In a series of articles commissioned by Intelligent Partnership, we asked industry experts RW Blears to share their thoughts on the current state of play in the venture capital scheme market. In the third article, written by Frank Daly, he tells us how these schemes are used to help kick-start economic growth and why they are likely here to stay.
The government has relatively few tricks up its sleeve when it comes to kick-starting economic growth. The lowering of interest rates to encourage borrowing and spending has been the historic go-to solution to provide economic stimulus, however this is a blunt instrument and far from guaranteed to work.
As we enter the seventh year with interest rates at 0.5%, growth is still only just creeping back. Even more drastic measures such as quantitative easing (QE) tend to be held in reserve for genuine financial crises.
Tax breaks are the other main tool. A far-reaching reward system used to encourage a wide range of desirable activities, such as film production, research and development and patented invention. The ‘cost’ to the Exchequer of these various tax breaks has now reached £117bn per year according to the Financial Times, a sum larger than the budget of any single government department.
Tax breaks for investment in venture capital (VC) schemes represent a small slice of that headline figure, which is dominated by the exemption on capital gains tax (CGT) from the sale of principal private residences. By comparison, total funding of £1.5bn was provided to small businesses through the enterprise investment scheme (EIS) in 2013/14.
Whether VC schemes are here to stay will partly be a matter of their retaining the fickle goodwill of the government of the day. The on-going media backlash against tax avoidance by multinational companies and celebrities has occasionally tarred mainstream programmes such as the EIS with its supercilious brush.
It is, of course, important that these schemes continue to deliver value for money for taxpayers. On the most basic level, if the corporation tax receipts garnered from successful EIS-funded SMEs outstrips the tax savings realised by EIS investors, the future of the scheme would seem assured.
Whilst this research might be impossible to accurately produce, if it were established this was not the case an argument could be made that the scheme was not achieving its policy objective and should be scrapped. This however would be short-sighted because the point of supporting the many start-up companies which fail is to ensure that when the oft-touted “next Facebook”, “next Twitter” or “next Airbnb” come along in embryonic form, they do not die on the vine owing to lack of funding.
In other areas of challenge, European State aid legislators concerned with perceived abuse of VC schemes have instigated a crackdown on some of the safer, asset-backed activities that had come to predominate (the prime example being energy generation) and the use of tax advantaged monies to fund replacement capital. Separately, the FCA has become more focused on consumer protection in recent years, with the result that advising on and marketing unquoted investment opportunities is increasingly weighed down with tedious compliance processes.
However whilst these factors may combine to frustrate the achievement of another record-breaking year for EIS fund raising, they are unlikely to prove an existential threat to the scheme. The same goes for venture capital trusts.
It is close to impossible to deny that SMEs are the engine room of economic growth and that equity funding gaps naturally occur owing to the costs of getting the required investment into growing companies to turn them into the behemoths of tomorrow. This is where the VC schemes are invaluable. SMEs innovate, disrupt traditional models and latch on to emerging trends far quicker than more established businesses and they employ more people. But they also need, and will always need, support to get off the ground