![Graphics]() ### British Smaller Companies VCT2 plc #### Annual Report #### for the year ended 31 December 2021 #### Transforming small businesses #### bscfunds.com Winner Best VCT Report and Accounts ![Graphics]() Financial Overview 2 Financial Highlights 4 Five Year Summary 4 Financial Calendar 5 Your Portfolio Strategic Report 6 Chairman’s Statement 10 Objectives and Key Policies 11 Processes and Operations 12 Key Performance Indicators 16 Portfolio Composition 18 Investment Review 24 Case Studies 25 Portfolio Summary at 31 December 2021 26 Summary of Portfolio Movement since 31 December 2020 27 Investee Company Information 32 Risk Factors 35 Other Matters 35 Section 172 Statement Corporate Governance 37 Directors 38 Directors’ Report 42 Corporate Governance 49 Directors’ Remuneration Report 52 Directors’ Responsibilities Statement Independent Auditor’s Report 53 Independent Auditor’s Report Financial Statements 60 Statement of Comprehensive Income 61 Balance Sheet 62 Statement of Changes in Equity 64 Statement of Cash Flows 65 Notes to the Financial Statements Company Information 91 Notice of the Annual General Meeting 95 Form of Proxy Advisers to the Company CONTENTS ## About us Registered Number: 04084003 British Smaller Companies VCT2 plc was formed in 2000. It aims to provide investors exposure to a diversified portfolio of UK businesses that offer opportunities in the application and development of innovation in their products and services, across established and emerging industries. The investment portfolio has a valuation of £70.0 million as at 31 December 2021. Discover more about British Smaller Companies VCT2 plc www.bscfunds.com ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 1 #### BRITISH SMALLER #### COMPANIES VCT2 PLC #### Transforming small businesses Share Buy-Backs Share buy-backs enable shareholders to obtain some liquidity in an otherwise illiquid market when there is a need to dispose of shares. This policy is kept under active review to ensure that any decisions taken are in the interests of shareholders as a whole. The current rate of discount at which ordinary shares will be bought back is targeted to be no more than five per cent of the latest reported net asset value. Dividend Re-Investment Scheme (“DRIS”) The Company operates a DRIS which gives shareholders the opportunity to re-invest any cash dividends. Currently, dividends are re-invested at the latest reported net asset value as adjusted for the relevant dividend in question if this has not already been recognised. Any dividends that are re-invested by shareholders are eligible for income tax relief at 30 per cent of the amount invested, subject to an annual investment limit of £200,000, or, if lower, the amount of a shareholder’s income tax liability. The Finance Act 2014 confirmed that shares acquired at any time under dividend re-investment schemes will not impact tax relief on sales of, or subscriptions for, VCT shares, unless in the latter case it results in a breach of the £200,000 investment limit. Manager YFM Private Equity Limited (“the Manager”) is a wholly owned subsidiary of YFM Equity Partners LLP and is a small Authorised Investment Fund Manager (AIFM), authorised and regulated by the Financial Conduct Authority. Investment Policy The investment strategy of British Smaller Companies VCT2 plc (“the Company”) is to invest in UK businesses across a broad range of sectors that blends a mix of businesses operating in established and emerging industries that offer opportunities in the application and development of innovation in their products and services. These investments will all meet the definition of a Qualifying Investment\* and be primarily in unquoted UK companies. It is anticipated that the majority of these businesses will be re-investing their profits for growth and the investments will comprise mainly equity investments. Further details of the Company’s investment policy can be found in the Strategic Report on page 10. Dividend Policy The Board remains committed to achieving the objective, over time, of paying tax free dividends from realised investment returns. This depends upon the level of investment income and realisations that the Company is able to make or achieve in any one period and cannot be guaranteed. The tax reliefs that are available for an investment in a Venture Capital Trust are of particular benefit for shareholders as there is no income tax payable on the dividend received, or need to declare them in a tax return. Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information \*Under Chapter 3 Part 6 of the Income Tax Act 2007 ![Graphics]() 2 British Smaller Companies VCT2 plc Annual Report & Accounts ## FinancialHighlights FINANCIAL OVERVIEW #### TOTAL RETURN IN THE YEAR 1 26.4% 139.5p The Company’s Total Return increased by 14.5 pence, from 125.0 pence per ordinary share to 139.5 pence per ordinary share, which includes cumulative dividends paid of 78.0 pence per ordinary share. The increase is equivalent to a return of 26.4 per cent of the opening net asset value. #### DIVIDENDS PAID IN THE YEAR #### Total Dividends 8.0p Total dividends paid were 8.0 pence per ordinary share, which equates to 14.5 per cent of the opening net asset value per ordinary share. h #### INVESTED #### for 2021 £6.1m Your Company completed a total of ten investments of which three were new additions to the portfolio. #### REALISATION PROCEEDS #### £7.7m over cost £11.7m Realisations of investments and loan repayments generated total proceeds of £11.7 million in the year, a gain of £5.3 million over the opening carrying value and £7.7 million over cost. h ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 3 1. Total Return (“TR”) and Investment Growth are defined as Alternative Performance Measures. The Board considers TR to be the primary measure of shareholder value and Investment Growth to be the key measure of the portfolio’s performance. TR is calculated as the total of current net asset value plus cumulative dividends paid since inception of the Company. Investment Growth is calculated as the gain arising from the portfolio (see page 60) during the period as a percentage of the portfolio’s value at the start of the period. The Annual Report contains a number of Alternative Performance Measures (“APMs”). APMs are financial measures that are in addition to those defined or specified in the Company’s financial reporting framework. Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information #### FUNDS RAISED #### for 2021 £31.0m £24.2 million raised at the end of the year and allotted in January 2022, as well as £6.8 million raised in a non-prospectus top up fundraising in March 2021 ![Graphics]() 4 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL OVERVIEW ## Five YearSummary Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 2021 2020 2019 2018 2017 Income £000 661 2,752 1,076 1,684 1,413 Profit before and after taxation £000 20,389 4,251 4,536 4,454 2,069 Net assets attributable to ordinary shares £000 87,375 70,929 72,333 64,054 59,056 Profit per ordinary share 14.71p 3.27p 3.60p 4.17p 2.07p Dividends per ordinary share paid in the year 8.0p 3.5p 8.0p 3.0p 3.0p Net asset value per ordinary share 61.5p 55.0p 55.2p 59.9p 58.8p Total Return per ordinary share 1 139.5p 125.0p 121.7p 118.4p 114.3p Increase in Total Return per ordinary share 1 14.5p 3.3p 3.3p 4.1p 2.1p Average annual investment rate of return 1 27.5% Cumulative 3 year increase in Total Return per ordinary share 1 21.1p Cumulative 5 year increase in Total Return per ordinary share 1 27.3p 1. These are Alternative Performance Measures. The Board considers Total Return to be the primary measure of shareholder value. The average annual investment rate of return comprises the cumulative dividends paid plus the NAV at 31 December 2021. Results Announced 21 March 2022 Ex-dividend date 31 March 2022 Record date 1 April 2022 DRIS Election date 19 April 2022 Interim dividend paid 6 May 2022 Annual General Meeting 13 June 2022 ## Financial Calendar ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 5 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information ## YourPortfolio Better Informed Journeys Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information ![Graphics]() 6 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT In my third annual statement I am pleased to report that, despite the prevailing pandemic and post Brexit fallout, the resilience and growth of the portfolio that was seen in the latter part of 2020 has continued throughout 2021. The weighting towards business-to-business services emphasising technology-enabled solutions, data management, analytics, protection and migration continues to benefit from the accelerated trends that the pandemic has provided. Meanwhile the more retail and leisure focused companies have proven themselves adept at flexing their businesses and adapting to an ever changing landscape, with many now emerging in a more focused and streamlined guise to capture their customers’ return to the market. This progress is reflected in the performance of the Company in the year to 31 December 2021, with positive valuation growth in the period. This means that over the two years since the outbreak of the pandemic, the Company has seen a total return of 32.2 per cent on the net asset value of 55.2 pence per share at 31 December 2019. I and my fellow Board members were pleased to see this shared by our investors, and were delighted to close the Company’s fundraising after just seven weeks, with funds allotted shortly after the end of the financial year. We thank you for your ongoing support of the Company. Financial Performance In 2021, the Company delivered a 14.5 pence per ordinary share increase in Total Return, which is equivalent to 26.4 per cent of the opening net asset value at 31 December 2020. Total Return is now 139.5 pence per ordinary share. This was driven by the portfolio, which generated a return of £26.0 million, 53.0 per cent over its opening value, of which £5.3 million was realised and £20.7 million unrealised. New and follow-on investments totalling £6.1 million were completed. Realisations in the Year Realisations of investments generated total proceeds of £10.3 million, a gain of £5.3 million over the opening carrying value and £8.0 million over the original cost. There were three significant realisations in the year: Deep Secure in July 2021; the partial realisation of Matillion in October 2021; and Tissuemed in December 2021. Additional proceeds of £1.4 million were generated from loan repayments. The Deep Secure exit generated capital proceeds of £3.3 million, delivering a realised gain of £2.8 million above cost, an uplift of £1.3 million on the carrying value at the beginning of the year. Including income, the total return from this investment was £3.9 million over a 12 year holding period, producing an internal rate of return of 23 per cent and a multiple of 7.7x cost. The Company realised 20 per cent of its investment in Matillion as part of its Series E funding round. The proceeds from this partial exit were £5.9 million, which represents an uplift on the carrying value at the beginning of the year of £3.4 million and a return to date of 3.3x the total cost of the Company’s investment. The value of the Company’s residual investment in Matillion is £25.1 million. This is an outstanding outcome to date, in a company which continues to experience fast growth. The Tissuemed exit generated capital proceeds of £0.6 million delivering a realised gain of £0.5 million above cost, an uplift of £0.5 million on the carrying value at the beginning of the year. Including income, the total return from this investment was £0.6 million over a 16 year holding period, producing an internal rate of return of 18 per cent and a multiple of 13.1x cost. New Investments Three new investments were made in the year, totalling £3.4 million. In our continued support of the portfolio, seven companies received follow-on funding in the year, totalling £2.7 million in aggregate. The new investments are: Investment Sector Outpost Visual effects for film and TV Vuealta Business planning software and services Vypr Cloud-based data validation platform ## Chairman’sStatement ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 7 Financial Results During the year, the Board paid interim dividends of 8.0 pence per ordinary share in respect of the year ended 31 December 2021, bringing the cumulative dividends paid to 31 December 2021 to 78.0 pence per ordinary share. The movement in net asset value (“NAV”) per ordinary share and the dividends paid are set out in the table below: Pence per ordinary share £000 NAV at 31 December 2020 55.0 70,929 Increase in portfolio value 14.6 20,702 Gain on disposal of investments 3.8 5,342 Gain arising from the portfolio 18.4 26,044 Net operating costs (0.8) (1,248) Incentive fee (3.1) (4,407) Issue/(buy-back) of new shares - 7,072 Total Return in year 14.5 27,461 NAV before the payment of dividends 69.5 98,390 Dividends paid (8.0) (11,015) NAV at 31 December 2021 61.5 87,375 Cumulative dividends paid 78.0 Total Return: at 31 December 2021 139.5 at 31 December 2020 125.0 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information The charts on page 12 show in greater detail the movement in Total Return and Net Asset Value over time. The investments held at the beginning of the financial year, amounting to £49.1 million, delivered a return over the year of £26.0 million. The current portfolio’s net valuation increased by £20.7 million. Within this there were valuation gains of £24.5 million, offset by £3.8 million of downward movements. As anticipated by the impact of the changes to VCT regulations in 2015, the composition of the portfolio continues to evolve towards younger, higher growth companies which are reinvesting earnings for further growth. This, along with the ongoing realisation of earlier, more income-focused investments, results in the ongoing reduction of the Company’s income. During the year, income was £0.7 million, compared to £0.8 million (excluding the exceptional £1.9 million dividend received from ACC Aviation) in the previous financial year and £1.1 million in 2019. This trend is expected to continue as the proportion of new investments continues to grow. ![Graphics]() 8 British Smaller Companies VCT2 plc Annual Report & Accounts #### Chairman’sStatement(continued) STRATEGIC REPORT Dividends Dividends paid in the year totalled 8.0 pence per ordinary share. These comprised interim dividends of 8.0 pence per ordinary share for the year ended 31 December 2021. Cumulative dividends paid as