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The London Stock Exchange has proposed measures to stimulate investment in UK industry, advocating amendments to the current Venture Capital Trust (VCT) regime in order to unblock much-needed investment in small and medium enterprises (SMEs). The Exchange also called for the removal of Stamp Duty to reduce the costs UK public companies face in accessing vital equity capital, encourage investment, and help restore the value of pension funds and other savings.
Clara Furse, Chief Executive of the London Stock Exchange, said:
“Last year, a record £71 billion was raised through our markets as many larger companies strengthened and rebuilt their capital positions through a process of re-equitisation as the risks of over-reliance on debt finance became clear. Moving swiftly to revive VCTs will help to ensure that smaller companies benefit from easier access to equity finance, and thereby help to mitigate the effects of the financial crisis on the real economy, complementing and reinforcing the steps that the Government is already taking to improve SMEs’ access to bank finance.”
“On AIM alone there are over 1,000 small and medium UK companies employing more than 155,000 people - dynamic companies like these are vital to our economic prospects and our ability to generate new jobs.”
VCT modifications
The Exchange believes that changes to existing tax legislation will offer a quick and decisive boost to equity investment in SMEs. The Exchange proposes two key modifications to the current VCT regime. First, VCTs should be allowed to invest in shares in qualifying companies through the secondary market, rather than being restricted to new share issues as now. This would boost liquidity in the secondary markets for the longer term, making it easier and cheaper for companies to raise further equity capital. It will also give VCTs greater freedom to re-orientate their portfolios towards companies with better prospects, increase their attractiveness to end investors, and stimulate the flow of capital into VCT funds.
Secondly, the Exchange recommends that the gross asset and employee limit tests that determine which companies are eligible for VCT investment should be increased to make existing funds available to a wider pool of companies. Since 2006, when the qualifying gross assets level was reduced to £7 million, and the maximum number of staff a qualifying company could employ was reduced to fifty, total fund-raising by VCTs has fallen substantially. The Exchange estimates that raising the gross assets limit to £25 million and the employee limit to 200 would provide scope for additional investment in a further 170 AIM companies with UK operations in eligible sectors, including technology, telecommunications, consumer goods and healthcare.
Stamp duty
Ending the unfavourable tax treatment of equities compared with other asset classes such as cash and bonds would stimulate investment in UK industry and improve investment returns for long-term savers. In particular, Stamp Duty discourages the purchase of UK-quoted shares, and acts as a drag on the competitiveness of UK companies by increasing their cost of capital. Research on the potential benefits of the abolition of stamp duty found that stamp duty depresses the value of a typical occupational pension scheme by up to 2.38 per cent and increases the cost of providing local government pensions1. Abolishing it would:
- deliver a one-off increase in share prices, narrowing the gap in company pension schemes and other savings.
- boost the competitiveness of UK companies, particularly benefiting companies in the technology and retail sectors.
- result in a long-run permanent rise in UK GDP of between 0.24 per cent thereby helping to increase overall tax take.
1"Stamp duty: its impact and the benefits of its abolition", research by Oxera, commissioned by the Association of British Insurers (ABI), the City of London Corporation, the Investment Management Association (IMA) and the London Stock Exchange, and published May 2007
