Investment firms which offer venture capital trusts (VCTs) and Enterprise Investment Schemes (EISs) are preparing for changes in next week’s Budget which could further regulate what they can invest in.
In the government’s Patient Capital Review earlier this year, concerns were raised that VCTs and EISs – which give investors tax breaks to combat the perceived risk of backing young startups – were being used outside their remit.
“The Treasury feels there is far too much VCT money being used to capture the tax breaks without it being capital at risk,” said John Glencross, chief executive of Calculus Capital, whose firm has been involved in discussions with the government throughout the Patient Capital Review.
Although many in the tax-efficient sector have not ruled out a fundamental reform, there are two particular niches widely believed to be in chancellor Philip Hammond’s crosshairs.
The first is VCT money being used for asset-backed schemes, predominantly those backed by property. In these situations, if the investment does not go well, “it will still have a value which substantially underpins the investment,” said Glencross. Little of the investor’s capital may be at risk.
The second area in danger of coming under fire in the Autumn Budget is certain types of film finance. EIS money may be used to cover production costs for a film which has already been pre-sold to a broadcaster, again de-risking the investment and essentially using the money as a bridging loan.
The push to reform the way VCT and EIS money is being spent comes as Brexit threatens to cut UK access to the European Investment Fund.
The Treasury has promised to make sure no less funding is available, but other than mooting the idea of a new investment fund has not set aside any more cash to meet the shortfall.