at 31 December 2021 were 78.0 pence per ordinary share. An interim dividend for the year ending 31 December 2022 of 1.5 pence per ordinary share will be paid on 6 May 2022, to shareholders on the register at 1 April 2022. Dividend Re-investment Scheme (“DRIS”) Your Company operates a DRIS, which gives shareholders the opportunity to re-invest any cash dividends and is open to all shareholders, including those who invested under the recent offers. The main advantages of the DRIS are: 1 the dividends remain tax free; and 2 any DRIS investment attracts income tax relief at the rate of 30 per cent. For the financial year ended 31 December 2021, £2.3 million was re-invested by way of the DRIS, from overall dividend proceeds of £11.0 million. Liquidity and Fundraising The Company announced a new share offer on 2 February 2021, alongside British Smaller Companies VCT plc, with the intention of raising up to £7.05 million. The related allotment took place on 11 March 2021, following which the Company received net proceeds of £6.8 million. At 31 December 2021 the Company’s cash reserves of £21.2 million represented 24.3 per cent of net assets. Having previously assessed its expected cash requirements the Company announced a new share offer on 22 September 2021, alongside British Smaller Companies VCT plc, with the intention of raising up to £60 million, in aggregate which included an over- allotment facility of £20 million, in aggregate. This was fully subscribed and closed on 12 November 2021. The related allotment of 40,224,521 ordinary shares took place post year-end, on 7 January 2022, following which the Company received net proceeds of £24.2 million. Share Premium Cancellation Following shareholder approval at a General Meeting, the Company, subject to the sanction of the High Court, is cancelling the balance of its Share Premium, £44.3 million, which will be transferred to the Capital Reserve. This will give the Company greater flexibility to continue to pay regular dividends to shareholders and to provide its periodic offer to buy back shares from shareholders. As set out on page 63 this will become available for distribution, if approved, at various times over the period to 1 January 2026. Shareholder Relations The electronic communications policy continues to be a success, with 82 per cent of shareholders now receiving communications in this way. Documents such as the annual report are published on the website www.bscfunds.com rather than by post, saving on printing costs, as well as being more environmentally friendly. The Company’s website, www.bscfunds.com, is refreshed on a regular basis and provides a comprehensive level of information in what I hope is a user-friendly format. SHAREHOLDER RELATIONS #### Annual General Meeting13 June 2022 The Annual General Meeting of the Company will be held at 12:00 noon on 13 June 2022 at 33 St James Square, London SW1Y 4JS. Full details of the agenda for this meeting are included in the Notice of the Annual General Meeting on page 91. ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 9 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information In 2021, we again had to change our plans for the Investor Workshops, subsequently holding two webinars in conjunction with British Smaller Companies VCT plc, on 25 June 2021 and 9 December 2021. We are pleased to announce the return of an in-person Investor Workshop, to be held jointly with British Smaller Companies VCT plc on 29 June 2022 at 1 Great George Street, Westminster, London SW1P 3AA. After the success of the webinars over the past couple of years, we will also continue providing these once per year, with the next event planned for December 2022. Post Balance Sheet Events As noted above, the Company allotted a successful £24.2 million fundraising on 7 January 2022. Ukraine During the build up to and subsequent to the recent invasion of Ukraine by Russia, we have been closely monitoring the impact of the war on our portfolio. There is minimal direct impact, which has principally been in a small number of cases where portfolio company software development teams have been based in Ukraine. From a business perspective, continuity of supply and service has been secured, although we are aware of a small number of developers who we believe are directly caught in the conflict and our thoughts are with them and all those suffering the humanitarian impact of the war. Outlook There’s little doubt that current market conditions are not straightforward. Many companies are currently navigating challenges from supply chain inflation, a highly competitive market for hiring talent as well as political challenges, both domestically and overseas. However, as we have seen through the pandemic the value of having the right management teams in place, and the right supportive advisers at their side, provides confidence that the portfolio has the capacity to chart a path through the current conditions and achieve success. Thanks to investors’ continued support, the Company is well positioned to both continue to support the existing portfolio and to continue to seek out the most promising new opportunities to augment the portfolio. I look forward to updating investors on this progress later in the year. Peter Waller Chairman 21 March 2022 ![Graphics]() 10 British Smaller Companies VCT2 plc Annual Report & Accounts The Company’s objective is to maximise Total Return and provide investors with a long-term tax free dividend yield whilst maintaining the Company’s status as a venture capital trust. Investment Policy The investment strategy of the Company is to invest in UK businesses across a broad range of sectors that blends a mix of businesses operating in established and emerging industries that offer opportunities in the application and development of innovation in their products and services. These investments will all meet the definition of a Qualifying Investment and be primarily in unquoted UK companies. It is anticipated that the majority of these businesses will be re-investing their profits for growth and the investments will comprise mainly equity investments. The Company seeks to build a broad portfolio of investments in early stage companies focussed on growth with the aim of spreading the maturity profiles and maximising return as well as ensuring compliance with the VCT guidelines in this regard. ## Objectives andKey Policies STRATEGIC REPORT Borrowing The Company does not borrow and has no borrowing facilities, choosing to fund investments from its own resources. Co-investment British Smaller Companies VCT2 plc and British Smaller Companies VCT plc (together “the VCTs”) typically co- invest in investments, allocating such investments 40 per cent to the Company and 60 per cent to British Smaller Companies VCT plc. However, the Board of the Company has discretion as to whether or not to take up its allocation; where British Smaller Companies VCT plc does not take its allocation, the Board may opt to increase the Company’s allocation in such opportunities. The VCTs may invest alongside co-investment funds managed by YFM, the Manager of the VCTs. The VCTs have first choice on the initial £4.5 million of all equity investment opportunities meeting the VCT qualifying criteria. Amounts above £4.5 million are allocated two thirds to the VCTs and one third to YFM’s co-investment funds. Asset Mix Cash which is pending investment in VCT-qualifying securities is primarily held in interest bearing instant access and short-notice bank accounts. Remuneration Policy The Company’s policy on the remuneration of its directors, all of whom are non-executive, can be found on page 49. Other Key Policies Details of the Company’s policies on the payment of dividends, the DRIS and the buy-back of shares are given on page 1. In addition to these the Company’s anti-bribery and environmental and social responsibilities policies can be found on page 36. ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 11 #### The Manager is responsible for thesourcing and screening of investmentopportunities, carrying out suitable due diligence investigations andmaking submissions to the Boardregarding potential investments. Post investment, the Manager intensivelyworks with the businesses andmanagement teams in which the #### Company is invested, monitoringprogress, effecting change and,where applicable, redefining #### strategies with a view to maximisingvalues through structured exitprocesses. The Board approves all investment and divestment decisions, save in that new investments up to £250,000 in companies whose securities are traded on a regulated stock exchange and where the decision is required urgently, in which case the Chairman of the Board of Directors, if appropriate, may act in consultation with the Manager. ## Processes andOperations The Board regularly monitors the performance of the portfolio and the investment requirements set by the relevant VCT legislation. Reports are received from the Manager regarding the trading and financial position of each investee company and senior members of the Manager regularly attend the Company’s Board meetings. Monitoring reports are also received each quarter from the Manager on compliance with VCT regulations so that the Board can monitor that the Venture Capital Trust status of the Company is maintained and take corrective action if appropriate. Monitoring reports carrying out an independent review of this compliance are received twice a year. The Board reviews the terms of YFM Private Equity Limited’s appointment as Manager at least annually. YFM Private Equity Limited has performed investment advisory, management, administrative and secretarial services for the Company since its inception on 28 November 2000. The principal terms of the agreement under which these services are performed are set out in note 3 to the financial statements. In the opinion of the directors, the continuing appointment of YFM Private Equity Limited as Manager is in the interests of the shareholders as a whole, in view of its experience in managing venture capital trusts and in making, managing and exiting investments of the kind falling within the Company’s investment policies. Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information ![Graphics]() 12 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 70.034.5 39.0 43.5 48.0 52.5 55.5 58.5 66.5 55.0 78.0 61.5 65.5 65.6 62.9 62.9 59.7 58.8 59.9 55.2 125.0 139.5 100.0 104.6 106.4 110.9 112.2 114.3 118.4 121.7 ## Key Performance # Indicators Total Return, calculated by reference to the cumulative dividends paid plus net asset value (excluding tax reliefs received by shareholders), is the primary measure of performance in the VCT industry. Total Return (as at 31 December) Total Return with DRIS (as at 31 December) Total Return (pps) NAV (pps) Cumulative dividends (pps) Total Return (pps) The evaluation of comparative success of the Company’s Total Return is by way of reference to the Share Price Total Return for an index of generalist VCTs which are members of the AIC (based on figures provided by Morningstar). This is the Company’s stated benchmark index. A comparison and explanation of the calculation of this return is shown in the Directors’ Remuneration Report on page 51. The chart illustrates the Total Return (excluding tax reliefs received by shareholders) for investors who subscribed to the first fundraising in 2000/01 who have re-invested their dividends. 2012 2013 2014 2015 2016 2017 2018 2019 20212020 102.1 108.2 111.0 118.0 120.4 124.3 132.0 140.1 147.9 182.0 ![Graphics]() Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information British Smaller Companies VCT2 plc Annual Report & Accounts 13 Average investment rate of return p.a. over 1, 2, 3, 5 and 10 year periods\* (to 31 December 2021) Excluding the benefits of all tax reliefs \* includes the benefits of the timing of dividend receipts. Shareholder Returns The Board considers Total Return to be the primary measure of shareholder value. The table below shows the cumulative dividends, the Total Return on each fundraising round per ordinary share and the IRR if a shareholder had not opted to participate in the Company’s DRIS. The cumulative dividend, total return and IRR figures in this table exclude the benefits of all tax reliefs. Year of issue Cumulative NAV at dividends Total Offer 31 December paid since Return to price 1 2021 fundraising date 2 IRR 3 Pence Pence Pence Pence % 2001 100.0 61.5 78.0 139.5 2.1% 2002 100.0 61.5 78.0 139.5 2.3% 2010 77.3 61.5 56.0 117.5 4.9% 2011 70.3 61.5 52.0 113.5 6.1% 2012 70.5 61.5 48.0 109.5 6.1% 2013 68.0 61.5 43.5 105.0 6.6% 2014 68.0 61.5 39.0 100.5 6.5% 2015 65.0 61.5 34.5 96.0 7.4% 2016 63.0 61.5 30.0 91.5 7.7% 2017 62.2 61.5 25.5 87.0 8.3% 2018 59.4 61.5 22.5 84.0 10.9% 2019 56.3 61.5 14.5 76.0 12.5% Notes 1. The offer price for the relevant year excluding the benefit of income tax relief available to investors at the time of the offer. 2 Total Return to date is cumulative dividends paid plus the 31 December 2021 net asset value in pence per ordinary share. This is an Alternative Performance Measure. 3 IRR is the unaudited annual rate of return that equates the offer price at the date of the original investment, with the value of subsequent dividends plus the 31 December 2021 net asset value per ordinary share. This excludes the benefit of any initial tax relief. Set out below is the average annual annualised investment rate of return over 1, 2, 3, 5 and 10 years to 31 December 2021. The average annual investment rate of return is calculated with reference to the cumulative dividends paid in the period plus the unaudited NAV at 31 December 2021. 