I’ve been thinking about the rules for “tax-advantaged venture capital schemes” (VCTs, EIS and SEIS).

The government’s stated aim is to ensure that the schemes continue to support economic growth and provide value for money for the UK Taxpayer.  I’m not sure that the:

• age of business criterion,
• cap on total investment and
• limit on number of employees for the investee companies

serve either of these objectives.

An arbitrary seven year limit on funding doesn’t seem to serve any logical purpose. It penalises firms with long R&D periods, or firms that have traded on a small scale for a number of years but then identified the potential to grow.

The cap on total investment penalises firms where there is a need to raise very substantial amounts of working capital to finance a long term development programme before investors see a profit, or where expensive capital assets need to be acquired in order to commence business.

And the size of a companies workforce will be a reflection of the type of trade carried on by the business, not an indication of its stage of development and how easy it can access finance.

Removing or amending these rules could let more capital flow to where it is needed – plugging the equity gap for SMEs and helping to create jobs. At the moment, the rules are putting a break on economic growth and therefore they do not represent good value for money for tax payers.

However, these rules are not down to the UK government’s decision making. They are there to ensure compliance with European State Aid rules. As the Policy Network identified in its recent publication “Supporting Investors and Growth Firms”, although the UK’s schemes are well regarded on the continent, politicians shy away from them as they fear that they will be perceived as giving tax breaks to the rich at a time of austerity for the majority.

Find out more about tax advantaged venture capital schemes at our Alternative Investment Summit in London this October.