Amidst the chaos and confusion around the government's recent "mini" Budget speech, otherwise known as Growth Plan 2022, Kwasi Kwarteng’s declaration of support for venture capital trusts has signalled confidence and indicated stability for the market to investors and managers alike.
In the long term, the now former chancellor’s decision to extend the tax relief scheme beyond its original 2025 sunset clause will help maintain the positive momentum the sector has built up over the past couple of years.
Looking ahead, the salience of VCTs in the UK’s funding ecosystem is only set to increase as geopolitical and economic uncertainties attract investors looking for a way to invest in the future of Britain's small and medium-sized enterprises, while capitalising on the vital tax relief benefits they continue to provide.
Funding the bedrock of Britain’s economy
During this period of heightened uncertainty, the government has been right to extend this form of tax relief. The VCT sector has proven itself to play an instrumental role in the UK’s funding ecosystem.
With banks and private equity investors focusing on larger businesses, and venture capital and angel investors solely backing companies at the very early stages of their development, VCTs are one of few investment vehicles on the market capable of effectively address the funding gap faced by many SMEs.
Since they launched in 1995 VCTs have played a pivotal role in the UK’s economy by supporting those that would otherwise fall through the cracks. Indeed, since 2018, VCTs have been responsible for more than £1.7bn of investment into more than 500 different SMEs.
Continued support for the scheme will undoubtedly help provide funding to thousands of SMEs by continuing to drive private capital towards the industries that need it the most. Supporting these business helps to provide growth, jobs, and innovation in sectors that are critical to scaling up the UK’s economy.
Indeed, SMEs account for 61 per cent of employment and 52 per cent of turnover in the private sector. The success or failure of these businesses in the coming years will ultimately impact the UK’s economic outlook.
At a time when the future of the economy remains uncertain, with the pound’s value and consumer confidence reaching all-time lows, the schemes continuation shows that the government recognises VCTs are at the heart of supporting Britain's entrepreneurial drive.
Matching investors’ needs
For investors, the extension of the 2025 sunset clause will enable VCTs to remain as one of the most efficient solutions in providing tax-free dividends and the much-needed income stream that many investors are looking for amidst growing instability within the markets and rising inflation.
With inflation at a 40-year high, and the Bank of England facing an uphill struggle as it continues to rise interest rates, tax relief could become a priority for investors facing increasing economic pressures.