1 yr 3 yrs2 yrs 5 yrs 10 yrs 15.9% 27.5% 12.3% 9.1% 6.3% ![Graphics]() 14 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT Expenses Ongoing Charges The Ongoing Charges figure, as calculated in line with the AIC recommended methodology, is used by the Board to monitor expenses. This figure shows shareholders the costs of the Company's recurring operational expenses, expressed as a percentage of the average net asset value. Whilst based on historical information, this provides an indication of the likely level of costs that will be incurred in managing the Company in the future. Year to Year to 31 December 31 December 2021 2020 (%) (%) Ongoing Charges figure\* 2.16 2.45 \* Alternative Performance Measure Expenses Cap The total costs incurred by the Company in the year (excluding any performance related fees, trail commission payable to financial intermediaries and VAT) is capped at 2.9 per cent of the total net asset value as at the relevant year end. The treatment of costs in excess of the cap is described in note 3 on page 71. There was no breach of the expenses cap in the current or prior year. Compliance with VCT Legislative Tests A principal risk facing the Company is the retention of its VCT qualifying status. The Board receives regular reports on compliance with the VCT legislative tests from its Manager. In addition, the Board receives formal reports from its VCT Status Adviser (Philip Hare & Associates LLP) twice a year. The Board can confirm that during the period, all of the VCT legislative tests have been met. Under Chapter 3 Part 6 of the Income Tax Act 2007, in addition to the requirement for a VCT’s ordinary share capital to be listed in the Official List on a European regulated market throughout the period, there are further specific tests that VCTs must meet following the initial three year provisional period. Income Test The Company’s income in the period must be derived wholly or mainly (70 per cent) from shares or securities. Retained Income Test The Company must not retain more than 15 per cent of its income from shares and securities. Qualifying InvestmentsTest At least 80 per cent by value of the Company’s investments must be represented throughout the period by shares or securities comprised in Qualifying Investments of investee companies. For shares issued in accounting periods beginning on or after 6 April 2018, at least 30 per cent of those share issues must be invested in Qualifying Investments of investee companies by the anniversary of the accounting period in which those shares are issued. Eligible Shares Test At least 70 per cent of the Company’s Qualifying Investments must be represented throughout the period by holdings of non-preferential shares. Investments made before 6 April 2018 from funds raised before 6 April 2011 are excluded from this requirement. At least 10 per cent of the Company’s total investment in each Qualifying Investment must be in eligible shares. In addition, monies are not permitted to be used to finance buy-outs or otherwise to acquire existing businesses or shares. Investment Limits There is an annual limit for each investee company which provides that they may not raise more than £5 million of state aided investment (including from VCTs) in the 12 months ending on the date of each investment (£10 million for Knowledge Intensive Companies). There is also a lifetime limit that a business may not raise more than £12 million of state aided investment (including from VCTs); the limit for Knowledge Intensive companies is £20 million. #### Key PerformanceIndicators(continued) ![Graphics]() Maximum Single Investment Test The value of any one investment must not, at any time in the period, represent more than 15 per cent of the Company’s total investment value. This is calculated at the time of investment and updated should there be further additions; as such, it cannot be breached passively. The Board can confirm that during the period, all of the VCT legislative tests set out above have been met, where required. Further restrictions placed on VCTs are: Dividends from Cancelled Share Premium The Finance Act 2014 introduced a restriction with respect to the use of monies in respect of VCTs. In particular, no dividends can be paid out of cancelled share premium arising from shares allotted on or after 6 April 2014 until at least three full financial years have elapsed from the date of allotment. The Company is cancelling, subject to the approval of the High Court, the balance of its Share Premium, £44.3 million, which will be transferred to the Capital Reserve. As set out on page 63, this will become available for distribution, if approved, at various times over the period to 1 January 2026. Other No more than seven years can have elapsed since the first commercial sale achieved by the business (ten years in the case of a Knowledge Intensive Company), unless: a. the business has previously received an investment from a source that has received state aid; or b. the investment comprises more than 50 per cent of the average of the previous five years’ turnover and the funds are to be used in the business to fund growth into new product markets and/or new geographies. Wherever possible, the Company self-assures that an investment is a Qualifying Investment, subject to the receipt of professional advice. Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information British Smaller Companies VCT2 plc Annual Report & Accounts 15 ![Graphics]() ## PortfolioComposition Diversity Less than 1 year Between 1 and 3 years Between 3 and 5 years Greater than 5 years 7 2021 26 5 62 6 2020 27 31 36 Value above cost At cost Value below cost 2021 85 15 2020 76 9 15 AGE OF INVESTMENTS (%) VALUE COMPARED TO COST (%) Portfolio Structure The broad range of the investment portfolio is illustrated with 62 per cent of the portfolio valuation being held for more than five years, whilst 85 per cent is held at cost or above. 21 per cent of the portfolio value is held in loans and preference shares, although loans now account for only 5 per cent of the value. 16 British Smaller Companies VCT2 plc Annual Report & Accounts Loan Preference shares Equity 2021 - 21% 2020 - 25% 2021 L P 79 L P 2020 L P 75 INVESTMENT INSTRUMENT (%) STRATEGIC REPORT ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 17 Strategic Report Portfolio Diversity Also included below is a profile of the investment portfolio by investments made before and after the VCT rule changes in 2015, and the break down by industry sector. 1 12 5 VCT rules post 2015 56 26 VCT rules pre 2015 38 4 36 12 2 8 Data & Analytics Software Applications Business Services New Media Advanced Manufacturing Retail & Brands Other VCT RULES (%) Investments made prior to rule change in 2015 Investments made following rule change in 2015 78 2021 22 64 2020 36 INDUSTRY SECTOR (%) ![Graphics]() ## InvestmentReview STRATEGIC REPORT The portfolio delivered a strongperformance in the year, with areturn of £26.0 million on the #### opening value of £49.1 million. The Portfolio #### £70.0 million Fair value of the portfolio (2020: £49.1 million) 22 Number of portfolio companies with a value of more than £0.5 million (2020: 19) #### £0.7 million Income from the portfolio (2020: £0.8 million\*) #### £6.1 million Level of investment (2020: £4.0 million) #### £26.0 million Return from portfolio (2020: £5.2 million\*) \* excluding exceptional dividend of £1.9 million received from ACC Aviation The portfolio has performed well during the period, adding £25.9 million of value on the opening fair value of £49.1 million. The composition of investments continues to show its dynamism, with £6.2 million invested in the period and cash proceeds of £11.2 million received. Table A Portfolio £million Opening fair value at 1 January 2021 49.1 Additions 6.2 Disposal proceeds\* (11.2) Valuation movement 25.9 Closing fair value at 31 December 2021 70.0 \* excluding deferred consideration At 31 December 2021 the investment portfolio was valued at £70.0 million, representing 80.1 per cent of net assets (69.2 per cent at 31 December 2020). Cash and fixed term deposits at 31 December 2021 of £21.2 million represented 24.3 per cent of net assets (29.6 per cent at 31 December 2020). Fair value changes The ongoing portfolio delivered a value gain of £20.7 million in the year. While Matillion continues to be a significant driver of value, it is pleasing to see the fair value increases arising across a range of companies, including tech-focused businesses such as Force24 and Elucidat, as well as companies benefiting from the ongoing post-pandemic recovery of the retail sector, such as Tonkotsu and Frescobol. Some decreases in value have been seen; Arraco and Arcus Global have both struggled somewhat over the past 12 months, but we continue to work closely with the companies’ management teams to navigate their current challenges. A further £5.2 million of value arose from investments which were realised in the year, including the partial realisation of Matillion (£3.4 million), Deep Secure (£1.3 million) and Tissuemed (£0.5 million). 