Behind the UK Budget headlines – impacts on venture

It's been a long time since a UK Budget and especially its behind-the-scenes mechanics (leaks, briefings and uploads) caused such a row. Looking behind those headlines, there was lots in the Budget of potential value to venture capital, but with a tax raising sting in the tail which we'll come to at the end.

First, no news was good news for private capital generally. As we reported in last week's Alternative Insights, many measures that were trailed before the Budget and which had caused consternation in the industry, did not make an appearance on the day: no wealth tax, no exit tax and no extension of "employer" social security charges for LLP members.

Second, the noises in the Budget towards venture specifically were encouraging. HM Treasury recognises that the UK has a decent track-record for start-ups, but the story is less good when it comes to "scaling and staying", with US equity-backed companies able to raise 2.6x more than their UK counterparts in later funding rounds. The government is tackling this problem on a number of fronts – investing in R&D, introducing "pro-talent" reforms to immigration, using the British Business Bank to focus on scaling-up and looking at how the tax system can encourage entrepreneurial behaviour.

It's worth adding some colour to those government goals because there is a lot going on.

The British Business Bank intends to support at least 10 new-to-market fundraisings, as well as backing its own British Growth Partnership fund, which is aimed at encouraging pension fund and institutional investment in UK innovation. That's not all – the BBB is also launching Venture Link where it will publish enhanced information about the venture funds it invests into, in the hope that this transparency will encourage pension funds to invest too: it's early days for this initiative and the BBB is looking for input from stakeholders.

Included in the Budget papers was a call for evidence on how to use the tax system to reward "genuine entrepreneurial risk taking" and, to kick that off, the government put its money where its mouth is and doubled (or more) the thresholds that apply to key UK tax reliefs relevant to small businesses - EIS, VCTs and EMI. Broadly EIS enables direct investment into smaller private companies, VCTs allow similar investments via a Stock Exchange listed wrapper and EMI helps companies grant options to their teams.

EIS and VCT qualifying businesses can now raise up to £10m per year, up to the point where their assets hit £30m (previously £5m and £15m). The "asset size" threshold for companies who can grant EMI options is now £120m, up from £30m. And the reliefs are generous: holders of EIS or VCT shares benefit from a capital gains tax exemption and EMI options can be structured to be exempt from tax on exercise. These benefits mean that increasing the size and number of companies that can qualify goes to the heart of the strategic aim of staying in the UK as you scale-up. Also impressive is that the thinking is joined-up with other initiatives – EMI options being amended so they can be exercised where the company lists on PISCES and by offering companies that choose to list on the London Stock Exchange an initial 3-year holiday from stamp taxes.

It's clear too that there is willingness to go further – the government is asking the industry to say what else it should do, especially in relation to BADR (entrepreneur's relief to older readers), Investor Relief and "high talent new arrivals".

While it looks like we are keen on the government's focus on venture and scaling-up, there are 2 buts…

The first "but" is complexity. There's so much going on. Reading through the government documents it is easy to feel overwhelmed by initiatives: we have UKRI, Innovate UK, Local Innovation Partnership Fund, the Innovation Marketplace, Procurement Innovation Champions, the Global Talent Taskforce. This isn't just a glib comment: it is genuinely hard to navigate and work-out how these strategies interact.

On the same theme, our feedback to the tax-focused call for evidence is to lose the complexity in the terms and conditions that apply to EIS, VCT and EMI tax reliefs. If these are targeted at smaller companies, they should be easy to operate, but instead they include nasty elephant traps. Even worse, EMI options cannot be used where a venture or private equity fund owns a majority stake – that is a fundamental flaw if the aim is to encourage institutional capital.

"the noises in the Budget towards venture…were encouraging…the UK has a decent track-record for start-ups, but the story is less good when it comes to "scaling and staying"".

The second is whether this is enough.

Although the Budget will increase the thresholds for tax reliefs, in fact those measures in the round are down to raise money for the government and that's because the Budget will cut the income tax relief that can be claimed on VCT investments from 30% to 20%. The last time income tax relief was cut in this way in 2006, VCT fundraising reduced dramatically. And based on the government's own statistics, VCT funds are currently in decline. There's a real risk that the need to raise money means that these changes will deliver a blow rather than a shot in the arm.

That risk is illustrated sharply in a government success story about the British Business Bank's backing for unicorns and the Budget papers namecheck Revolut. So it's unfortunate that, at the time of writing, the FT is reporting that Revolut's CEO has moved from the UK to the UAE. And that might be the key to the size of the problem the government is facing: their efforts to inject growth back into the economy have faltered so far and, after a period of real knocks and uncertainty for private capital on the tax front, this all might be too little, too late.