Tax relief scheme requirements must be reformed to reduce the regional inequality in venture capital investment, according to a new report from the Treasury.
The Venture Capital Report, published today by the Treasury Select Committee, found that equity funding for startups remained disproportionately concentrated in London.
According to the report, in 2020, London-based SMEs received 47% of equity deals and 66% of total equity value, despite only accounting for 19% of SMEs in the UK.
Furthermore, recent data has found that the southern ‘Golden Triangle’ of London, Oxford and Cambridge received as much as 80% of total VC funding in the UK.
“I think London is a really good place to start a business. If you are in Preston, it is harder. If you are in Preston and you want to get scale-up capital to build your business, it is close to impossible,” said Dr Mark Payton, CEO of the regionally focused investor Mercia Asset Management.
The report suggested that while tax relief schemes like the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are available to businesses across the country, there are several qualifying restrictions holding back firms.
One such condition is an age limit that requires firms to be no older than seven years from their first commercial sale.
While the restriction was put in place to “ensure that tax relief is targeted on investments in earlier stage companies that need several rounds of tax-advantaged funding before the market will invest in them”, the report found this disadvantages regional firms.
Evidence collected by the committee suggested that age limits favour London startups as they typically take less time to become established and have more immediate access and proximity to capital.
“It is a lot less efficient out in the regions because, frankly, there are a lot fewer sources of capital in the first place,” added Payton.
“Just get rid of the age cap—please just get rid of the age cap on businesses. It is really hamstringing the regional businesses, in particular.”