On 26 January 2023 the UK released statistics on Venture Capital Trust (VCT) tax relief for the year 2021/2022.

By monitoring investments through the collection of relevant statistics the UK government can better assess the effectiveness of the tax incentives given to VCTs. This can be taken into consideration in future tax policy decisions. Although it is difficult to measure the extent to which the incentive increases investment, the statistics may allow the government to pinpoint relevant issues arising and to formulate adjustments to improve the targeting of the tax incentives. The more the incentive achieves its intended goals, the greater is the efficiency of the tax expenditure involved.

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 2021/22 VCTs issued shares valued at GBP 1,122 million, which was an increase of 68% on the shares issued in the previous year. The number of VCTs managing funds dropped slightly to 52 in 2021/22, and of this number 46 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 significant increase in the amount raised by VCTs in 2021/22 was mainly due to a small number of VCTs raising funds, which shows the further concentration of the VCT market. This results from mergers of VCTs over time to achieve economies of scale.

The commentary notes that the number of individual investors claiming VCT tax relief increased by 9% to 19,475 in 2020/21, 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. Tax relief was claimed on investments totalling GBP 640 million, an increase of 10% on the previous year.

Background

The UK government introduced the VCT regime 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.