In a report published last month, the Treasury Committee recommended the government take swift action to further promote diversity in the UK’s venture capital (VC) industry, advising funds to target female and ethnic minority founders as well as businesses outside of London.
“An engine of economic modernisation and growth”
VC was described in the report as an “engine of economic modernisation and growth”, and is recognised as playing a crucial role in the UK’s economy by the Committee, who urged the government to renew successful state support measures – in particular, tax relief schemes specifically targeted at VC activity – beyond their expiry in 2025.
The benefits of tax relief schemes (specifically, the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs)) was a point of focus in the report, in particular due to the schemes’ ability to attract global investors to the UK over competitor markets. The Committee identified that a further benefit of the schemes’ popularity was their potential to “achieve better diversity and inclusion capital”, with proposed policies to implement from April 2025 including:
- a mandatory requirement for VC firms to disclose the gender and ethnic breakdown of their employees and funding recipients in order to be eligible for EIS, SEIS or VCTs; and
- a “comply or explain” condition of EIS, SEIS or VCT eligibility requiring VC firms to either comply with the Women in Finance Charter and Investing in Women Code or justify why not.
Venturing beyond London
The Committee further recommended using the popularity of EIS, SEIS and VCTs to attract VC investors towards opportunities in the regions and nations outside of London, which it noted only accounts for 19% of the UK’s small to mid-size enterprises.
The report identified potential obstacles in the form of EIS and VCTs’ time limits, known as “sunset clauses”. Although both schemes are available nation-wide, part of their criteria is that eligible firms be no older than seven years from their first commercial sale, or 10 years for “knowledge intensive companies”.
The Committee advised this disproportionately affects regional firms, who on average take longer to become established in part due to more limited resources. Consequently, a further proposed amendment to the tax relief schemes is to remove the sunset clauses with effect from April 2025, with the objective of removing any disadvantage to regional firms.
A future-facing industry
With the Committee’s recommendations echoing policies pioneered by industry thought-leaders such as Cornerstone VC, a black-led angel investor group which has consistently endorsed collection and publication of diversity data, the report is an optimistic indication of progress.
Whether the government implements such policies, it is clear that there is an industry-wide appetite for positive action far sooner than April 2025.
Firms must be compelled to reveal their diversity data when applying to these tax reliefs in an effort to increase transparency and drive change.