The UK government has pleased the investment sector by postponing a cap on the amount that tax-advantaged Venture Capital Trusts can invest in small and medium-sized firms at £2 million ($3.2 million), seeking to allay fears that this measure will hit investment.

The new rules were laid out in the Finance Bill published last week and were originally scheduled to apply from 6 April 2012.However, the cap on investments had provoked some industry groups to voice concerns that this will hit investment in new businesses at a time when bank lending to companies has been squeezed.

However, the decision to reconsider the cap was welcomed by the Association of Investment Companies, the trade body that represents firms within the investment trust industry. The AIC wants the proposal to be reviewed because the current time frame does not give the venture capital sector time to adapt its investment processes.

According to the AIC, investment from VCTs, Enterprise Investment Schemes and other tax-efficient investment plans are integral to the growth of SMEs who are “struggling to find reliable sources of funds” during current economic uncertainty. As a result, the proposed investment cap of £2 million may have proven harmful to the sector, it says.

The government’s decision to review the cap idea highlights their “commitment to supporting the venture capital sector” and ensuring fiscal stability for the UK’s SMEs, as the AIC’s director general Ian Sayers said.

The limit is to be reviewed and may be raised to £5 million. However, such an increase is dependent on the approval of the European Commission, a move that would “provide additional support to small businesses”, according to Sayers.

As described by HM Revenue and Customs on its website, VCTs, introduced in the mid-1990s, are “designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange, by investing through Venture Capital Trusts”.