The Patient Capital Review consultation closed last week and, reports Scott Longley, the tax-efficient sector is now waiting nervously to see what Chancellor Philip Hammond announces in his November Budget.
Venture capital trust (VCT) and Enterprise Investment Scheme (EIS) managers have reacted with caution to the Patient Capital Review consultation document issued by the government last month.
The review was launched by the government late last year and a panel of investment luminaries, headed by Sir Damon Buffini and including Neil Woodford, was set the task of shaping the themes of the consultation.
The document subsequently released by the Treasury suggests the government is most worried about the ability of innovative firms to scale up and source capital for their growth plans.
Within the consultation document, the government notes the contribution of current tax-efficient schemes to the funding landscape. Pointing to the amounts that have been raised by VCT, EIS and Seed EIS schemes since inception – more than £2.2bn in the last tax year alone – the document acknowledges the various schemes have collectively “delivered a significant quantity of investment to the market”.
“EIS in particular is praised highly by business angels as having supported significant amounts of new investment since its inception,” the report says.
Figures within the tax-efficient investment sector remain concerned, however, that the review signals another period of unnecessary government meddling at a vital time in the economic cycle, with all eyes focused on the small and medium enterprises sector.
Pointing to the relatively tight timetable involved – with the consultation closing last week, Chancellor Philip Hammond is expected to announce measures in his November Budget statement – EIS manager Calculus Capital chief executive and co-founder John Glencross says what concerns him is it is “more instability”.
He continues: “We could have regulation rushed through because they are talking about a consultation process ending in October and then proposals in the autumn Budget. We have to be very careful about significant changes to rules – particularly when the economy is clearly in a fairly delicate place.”
His views are echoed by others within the sector. Unicorn Asset Management director and senior manager Chris Hutchinson says he is worried VCTs might become “soft targets” for politicians and civil servants who have a “lack of understanding” about the workings of both the tax-efficient sector and early-stage investment. “It would be a real shame if we end up with further restrictions as a result of the ongoing Patient Capital Review,” he says.
He is especially worried about how the Treasury views the success of the VCT sector – hoping the inherent risks of investing in early-stage companies are properly understood and that the government does not seek to punish funds that have enjoyed particular success by halting their tax-efficient status.
“Just because they are no longer what you would call early-stage, speculative, capital-starved businesses does not mean the VCT investor who took the capital risk in the early stages should now be penalised,” he argues.
The tax-efficient investment sector has already seen a variety of regulatory developments in recent years – many but not all of which were initiated at the behest of the European Commission with a view to forcing the UK to abide by state aid rules.
The Patient Capital Review consultation document concedes government does not have the best track record when it comes to correctly identifying and providing solutions for perceived funding gaps. Previous interventions to support venture capital, it notes, have been “ineffective because they have simply tried to increase the supply of capital to the market overall without considering how to ensure that capital is deployed effectively within the market”.
Past initiatives have included the government’s High Technology Funds instigated during the dotcom boom, which the report points out were launched at a time when the supply of equity finance was already high. Analysis from the National Audit Office in 2009 showed funds launched at a similar time had an average internal rate of return of -5.2% but the High Technology Funds did worse with an equivalent return of -9.7%.
Pointedly, the report suggests it is “not possible” to ensure schemes target only those firms that would otherwise struggle to access finance, adding that the upfront income tax relief “encourages a subset of investors and fund managers to use them for ‘capital preservation’ investments”.
The VCT sector in particular can counter that it has been achieving government aims for the tax-advantaged space. According to Hutchinson, for example, many established VCTs have “delivered on all of the Treasury’s initial objectives”. “I am sure we can demonstrate that satisfactorily if we had the time to provide all that data,” he adds.
A fear of further government meddling is evident throughout the sector. Downing partner and chief executive Tony McGing says the current regime related to tax-efficient investment is “going in the right direction”.
“My concern is that someone wants something shiny and new,” he adds, however. “It is like we have a perfectly good 20-year old Volvo that is working fine and they are saying, no, we want this brand new car. Let’s not scrap the car – it has been well-maintained and it is doing a good job.”
McGing calls for further dialogue and consultation – a theme picked up by Octopus head of tax-efficient investments Stuart Lewis. “There is a very helpful dialogue with government as to how we really help and transform and support small companies and entrepreneurs as the life blood of the economy and as creators of jobs and prosperity,” he says.