On 21 January 2022 the UK released statistics on Venture Capital Trust (VCT) tax relief for the year 2020/2021. The annual statistics on VCT tax relief help the UK government to monitor the cost and effectiveness of the tax relief, which may be taken into consideration in future tax policy decisions.

A VCT is a publicly listed, closed-end UK fund providing individual investors with a chance to access venture capital investments through capital markets. The investments made by VCTs encourage small businesses to grow and give investors an opportunity to potentially access high returns from investing in high-growth private companies.

The statistics show that in the tax year 2020/2021 VCTs issued shares valued at GBP 668 million, which was an increase of 4% on the shares issued in the previous year. The number of VCTs managing funds dropped slightly to 57 in 2020/2021, and of this number 40 VCTs actually raised funds in the year. The remaining VCTs did not raise funds in the year but were managing the funds they raised in previous years.

The commentary notes that the number of individual investors claiming VCT tax relief decreased by 11% to 17,725 in 2019/2020, which is the latest year for which those figures are available. This statistic includes investors claiming tax relief on their self-assessment tax return but it does not include investors claiming tax relief through other methods such as the PAYE system, or those not claiming any relief.

The decrease in the number of investors compared to the previous year is likely to have been due to reforms to the VCT investment conditions that were introduced in 2017 and were taking effect in subsequent periods. The uncertainty due to the pandemic may also have reduced the number of investors.

Most of the investors claiming relief under the VCT scheme (around 83%) made investments under GBP 50,000. The average amount invested by each investor in 2019/2020, the latest period for which the figure is available, was GBP 32,000.

Background

The VCT regime aims to encourage investment in small and start-up companies by allowing tax relief to individual investors based on a percentage of the amount they invest. If a VCT is suitably structured, it can obtain tax relief for the trust itself and for its investors.

Income tax relief is available at 30% where an investor subscribes for shares in a VCT. The investor can receive the VCT tax relief on investments up to a maximum of GBP 200,000 per year. The VCT shares must be held by the taxpayer for a minimum qualifying period of five years. Dividends on VCT shares acquired, whether by subscription or otherwise, are exempt from income tax if the shares are held for at least five years.

Monitoring

Monitoring investments through collection of the relevant statistics allows the UK government to better assess the effectiveness of the tax incentive. Although it is difficult to measure the extent to which the incentive increases investment, the statistics may enable the government to pinpoint issues arising and formulate adjustments to improve the targeting of the incentive.