Some argue the vehicles available to investors are being abused, used as nothing more than a handy pocket to stash cash away from the taxman, but what of the benefits of investing in patient capital both for the investor and business as a whole?
While most accept the schemes have been troubled by tax avoiders in the past, they argue the system has since cleaned up its act.
Gervais Williams, director of Miton Group and manager of small and micro cap funds, certainly is a believer in the power of the likes of venture capital trusts and the Enterprise Investment Scheme.
He, as well as asset management giant Neil Woodford, sits on the advisory panel of the government’s Financing Growth in Innovative Firms review looking into how to provide more long-term investment to smaller start up firms.
“We are lucky because we still have a viable AIM market, there are many other markets that were around which have died away,” Williams says.
“Even the Nasdaq has moved away from being a micro cap index and is now dominated by west coast tech stocks now.
“The history of having patient capital investors over the years has meant that the number of companies coming to market has been consistent and has meant the AIM has remained viable.”
He is among those who believe the government has done enough to stamp down on tax avoidance with “difficult rule”, and presses the importance of patient capital to the economy as a whole.
Williams adds: “Capital goes to companies who are paying local taxes and ultimately creating local employment. With Brexit I think, if anything we have got to be even more attentive to these smaller companies.”
The popularity of VCTs and EIS can’t be denied. Kuber Ventures CEO Dermot Campbell says demand from wealth managers on his specialist EIS platform has doubled every year since it launched.
He argues the focus on tax avoidance is missing the point and “scaremongering” the wider public.
AIC speaks out
Research from the Association of Investment Companies backs his claim of growing demand.
It reported fundraising in 2016/17 in the VCT sector hit its second highest level since 2005 with £542m funnelled into the vehicles.
And why shouldn’t it be popular? In more recent research the AIC found VCT investment has created 27,000 jobs, and that for every £1m invested there is an average increase of £2.2m in turnover.
Ian Sayers, CEO at the AIC, said VCT investment provided vital funds for small companies, the “engine of the UK economy”.
Who wouldn’t sleep easier at night knowing they had helped keep the heart of the UK economy ticking over?
Ultimately however, with 30% tax relief available, the vehicles remain among many advisers an efficient way to offer clients some sought-after relief from HMRC.
David Bethell, financial planning consultant at City Asset Management, says they use VCTs and the EIS primarily as tax vehicles, preferring asset-backed to make sure it remains a viable investment offer.
“They are a useful tool because you can get 30% income tax relief, but we do have to have a solid investment case in the company to invest,” he says.
“The client has to be comfortable but obviously we are looking for the right investment too.
“For the right client it can be a solid investment proposition.”
VCT, EIS and UK economic growth
Clearly, the ability to save on a tax bill is a key attraction, but this is the hook needed to really get people interested in something which is a clear risk.
It could also be the necessary angle to take to get clients to trust an adviser who begins spouting the benefits of investing in an unknown tech business based in Stockport.
Alex Davies, CEO and founder of Wealth Club, rounds up the argument well when he says: “While many investors look to VCTs for impressive growth and excellent tax benefits, including up to 30% upfront tax relief, tax-free dividends and tax-free growth, let’s not forget that VCTs play an integral role in creating jobs, rewarding innovation and supporting economic growth.
“With traditional lenders parked on the sidelines, VCTs have grown to become an essential way for small business to access capital.”
Only time will tell if the likes of the UK government come to the same conclusion.
