Venture capital access for small firms could evaporate

Small business bank account holders could see their access to venture capital evaporate under new EU rules covering state aid, industry experts recently warned.

Venture capital trusts currently offer 30 per cent tax relief up front on investments as much as £200,000 on an annual basis, as well as capital gains and tax-free dividends.  With business loans from traditional lending sources becoming thin on the ground, VCTs provide crucial finance to companies in need of growth, as they channeled £350 million to SMEs in the 2010-2011 tax year alone.

However, VCTs that invest in smaller sized firms could see their tax benefits lost with a new measure capping state-backed investment sources in the Finance Bill.  Investors of companies that receive in excess of £2 million from risk capital investment such as VCTs will lose their tax advantages as the Finance Bill attempts to come into compliance with European investment regulations.

VCT scheme managers need to now go over each source of funding used by firms they are planning to finance in the future, experts say.  The results could be a potential delay in investment activity, cautioned the Association of Investment Companies.

The AIC responded to the draft bill, remarking that VCT deal flows will be severely disrupted by a £2 million investment limit.  Other experts, such as Albion Partners managing partner Patrick Reeve, have said that it was both ‘unnecessary and annoying’ to be limited by the imposition of the £2 million cap.

While the new limit had been originally scheduled for introduction yesterday, the Government has decided to postpone this until royal assent for the bill is received in the summer.

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