Threat to UK access to venture capital European rules on state aid have jeopardised small UK companies" access to venture capital funding worth hundreds of millions of pounds each year, placing further strain on a sector already starved of credit. Under a measure included in the Finance Bill, venture capital trusts that invest in small growth companies could lose generous tax benefits as a result of a new cap on state-backed investment sources. At present, VCTs offer 30 per cent upfront tax relief on investments of up to £200,000 a year, as well as tax-free dividends and capital gains. VCTs were first introduced in 1995 and channelled £350m to small and medium-sized enterprises in the 2010-11 tax year. VCTs have been one of the cornerstones of the government's policy to stimulate UK enterprise through alternative sources of funding. Although banks had agreed to increase their small business lending under the "Project Merlin" deal with the coalition last year, a Bank of England report in February found they had fallen £1bn short of the agreed target. But in an effort to comply with European rules, investors will lose these tax advantages if the companies they are funding receive more than £2m from VCTs and other forms of "state aided, risk capital investment." As a result, managers of VCT schemes will have to check all the sources of funding used by companies they plan to finance - and potentially have to delay their investments until a higher level can be negotiated. In response to the draft bill, the Association of Investment Companies, which represents VCT managers, warned that a £2m investment limit "will severely disrupt VCT deal flows." Patrick Reeve, managing partner of Albion Ventures, told the Financial Times that the imposition of the £2m limit was "unnecessary and annoying and disrupts some immediate investment plans." Albion Ventures has raised VCT finance for more than 90 small companies in the technology, healthcare and environmental sectors. Shore Capital, an operator of seven VCTs with £1.3bn under management, suggested the limit would potentially affect any company receiving VCT or other state funding. "We did look at one prospective investment which was also hoping to receive money from a regional development board," said Graham Shore, managing director. In the end, we did not make this investment, but had we done so, this new limit would have had an effect. He added that companies in UK regions already benefiting from government assistance would be among the hardest hit. The £2m limit was originally scheduled to be introduced on Friday, at the start of the new tax year, without any consultation period. After an emergency meeting on Wednesday between AIC members and David Gauke, exchequer secretary to the Treasury, the government agreed to delay enforcement until the bill receives royal assent in the summer. However, a Treasury spokesperson warned that VCTs breaching the limit were still at risk: "Any company receiving aid through VCT schemes, or any other Government State aid scheme, on or after 6 April 2012 ... in excess of £2m, will need to consider the risk of the European Commission deeming the aid to be illegal."