Abstract
The VCT scheme offers large tax breaks (worth around 38.4% of the amount subscribed) to encourage UK taxpayers to invest in start‐up companies. Taking account of deadweight and other effects, the scheme currently costs close to £1 in tax subsidies per additional £1 invested in eligible venture capital projects. Despite the large tax subsidy, the scheme is unpopular: only 13,420 taxpayers subscribed to VCTs in 2013/14. This paper finds that the most likely reason for its unpopularity is the very poor liquidity of listed shares in VCT funds, and that this illiquidity is – perversely – largely the result of the tax breaks. This suggests that the scheme could be made much more cost effective by altering the tax regime so as to improve liquidity. Possible options for reform are identified.
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