MPs urge changes to tax relief to boost UK’s regional start-ups

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Tax relief for investors in early-stage UK companies should be harnessed to boost regional start-ups, according to a group of MPs who have challenged venture capitalists to widen the reach of their investments.

In a report published on Monday, the House of Commons Treasury select committee said ministers should deliver certainty over income tax relief for investors via the enterprise investment scheme (EIS) and venture capital trusts (VCTs), which are scheduled to expire in April 2025.

The EIS and VCTs offer 30 per cent upfront income tax relief to investors and are also exempt from capital gains and dividends tax to encourage investment in higher-risk early stage companies.

The MPs said VC investment was “disproportionately allocated” to London and the South East of England and that this undercut the “potential for economic growth across the UK regions and nations”. 

They also called for a revamp of eligibility rules, under which companies can currently receive funds under EIS if it is within seven years of their first commercial sale.

“Having an arbitrary seven years may not work for companies outside London,” said Will Fraser-Allen, chair of the Venture Capital Trust Association. He said these companies took longer to scale and raise venture capital, in part because of a younger start-up ecosystem.

The committee’s intervention follows government reforms this year that have affected funding for early-stage companies.

The EIS and VCTs benefited from investors seeking tax relief when the cap on pension contributions was lifted from £40,000 to £60,000 in April, meaning people are able to funnel more into their pensions while reaping tax benefits.

Chancellor Jeremy Hunt in June agreed a “compact” with leading pension providers to commit 5 per cent of their so-called default funds to unlisted equities by 2030. Unlike the EIS and VCTs, they will focus on later stage ventures and will not be required to invest in UK companies.

Hunt wrote to the committee in March stating a “firm intention” to extend the schemes. But Fraser-Allen said uncertainty over the length of any extension made it difficult to invest in companies and assure shareholders of liquidity as new funds are used to cash out investors.

VCTs raised more than £1bn from retail investors in the 2022-23 tax year, according to the Association of Investment Companies. This was down slightly on a record year in 2021-22.

The Treasury said: “Given the importance of venture capital in providing funding for innovative companies . . . it is right that the government continues to support the sector.”

MPs in the report also criticised VCs for failing to invest in women-led enterprises, stating this was a “dereliction of duty” in light of generous tax relief and investment by the state-backed British Business Bank.

“Public funds play a key role in the success of the UK’s venture capital sector,” said Harriett Baldwin, Conservative MP and chair of the committee. She said VCs should be compelled to share diversity data as a precondition for offering tax-relief in future.

The committee has also advised the British Business Bank to create a fund with the aim of promoting gender diversity in the allocation of venture capital.