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Rudd urges UK government to use budget to support British innovation

Sir Nigel Rudd (pictured), chairman of Longbow Capital, the specialist VCT and EIS healthcare investor, is urging the Government to support British innovation by strengthening tax relief measures and tightening investment rules in the Budget on 23 March 2011.

Longbow is a founding partner of the Boots Centre for Innovation, an innovation hub based in Swansea, Wales, which works closely with early stage companies or inventors to develop pioneering products for the shelves of Boots stores.

Sir Nigel says: “Strong British business will be the catalyst for the UK pulling away from recession and into consistent, durable growth. Next week’s Budget provides a clear opportunity for the Government to get behind British business and encourage innovation.”

“Up front tax reliefs must be exploited as attractions to invest. The current VCT and EIS vehicles present a bewildering array of different tax reliefs to the professional adviser, let alone the private investor.

“These must be simplified and, preferably, harmonised under one set of tax guidelines. Whilst there may be many historically good reasons why the VCT and EIS rules are the way they are, it does not stand the test of time and they are now an obstacle to raising investment for the companies they are designed to support.

“Longbow’s solution to this problem is that the initial income tax relief should be harmonised at 30%. There should not be a differential between two vehicles that are trying to achieve the same aim of raising funds for British venture. Presently, EIS enjoys lower income tax reliefs by arguing that this is balanced out by a different set of reliefs, like CGT deferral. This does not work as income tax relief is the primary driver for tax efficient investing.

“It is important that capital raise through VCT and EIS vehicles is targeted at the companies that need this investment. Longbow believe that the rules on what constitutes a qualifying investment for EIS and VCT should be extended to cover some measure of future return to the Treasury from that business. This requirement should cover a proportion of any fund, such that perhaps 45/50% of any venture fund is required to invest in true venture companies.   

“As long as VCTs and EIS remain different structures, Business Property Relief (BPR) will only be available to EIS. At Longbow it is our contention that holding VCT shares for two years should also qualify for 100% BPR relief. This will add to the attraction of VCTs for IHT purposes, and have the effect of allowing investment for IHT to be in a more liquid investment than EIS. This will reduce the number of EIS investments that are undertaken for IHT planning where the investor is chasing IHT relief, yet is holding an investment that has a risk profile inappropriate for their age.

“Investments in both EIS and VCT funds enjoy 100% relief from Capital Gains Tax (CGT) on sale, it is important that this should remain. CGT deferral should also not be restricted to just EIS, but should also be available for an investment into VCT shares. We would recommend that CGT deferral relief should only be available on initial subscription to VCTs and not to shares bought on the secondary market.”

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