18 British Smaller Companies VCT2 plc Annual Report & Accounts ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 19 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company InformationStrategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Table B Investment Portfolio £million % Gain in fair value 20.7 80 Gain on disposal over opening value 5.2 20 Valuation movement above 25.9 100 Deferred proceeds received in respect of assets previously disposed of 0.1 - Gain arising from the portfolio 26.0 100 Other Significant Investment Movements Investments During the year ended 31 December 2021, the Company completed ten investments, totalling £6.1 million. This comprised three new investments of £3.4 million and seven follow-on investments of £2.7 million. The analysis of these investments is shown in Table C. The case study on page 24 gives more information on the investment in Outpost. Table C Investments Investments made New Follow-on Total Company £million £million £million Vuealta 1.4 - 1.4 Outpost 1.0 - 1.0 Vypr 1.0 - 1.0 Wooshii - 1.0 1.0 SharpCloud - 0.8 0.8 Sipsynergy - 0.3 0.3 Other follow-on investments - 0.6 0.6 Invested in the year 3.4 2.7 6.1 Capitalised income 0.1 Total additions in the year 6.2 ![Graphics]() 20 British Smaller Companies VCT2 plc Annual Report & Accounts #### InvestmentReview(continued) STRATEGIC REPORT Disposal of Investments During the year to 31 December 2021 the Company received proceeds from disposals and repayments of loans of £11.7 million, a gain of £5.3 million over the opening carrying value and £7.7 million over cost. This included the very successful realisation of Deep Secure and the partial realisation of Matillion. The Company’s investment in Friska was disposed of for nil proceeds; the investment had been fully written down in previous periods. Further details are given in the Chairman’s statement on page 6. Table D Disposal of Investments Net Opening proceeds value from sale 31 December Gain on of investments 2020 opening value £million £million £million Total investment disposals 11.7 6.4 5.3 Further analysis of all investments sold in the year can be found in note 7 to the financial statements on page 78. Portfolio Composition As at 31 December 2021 the portfolio was valued at £70.0 million, comprising wholly of unquoted investments. An analysis of the movements in the year is shown on page 75. The portfolio has 22 investments valued above £0.5 million (2020: 19) with the single largest investment, Matillion, representing 28.7 per cent of the net asset value. The charts on pages 16 and 17 show the diversity of the portfolio, splitting it by industry sector, age of investment, investment instrument and the valuation compared to cost. Valuation Policy Unquoted investments are valued in accordance with both IFRS 13 ‘Fair Value Measurement’ and International Private Equity and Venture Capital Guidelines, December 2018 edition (IPEV Guidelines). Initially, at the first quarter-end following investment, investments are valued at the price of the funding round; following this, the valuation switches to a new primary basis for all subsequent periods. The valuation methodology applied depends upon the facts and circumstances of each individual investment. This may be with reference to revenue multiples, earnings multiples, net assets, discounted cash flows or calibrated from the price of the most recent investment. The full valuation policy is set out in note 1 on pages 66 and 67. Table E shows the value of investments within each valuation category as at 31 December 2021; no investments are currently valued using discounted cash flow methodologies. With continued investment in earlier stage businesses that are investing for growth, an increasing proportion of valuations are based on revenue multiples. ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 21 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Table E Valuation Policy 2021 2020 % of % of Valuation portfolio portfolio £million by value by value Revenue multiple 54.6 78 60 Earnings multiple 13.4 19 29 Net assets, reviewed for change in fair value 1.9 3 4 Cost or price of recent investment, reviewed for change in fair value 0.1 - 7 Total 70.0 100 100 Grow our economy Improve our society Value their people Protect the environment Sustainable Investment and Environmental, Social and Governance (“ESG”) Management The Company backs small UK businesses to help them to grow and produce strong financial returns for shareholders with the additional aim of building better businesses that are ultimately more sustainable. In order to deliver more sustainable businesses, and to meet its commitments under the Principles for Responsible Investment (PRI), the Manager has continued to develop its processes in this area. The Manager’s approach is based on the belief that good businesses: These aims are consistent with the Company’s financial aims because businesses which improve in these areas also strengthen their resilience and value creation potential through their increased attractiveness to customers, employees, suppliers and eventual future owners and investors. Sustainable Investment Principles This set of principles guides the Manager’s investment process: > To seek to understand the ESG related impacts and potential impacts of investments, aiming to grow and enhance positive impacts and to avoid, reduce or minimise any negative impacts over an investment’s lifetime, leaving them overall better businesses. > To play a positive role in the investor, business and wider communities by promoting good practice in ESG management, and by being transparent in the way that investments are made and how the Manager behaves. > To increase focus on the challenge of climate change both as it may be affected by our investments, and as it may impact on them and their resilience to possible climate change scenarios. > To show leadership by managing the Manager’s own business’ ESG impacts to the best of their ability. > To be a proactive signatory to the PRI and to integrate its principles into the Manager’s business practices. In line with the PRI the Manager has developed processes to help the portfolio businesses to be better in each of these spheres, by assessing them in terms of creating positive impacts and outcomes and preventing or minimising negative ones. The Manager has more recently developed and integrated its ESG management processes, which are: ![Graphics]() > Pre-investment Phase: Structured processes at the pre-investment stage to identify areas of potential ESG improvement