The Case for Reforming VCT Rules
Since 2016, the global business environment has shifted considerably.
Capital requirements have grown, inflation has eroded purchasing power, and scaling a business in high-growth sectors — from deep tech to life sciences — is now more expensive and time-sensitive than ever.
Yet the rules governing one of the UK’s most effective early-stage investment mechanisms, the Venture Capital Trust (VCT) scheme, have remained largely unchanged.
Designed to support young, innovative businesses during their riskiest stage of growth, the VCT model continues to perform well. It has helped support more than 100,000 jobs, channelled over £5.6 billion into UK companies, and backed firms such as Zoopla, Secret Escapes, Unbiased and Quantexa. But the framework around it is increasingly out of step with the economic reality these businesses operate in.
The Venture Capital Trust Association (VCTA) recently published its Summer 2025 Policy Paper, outlining a set of targeted, cost-neutral changes aimed at restoring the scheme’s effectiveness and ensuring it remains fit for purpose.
Static limits in a shifting market
The VCT scheme’s core investment limits have not changed since 2016. The current caps — £5 million annually and £12 million lifetime (or £10m/£20m for Knowledge Intensive Companies) — were set nearly a decade ago and have not been adjusted for inflation or sectoral shifts.
In that time, inflation has significantly reduced the real-terms value of those limits. According to the Bank of England’s inflation calculator, £12 million in 2016 equates to just over £15 million today. When applied to fast-scaling businesses in high-intensity sectors such as cleantech or biotech (where inflation has been much higher), the impact is clear: a funding model originally designed to support growth now risks constraining it.
The VCTA proposes increasing the investment limits to £30 million lifetime / £15 million annual, or £40 million / £25 million for Knowledge Intensive Companies. Crucially, it recommends introducing a rolling three-year review cycle, allowing for regular reassessment in line with inflation and market conditions.
The age test: arbitrary cut-offs for viable companies
The second core issue is the age-based eligibility test, which was brought in to meet EU State aid rules. The rules restrict companies from receiving VCT funding more than 7 or 10 years after their first commercial sale.
In practice, this test penalises certain business models and regions. Research shows that founders outside London take, on average, two to five years longer to reach the point where they can take outside funding. Many capital-intensive businesses — particularly in sectors prioritised by the government’s own innovation agenda — are effectively excluded from follow-on investment simply because they scale more slowly or differently. It is unfortunate that the rule exacerbates the differences in the business environment in different parts of the UK.
The VCTA proposes two straightforward adjustments:
- Equalise the 7/10-year age limit across the board
- Where commercial sales are recognised by the quantum of annual turnover, to double the revenue threshold from £200,000 to £400,000, delaying the start of the age clock, as a better reflection of when companies have made a commercial sale.
These changes would reduce the risk of technical disqualification and ensure the scheme remains accessible to viable, regionally distributed, and strategically important businesses.
Real consequences, not just technical flaws
These are not hypothetical problems. Several UK businesses have already faced significant challenges under the current rules.
Chess Dynamics, a UK defence manufacturer, was nearly excluded from further VCT investment due to age-test complications linked to a dormant subsidiary. Oxsensis, a high-potential sensor technology firm, lost access to funding after a majority stake changed hands — and was subsequently sold to foreign buyers.
Both cases reflect a broader issue: businesses that qualify on merit are being excluded on technicalities. That undermines confidence, deters capital, and weakens one of the few funding mechanisms explicitly designed to support UK-based innovation at scale.
A modern framework for a modern economy
The UK government has repeatedly committed to becoming a “science and technology superpower.” But that ambition must be matched by the policy frameworks that enable capital to flow efficiently to the companies best placed to deliver it.
The proposals set out in the VCTA’s 2025 Policy Paper are neither radical nor expansive. They do not require additional spending. They are pragmatic adjustments to a well-functioning scheme — designed to ensure it continues to serve its purpose in a new economic context.
When capital costs more, when sectors demand greater investment, and when global competition for scale-up talent is intensifying, the UK cannot afford to leave one of its most successful funding mechanisms tied to rules written a decade ago.
The VCT model still works. But the environment around it has changed. It’s time the policy did too.
You can find the full policy paper here.
