Nineteenth Report - Venture Capital

Industry and government are aligned in their assessment that venture capital tax reliefs have had a positive impact on UK small businesses. They argue that the EIS, SEIS and VCTs are internationally competitive schemes that attract investors, which in turn has provided billions in financial support to start-ups and growing businesses since their inception. It is a consistently held view in our evidence that the removal of these schemes would negatively impact the UK venture capital market, materially limiting the support to entrepreneurs to help establish and grow their businesses. (Paragraph 16) Sunset clauses on venture capital reliefs

The Treasury continues to express the importance of the EIS and VCT schemes and a desire to extend their sunset clauses. The Chancellor has told us he does not see a barrier to doing so. However, despite our raising concerns repeatedly, the Treasury has not provided a clear plan and timeframe for this extension. As the April 2025 deadline draws closer, this lack of firm action is damaging given that investment relies on the certainty of such support.

We recommend that HM Treasury extend the EIS and VCT sunset clauses beyond April 2025 at the earliest opportunity. HM Treasury should provide more certainty for founders and investors alike by announcing the length of the extension and a clear timeline for implementing it as soon as possible. (Paragraph 24) Diversity in venture capital

The diversity statistics in the venture capital market are unacceptable. Venture capital firms are dominated overwhelmingly by white men, and the recipients of venture capital funding are even more unrepresentative of the wider UK population in terms of gender and ethnicity. While there has been some improvement, it is happening far too slowly, and affecting rapid change should be viewed as a priority by government and industry.

It is difficult to understand comprehensively the diversity breakdown of staffing and investment decisions across the venture capital market and its many small organisations. These firms do not have consistent policies on diversity or associated reporting, and a heavy emphasis on personal networks means that the true scale of the problem remains unseen. The most urgent course of action is to improve the transparency and consistency of data. This will allow more informed action to be taken by Government, arm’s-length bodies and industry. Disclosure will also shine a light upon firms which are both best and worst in class, providing a reputational incentive to address diversity in the sector. (Paragraph 37) Venture Capital 27

Venture capital tax reliefs are uses of public funds. It is only right and proper that their use is open to public scrutiny, including whether such funds are deployed fairly to women and people from ethnic minorities. At the moment, their use is unacceptably opaque.

HM Treasury should make provision of diversity statistics a requirement for eligibility to receive EIS, SEIS and VCT tax reliefs. Firms should be required to disclose the gender and ethnic breakdown of both recipients of their funding and their own staff. This should take effect from the renewal of the sunset clauses in April 2025.

We support the Women in Finance Charter and the Investing in Women Code. However, we are concerned that as a voluntary initiative with a low rate of take up, progress in improving diversity in venture capital is too slow and restricted to the more enlightened firms.

All relevant organisations in the venture capital industry ought to become signatories to both the Women in Finance Charter and Investing in Women Code, if they have not done so already. We have not determined that compulsory membership is appropriate at this time but recommend that HM Treasury and the BBB adopt a “comply or explain” policy with regards to both. Organisations ought to comply with the Charter or Code or explain why they are not, as a condition of EIS, SEIS and VCT eligibility. This approach will communicate to the market that the default expectation is that firms become signatories. Should diversity statistics and reporting not improve quickly enough, we will instead consider calling for compulsory membership.

The British Business Bank has active funds designed to target specific market failures in venture capital, such as its regional funds. Representatives from the BBB have suggested that diversity-focused funds could theoretically be used in the same way, if there were provision set aside for them. The woeful diversity record of venture capital, which is failing to invest in high potential female and ethnic-minority- owned businesses, makes for a strong case for such intervention.

We recommend that the Government and British Business Bank consult on the creation of one or more venture capital funds with the specific purpose of promoting greater diversity in venture capital allocation. (Paragraph 55) Regional inequality in venture capital

The evidence we have received suggests that venture capital investment is concentrated in London, strongly disproportionately to its share of the UK SME population. This means that throughout most of the UK regions and nations, opportunities for investment in high-growth businesses are more limited than they ought to be. This may be undercutting the potential for economic growth across the UK regions and nations.

The 7 and 10 year company age limits on EIS and VCTs serve to disadvantage businesses outside prime investment zones in London and the “Golden Triangle”. Firms from other regions can take longer to become established and therefore may 28 Venture Capital miss out on venture capital support through no fault of their own. This risks holding back economic growth and innovation in areas that would most benefit from it.

The Government should extend the 7 and 10 year company age limits for support through the EIS and VCT schemes. HM Treasury should consult on revised limits, with the objective of not disadvantaging regional businesses. This revised limit should take effect from the renewal of the sunset clauses in April 2025. (Paragraph 68) Scale-up capital

The funding limits on tax-beneficial venture capital funding through the EIS and VCTs schemes limit their utility in helping companies grow and scale-up in today’s economy. Altering these limits presents an opportunity to support domestic business growth through established policy routes.

HM Treasury should consult on higher funding limits on the EIS and VCT schemes with the objective of better supporting scale-up businesses. These revised limits should take effect from the renewal of the sunset clauses in April 2025.

Our evidence suggests that UK pension funds may be an untapped source for a deeper domestic capital market more inclined to risk investment in high-potential businesses. We welcome the Government’s announcement of work on pension fund consolidation in the autumn. We will scrutinise the details of those proposals closely. Any change must pay due regard to the balance between risk and reward for pension investors. We also look forward to the forthcoming consultation on the pooling of Local Government Pension Scheme assets and encourage the government to progress this work with urgency.

Access to UK domestic capital has been a barrier for British businesses wishing to grow their operations beyond early venture capital funding stages. The US has deeper pools of capital for venture capital investment, and this has often led to UK firms looking overseas for funding. It is imperative that the UK makes best use of its pools of capital to make UK ownership an attractive option for the innovative and dynamic businesses which are the future of a successful UK economy. (Paragraph 87) Venture Capital 29