Threat To UK Access To Venture Capital

European rules on state aid have jeopardised small UK companies’ access to venture capital funding worth hundreds of millions of pounds each year, placing further strain on a sector already starved of credit, the Financial Times reported. Under a measure included in the Finance Bill, venture capital trusts that invest in small growth companies could lose generous tax benefits as a result of a new cap on state-backed investment sources. At present, VCTs offer 30 per cent upfront tax relief on investments of up to £200,000 a year, as well as tax-free dividends and capital gains. VCTs were first introduced in 1995 and channelled £350m to small and medium-sized enterprises in the 2010-11 tax year. VCTs have been one of the cornerstones of the government’s policy to stimulate UK enterprise through alternative sources of funding. Although banks had agreed to increase their small business lending under the “Project Merlin” deal with the coalition last year, a Bank of England report in February found they had fallen £1bn short of the agreed target. But in an effort to comply with European rules, investors will lose these tax advantages if the companies they are funding receive more than £2m from VCTs and other forms of “state aided, risk capital investment”. As a result, managers of VCT schemes will have to check all the sources of funding used by companies they plan to finance – and potentially have to delay their investments until a higher level can be negotiated. Read more. (Subscription required.)