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

Members of the UK House of Commons Treasury Select Committee have proposed utilising tax incentives for early-stage investments to promote the development of regional start-ups and expand the scope of venture capital investment.

In their latest report, the Treasury Select Committee states that government ministers should ensure certainty for investors regarding income tax by utilizing the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT). These two schemes, which are set to run until April 2025, provide investors with a 30% upfront income tax relief, and also exempt them from capital gains tax and dividend tax, with the aim of encouraging early-stage investment in high-risk enterprises.

Currently, there is an ‘overwhelming bias’ in venture capital allocation towards London and the South East of England, weakening the economic growth potential in other regions. Additionally, the inflexibility of the EIS program has been criticised. The rules stipulate that companies can only receive funding support within seven years after their first commercial sale, which is unreasonable for many regions outside London where high-risk companies usually require more time to expand and raise venture capital.

In March of this year, the Chancellor of the Exchequer Jeremy Hunt wrote to the committee, expressing his desire to extend these schemes. However, Fraser Allen, Chairman of the Venture Capital Trusts Association, believes that extending the deadlines would bring uncertainty and difficulties for investment companies, and may hinder the liquidity of shareholders when retrieving shares from investors.

The report also criticises venture capitalists for neglecting investments in women-led businesses, deeming it a complete failure when the country offers tax incentives and encourages investments. Consequently, it suggests that UK commercial banks establish a fund to promote gender diversity in venture capital distribution.

According to data provided by the Investment Company Association, Venture Capital Trusts raised over £1 billion from retail investors in the 2022-2023 tax year, slightly down from the record-breaking figures in the previous year. The Treasury Department stated that ‘venture capital is crucial for providing funding to innovative industry businesses, so the government’s decision to continue supporting this sector is the right one’.

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