as part of the due diligence and pre-investment deliberations. Appropriate data is collected and assessed on each business against ESG criteria at the point of investment as a benchmark against which to evaluate future progress. > Portfolio Phase: For those investments made since 2020, based on the data collected at the point of investment at the start of the portfolio phase, bespoke areas for improvement are agreed with each management team together with consequent objectives and targets. A similar process has been applied to the significant majority of investments made prior to 2020. Improvements are then measured and recorded against a set of ESG criteria using the Manager’s bespoke ESG framework, refreshing targets annually and placing focus on any new issues as they become more material in the management of the company and in meeting the expectations of its stakeholders. > Reporting: Annual reports will be produced, using the Manager’s ESG framework for consistency, recording the relevant initiatives, impacts and ESG KPI performance of each company and providing an overview of progress across the Manager’s portfolios. Note that Investment Companies are not eligible for reporting under the Task Force on Climate-Related Financial Disclosures (TCFD); and the Company does not use more than 40,000kWh of energy and therefore is not required to report on its energy usage within Streamlined Energy and Carbon Reporting regulations. ESG Performance Data and Reporting ESG KPI data analysis The Manager has developed its ESG KPI data collation process. They have established a data set reflecting the above ESG themes and a means of collecting this to make year on year comparisons for each company and across all of its portfolios. Where possible baseline data has been collected from the date of investment with a view to showing where the Manager’s support has made a difference during the hold period to the reporting date. Annual company specific ESG performance progress report The reviews that the Manager has been conducting enabled the identification of relative strengths and weaknesses and agreement of programmes of action with each business. In 2021 the Manager has moved to recording annual updates and agreed actions in a more visual and detailed report on both qualitative and quantitative aspects of each company’s progress. As well as using this for portfolio reporting to investors it will be used as an engagement tool with the senior management teams of each company. 2021 ESG KPI Report for Investments held in YFM’s VCT funds > £31.3 million of R&D investment during 2021 > £37.8 million of export sales achieved in 2021 > 95 per cent of companies were independently chaired in 2021 > 40 per cent of companies had female directors on boards, with 25 per cent having a female CEO > 25 per cent of businesses had a designated board member with responsibility for improving ESG issues 22 British Smaller Companies VCT2 plc Annual Report & Accounts #### InvestmentReview #### (continued) STRATEGIC REPORT Growing our economy Improving our society ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 23 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Valuing our people Protecting our environment > 30 per cent of the portfolio workforce was female in 2021 > 866 new jobs were created from date of investment to 2021 > 65 per cent had mental wellbeing programmes in place and 55 per cent held regular employee engagement surveys > Over 22,000 hours of training was given to employees > 60 per cent of companies had active carbon reduction strategies (up from 15 per cent at investment) > 25 per cent offset all or a defined portion of their carbon impact > But only 15 per cent formally measure their carbon footprint Summary and Outlook It has been pleasing to see the continued positive progression of the portfolio during the year, both from the continued growth of the Company’s technology-enabled and software-focused investments, but also from the recovery of businesses which were heavily impacted by the pandemic. We continue to help all of our companies navigate a fluid economic environment, with many facing obstacles relating to inflation, hiring of talent and an ever-changing political landscape. Despite these challenges, we continue to see a strong pipeline of potential investments in a range of growth companies, as well as opportunities to further support the continued growth of the current portfolio. We thank investors for their ongoing support from the Company’s January 2022 fundraising, and are looking forward to putting the funds raised to work. David Hall YFM Private Equity Limited 21 March 2022 ![Graphics]() 24 British Smaller Companies VCT2 plc Annual Report & Accounts ## Case Studies AMOUNT INVESTED £1.0 million BUSINESS AT INVESTMENT A visual effects (‘VFX’) company supplying subscription video on demand (eg. Netflix), television and feature film markets. THE INVESTMENT Funding to expand operations globally. RATIONALE FOR THE DEAL Bolstered by the rapid growth in video on demand companies such as Netflix and Amazon, VFX studios are experiencing unprecedented demand for their work. Differentiated from competitors by a distinctive culture, Outpost is able to attract the best talent and consequently, delivers high quality work on time and in budget. This has resulted in a brand valued by customers and poised for rapid growth. SINCE INVESTMENT The business was significantly impacted by Covid-19 in the initial phase of the investment. As the effects of Covid abated, Outpost accelerated revenues and opened or expanded offices in LA, Montreal and Mumbai as well as its presence in the UK and has won significant work on high quality productions since investment. AMOUNT INVESTED £2.0 million BUSINESS AT INVESTMENT A lead platform connecting customers with financial advisors covering investment mortgages and life insurance advice. THE INVESTMENT Growth capital to enhance the platform and broaden the service offering at the same time increasing consumer awareness of the marketplace. RATIONALE FOR THE DEAL A leader in its field, with the opportunity to build additional services, moving into other market sectors with the potential for expansion into overseas geographies. SINCE INVESTMENT Unbiased has demonstrated the ability to grow its offering into multiple service verticals, increasing the value of its offering, expanding its reach to over 27,000 IFAs to help all access financial advice. STRATEGIC REPORT ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 25 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Valuation at Realised & Date of Current 31 December Proceeds unrealised Page Name of initial Industry cost 2021 to date value to date\* No company investment Location Sector £000 £000 £000 £000 28 Matillion Limited Nov-16 Manchester Data & Analytics 1,456 25,050 5,946 30,996 28 Springboard Research Oct-14 Milton Keynes Data & Analytics 1,881 3,959 120 4,079 Holdings Limited 29 Intelligent Office UK May-14 Alloa Business Services 1,956 3,163 - 3,163 (IO Outsourcing Limited t/a Intelligent Office) 29 Wooshii Limited May-19 London New Media 2,440 3,162 - 3,162 29 Unbiased EC1 Limited Dec-19 London Software Applications 1,964 3,082 - 3,082 30 SharpCloud Software Limited Oct-19 London Data & Analytics 2,271 2,927 - 2,927 30 Elucidat Ltd May-19 