Corporate venturing funds might find themselves inadvertently caught by the global tax and regulatory crackdown on financial services.
In the UK, quietly, the outgoing Labour government at the end of March failed to renew the Corporate Venturing Scheme, which was set up to promote venture capital-style investments for companies.
The tax breaks offered upfront corporation tax relief (20% of the investment) and capital losses could be offset against trading income, but after 10 years the scheme has come to the end of its life.
Julian Dobbin, a partner at chartered accountants Mercer & Hole, said: “Rather than directly funding businesses, the public sector should do more to promote investment within the private sector, and in particular by successful businesses. Not only does this alleviate the financial burden on the public purse, the experience and knowledge within ‘corporate UK’ should be more relevant than that in the civil service.”
Separately, the US House of Representatives last month put forth HR 4213, which is entitled The American Jobs and Closing Tax Loopholes Act of 2010. The bill has a provision which changes the tax rate on venture capital and leveraged buyout funds’ performance fees – called carried interest – beginning in 2013 to a blended rate of 75% ordinary income and 25% capital gains, which results in a 35% tax rate.
The US move, which awaits the Senate’s own version of the bill, comes as the UK and other countries also discuss whether or how much to increase tax rates. Europe is also in the process of passing its Alternative Investment Fund Managers directive to regulate more closely these vehicles and hedge funds. Corporate venturing funds would be caught by the tax and regulatory changes if they act independently of the parent and raise money from third parties.
Georges Noel, director of the European Private Equity and Venture Capital Association’s venture capital platform, said as corporate venturing units raising third-party money was still rare, the impact of the changes would be limited.