Ahead of the Autumn Budget on 22 November, Tom Hopkins and Richard Hoskins write an open letter to Chancellor of the Exchequer Philip Hammond on the subject of encouraging investment in growth businesses
You, above all people, will be aware that the headlines are dominated by all things Brexit and the clouds of uncertainty that surround all of us in the UK. No doubt you are also aware that, less prominently, there has been quite a lot in the press recently about the subject of tax-efficient investing – namely the Enterprise Investment Scheme (EIS) and venture capital trusts (VCTs). These press articles are a result of the Patient Capital Review, which you launched in August to review the funding of growth businesses, and the heightened speculation that EIS and VCT rules and limits are under your microscope.
This speculation has caused considerable consternation among those of us who are immersed in this world. Indeed, these concerns were highlighted by a recent letter to the Sunday Times signed by such luminaries as Lord Howard Flight, Lord David Blunkett and Lord Michael Grade. So, as you put the finishing touches to your Budget, here are some hopefully helpful suggestions should you be deliberating on this powerful and economically positive sector. In our view over-tinkering in this field risks compromising the future growth and prosperity of a post-Brexit Britain.
First, growth investing is a hugely positive thing for UK plc so please do not meddle too much with the UK’s venture capital schemes. We agree that tweaks are required to ensure more capital is finding its way to growth businesses, but introduce too much change and you risk paralysing or marginalising this important source of capital. Many on the left, including Jeremy Corbyn, might view these as ‘tax breaks for the rich’ but you know better. VCTs and EIS have been around for more than 20 years and – along with business investment relief, social investment tax relief and seed EIS – do an important job building and nurturing UK plc, especially given the lack of UK institutional capital in venture capital. And it costs HM Treasury nothing – in fact, the sector will be a net contributor in this coming tax year, given the return growth investing produces via National Insurance, PAYE, VAT and so on.
Second, given the lack of UK institutional capital – notably from pension funds – investing in venture capital, and hence growth businesses, may we suggest you look at ways of offering corporates incentives to invest in UK growth businesses? Corporate venturing is, happily, on the rise as older established firms look for ways to change operating models and identify potential acquisitions early in a rapidly changing business environment. Corporate venturing is far more commonplace in the US, though, and the UK should look at the success of the various corporate incentives there. Indeed, the UK did have a corporate venturing scheme that offered a corporation tax break for investing in EIS and VCT-type qualifying businesses but it was abolished by the Labour Government before it really got going. Given the current entrepreneurial environment and lock of scale-up capital, now could be the time to bring it back.
Third, the UK is a market leader in innovation, with 16% of the most often cited research papers coming out of the UK – a country that boasts just 1% of the world’s population. We have seen from the manifesto – well, the good bit anyway – and the Patient Capital Review consultation that the government is keen to continue to support research and development in UK universities and, importantly, the commercialisation of intellectual property coming out of these universities. The spin-out process has been transformed over the last 10 years yet ringfencing some capital to support the tech transfer offices at the universities will go a long way in ensuring the intellectual property remains in the UK and that we can continue to build world-leading centres of excellence.
Fourth, innovation and technology is undoubtedly important for the future of the UK, but do not forget the non-tech businesses. In fact, given their respective business models, non-tech companies create more jobs than tech companies. One idea previously floated would be to make sure we tax the global tech giants fairly and use those tax revenues to cut business rates to ensure our high streets are not totally wiped out – along with all the jobs they produce. Why should non-domiciled companies pay a fraction of the taxes compared with a UK based company? Especially as those tech businesses are competing with small local businesses that are supporting communities? This is not about protectionism but rather a fair and level playing field, and therefore safeguarding jobs ‘shopkeeper’ Britain.
Regardless of individuals’ views on Brexit, we are all agreed we want Britain to grow and prosper. A recent online survey showed that while only 34% thought Brexit would be net good – versus 39% net bad – for the UK over the next few years, 51% thought it would be net good over next 10 to 20 years – versus 25% net bad. Let’s start putting in place those policies now to turn this hope into reality.
With this letter, we assure you we are seeking only to be helpful and wish you luck with what either way will prove a challenging Budget.
Tom Hopkins & Richard Hoskins, co-founders of Kin Capital