Recommendation 12

HM Government Accepted

HM Treasury agrees with the Committee that regional businesses should not be disadvantaged and is committed to helping businesses across the UK thrive. We recognise that current UK venture capital activity is concentrated particularly in London. British Business Bank data shows that up to Q3 of 2022, London received 52% of all UK equity deals and 61% of total UK equity investment. In 2022, 50% of the UK’s overall deal count and 65% of the total investment value occurred in London. That is why the British Business Bank has an explicit objective to identify and help to reduce regional imbalances in access to finance for smaller businesses across the UK. There are several programmes and funds the Bank operates to address regional imbalances: the Regional Angels Programme, Northern Powerhouse Investment Fund (NPIF), Midlands Engine Investment Fund (MEIF) and the Cornwall and Isles of Scilly Investment Fund (CIOSIF). These programmes play an important role in increasing the supply of finance in all areas of the UK and are delivering well. An interim evaluation report published in April 2022 showed that the Northern Powerhouse Investment Fund has increased productivity, employment and skills across the North. At Spending Review 2021, the government announced a £1.6 billion commitment to a new generation of British Business Bank’s regional investment funds, including an expansion into the North East and South West of England as well as new regional funds in Scotland (£150 million) and Wales (£130 million) and to build on its existing programmes in Northern Ireland (£70 million), working closely with the Devolved Administrations. HM Treasury is not convinced that extending the company age limits of the EIS and VCT schemes is the best way to support regional funding. The tax-advantaged venture capital schemes, the EIS, SEIS and VCT, are designed to and continue to offer key support to start-ups and SMEs across the UK. The schemes are intended to incentivise investment into early-stage, higher-risk companies as these companies are most likely to be affected by market failures such as information asymmetry due to their lack of track record. To ensure support is targeted at the companies who face the biggest challenges in accessing growth capital, the scheme rules set age limits on when a company must have received its first risk finance investment, after which further follow-on funding is allowed. For the EIS and VCT scheme, companies are eligible if at the time of initial investment less than 7 years has passed since their first commercial sale. This is extended to a more generous 10 years for knowledge intensive companies as research shows that the equity gap in early-stage financing is greater for knowledge intensive companies such as biotech, life sciences or deep tech companies. These age limits are informed by the evidence which supports the market failure early-stage companies face. Extending the age limits would allow larger, more mature companies to access the schemes which would risk displacing investment away from the smaller companies the schemes are designed to target, reducing their value for money. The government continues to keep these schemes under review to ensure they continue to meet their policy objectives in a way that is fair and effective and that the scheme limits remain appropriate.