, this one called for by the Federation of Small Businesses and the British Property Federation, is the introduction of a new investment relief to encourage businesses to adopt green technologies like solar panels. It is backed by incentives totalling £750m.

This ‘Go Green’ drive will have an impact. Small businesses, which on aggregate have a high environmental footprint (especially those in the manufacturing sector) are critical for the green transformation. Since they and the other business rates improvements are also the focus of tax-advantaged investments, their resulting reduced costs and enhanced growth will naturally benefit existing and potential investors in schemes like EIS and VCT.

A toast to the Chancellor?

Renewable energies are among the commonly recognised trades in Business Relief (BR). BR plays an important role in supporting family-owned businesses and growth investment in the Alternative Investment Market (AIM) and other growth markets. 

A major appeal of investing in AIM-listed companies is the possibility of 100% relief from future Inheritance Tax (IHT) on such investments, as many AIM shares qualify for Business Relief (BR).

As discussed in our soon-to-be-published AIM Update (due out in November), the current success of the AIM market receives a sizable boost from those looking to invest in  BR-qualifying companies.

On another front, English pub owners could raise a toast to the Chancellor for introducing a new draught relief, which will apply a lower rate of duty on draught beer and cider.

“It will particularly benefit community pubs who do 75% of their trade on draught”, he said, adding the measures, which are ‘not temporary,’ represent the ‘the biggest cut to cider duty since 1923,’ ‘the biggest cut to fruit ciders in a generation,’ and ‘the biggest cut to beer duty for 50 years’. 

These tax breaks are good news for EIS investors. Pubs have were among the favourites of EIS investment managers, pre-Covid; therefore, these new reliefs along with the return of big nights out, have the potential to help reinvigorate EIS investment in this area.

The Chancellor confirmed the government’s target to increase investment in research and development (R&D) to £22bn.

Combined with the tax reliefs, total public investment in R&D is increasing from 0.7% of GDP in 2018 to 1.1% of GDP by the end of this Parliament.

This level of public investment compares to an OECD average of just 0.7%, with Germany investing 0.9%; France, 1%; and the United States, just 0.7%, Sunak said.

R&D isn’t something only big corporations can do. Small businesses have been known to leverage R&D to compete on, and even lead, their markets. For EIS and VCTs that invest in such companies, including the knowledge-intensive companies, the tax relief could make a real difference.

A few of the pre-budget pundits predicted that the government would cut down the tax relief on VCTs. Perhaps the Chancellor’s decision to leave VCT and EIS tax reliefs unassailed is a recognition of their crucial role in Britain’s economic recovery from the Covid-19 pandemic. 

However, some in our industry believe that was not nearly enough, arguing that an economic agenda that the Chancellor said aims to “create jobs, lift growth, [and] spur innovation,” calls for an increase in the levels of VCT and EIS tax reliefs.