Brighton Software Applications 1,800 2,926 - 2,926 30 Force24 Ltd Nov-20 Leeds Software Applications 1,600 2,773 - 2,773 31 ACC Aviation Group Limited\*\* Nov-14 Reigate Business Services 145 2,450 1,233 3,683 31 KeTech Enterprises Limited Nov-15 Nottingham Data & Analytics 10 1,976 1,775 3,751 Investment companies Apr-15 - - 2,500 1,895 - 1,895 DisplayPlan Holdings Limited Jan-12 Stevenage New Media 70 1,891 820 2,711 Ncam Technologies Limited Mar-18 London New Media 1,675 1,636 87 1,723 Outpost VFX Limited Feb-21 Bournemouth New Media 1,000 1,614 - 1,614 Sipsynergy (via Hosted Network Jun-16 Hampshire Software Applications 1,636 1,561 - 1,561 Services Limited) Tonkotsu Limited Jun-19 London Retail & Brands 1,592 1,520 - 1,520 Vuealta Group Limited Sep-21 London Software Applications 1,399 1,491 - 1,491 Vypr Validation Jan-21 Manchester Data & Analytics 1,000 1,386 - 1,386 Technologies Limited Arcus Global Limited May-18 Cambridge Software Applications 2,050 1,324 - 1,324 Frescobol Carioca Ltd Mar-19 London Retail & Brands 1,200 1,148 - 1,148 Traveltek Group Holdings Limited Oct-16 East Kilbride Software Applications 1,163 983 - 983 Panintelligence Nov-19 Leeds Data & Analytics 1,000 750 - 750 (via Paninsight Limited) e2E Engineering Limited Sep-17 Welwyn Business Services 600 688 - 688 Garden City Other investments below £0.5 million 9,629 664 5,384 6,048 Total investments 42,037 70,019 15,365 85,384 Full disposals to date 37,885 - 56,000 56,000 Total portfolio 79,922 70,019 71,365 141,384 \* represents proceeds received to date plus the unrealised valuation at 31 December 2021 \*\* additional ordinary dividends of £1.93 million have also been received ## Portfolio Summary #### at 31 December 2021 ![Graphics]() Investment Additions Valuation Investment valuation at including gains including valuation at 31 December Disposal capitalised profits/(losses) 31 December 2020 proceeds income on disposal 2021 Name of Company £000 £000 £000 £000 £000 Matillion Limited 12,695 (5,946) - 18,301 25,050 Force24 Ltd 1,600 - - 1,173 2,773 Tonkotsu Limited 605 - - 915 1,520 Elucidat Limited 2,031 - - 895 2,926 Frescobol Carioca Ltd 326 - - 822 1,148 Outpost VFX Limited - - 1,000 614 1,614 Wooshii Limited 1,566 - 1,000 596 3,162 SharpCloud Software Limited 1,544 - 811 572 2,927 Unbiased EC1 Limited 2,512 - - 570 3,082 Vypr Validation Technologies Limited - - 1,000 386 1,386 e2E Engineering Limited 434 - - 254 688 Traveltek Group Holdings Limited 808 - - 175 983 Sipsynergy (via Hosted Network Services Ltd) 1,113 - 327 121 1,561 Vuealta Group Limited - - 1,399 92 1,491 Ncam Technologies Limited 1,476 (87) 175 72 1,636 Other investments £0.5 million and below 109 - 160 41 310 Panintelligence (via Paninsight Limited) 1,000 - - (250) 750 Arcus Global Limited 2,160 - 100 (936) 1,324 Arraco Global Markets Limited 1,500 - 120 (1,620) - Investments made after November 2015 31,479 (6,033) 6,092 22,793 54,331 Deep-Secure Ltd 1,966 (3,279) - 1,313 - Springboard Research Holdings Limited 2,678 - 59 1,222 3,959 KeTech Enterprises Limited 2,601 (1,275) - 650 1,976 Displayplan Holdings Limited 1,267 - - 624 1,891 Tissuemed Limited 65 (599) - 534 - Intelligent Office UK (IO Outsourcing Limited t/a Intelligent Office) 3,156 - - 7 3,163 ACC Aviation Group Limited 2,993 - - (543) 2,450 Other investments £0.5 million and below 2,910 - - (661) 2,249 Investments made prior to November 2015 17,636 (5,153) 59 3,146 15,688 Total investments 49,115 (11,186) 6,151 25,939 70,019 26 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT ## Summary of Portfolio Movement #### since 31 December 2020 ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 27 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information ## Investee CompanyInformation Fair Value £36.3m 2020: £20.6m Number of companies 7 2020: 6 Fair Value £14.8m 2020: £12.9m Number of companies 7 2020: 7 Fair Value £8.3m 2020: £4.3m Number of companies 6 2020: 5 Fair Value £6.3m 2020: £8.1m Number of companies 5 2020: 5 Business Services New MediaData & Analytics Software Applications Fair Value £0.4m 2020: £1.1m Number of companies 3 2020: 3 Fair Value £1.2m 2020: £1.2m Number of companies 6 2020: 7 OtherAdvanced Manufacturing Fair Value £2.7m 2020: 0.9m Number of companies 2 2020: 3 Retail and Brands ![Graphics]() Matillion is a leading provider of cloud-based data extraction and transformation tools. The company helps businesses interpret their data in the cloud for insight and decision making and is headquartered in Manchester with offices in Denver, Seattle and New York. www.matillion.com Cost: £1,456,000 Valuation: £25,050,000 Date of initial investment: November 2016 Equity held: 2.4% Valuation basis: Revenue multiple 2020 2019 Year ended 31 December $million $million Revenue 29.98 16.05 LBITA (11.57) (16.43) Loss before tax (11.89) (15.53) Retained losses (36.88) (24.83) Net assets 22.89 33.18 Matillion Limited Manchester #### Portfolio The top 10 investments had a combined value of £51.5 million, 73.6 per cent of the total portfolio. 28 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT Springboard Research is the leading provider of performance insights for the retail industry across Europe and North America. The company has seen a significant increase in usage of its products as the industry reacts to the new retail environment created by Covid-19. www.spring-board.info Cost: £1,881,000 Valuation: £3,959,000 Date of initial investment: October 2014 Equity held: 13.0% Valuation basis: Revenue multiple Interest: £47,566 (2020 £94,632) Dividends: £59,136 (2020 £59,298) 2020 2019 Year ended 31 December £million £million Revenue 7.39 6.34 EBITA 1.77 0.50 Profit (loss) before tax 0.51 (0.70) Retained losses (3.14) (3.46) Net liabilities (0.01) (0.33) Springboard Research Holdings Limited Milton Keynes ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 29 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Unbiased is a technology-enabled marketplace that connects consumers to Independent Financial Advisers, Mortgage Brokers and Accountants. The company has a strong, well-established position and brand awareness in the IFA market with a high level of recurring subscription income from the thousands of professionals in their network. www.unbiased.co.uk Cost: £1,964,000 Valuation: £3,082,000 Date of initial investment: December 2019 Equity held: 10.6% Valuation basis: Revenue multiple 2020 2019 Year ended 30 September £million £million Revenue 5.02 4.02 (LBITA) EBITA (0.83) 0.20 (Loss) profit before tax (1.10) 0.06 Retained (losses) profits (0.96) 0.23 Net (liabilities) assets (0.96) 0.23 Accounts for the trading company Unbiased Limited are shown Unbiased EC1 Limited London Intelligent Office UK is a leading provider of support services to the legal sector. The company has more than 900 employees in over 60 client sites across the UK, as well as four onshore shared services centres. www.intelligentofficeuk.com Cost: £1,956,000 Valuation: £3,163,000 Date of initial investment: May 2014 Equity held: 17.8% Valuation basis: Earnings multiple Interest: £39,316 (2020 £39,423) Dividends: £60,894 (2020 £60,894) 2020 2019 Year ended 30 September £million £million Revenue 27.55 30.01 EBITA 1.42 1.51 Profit (loss) before tax 0.27 (0.50) Retained losses (3.90) (3.93) Net assets 1.64 1.61 Intelligent Office UK (IO Outsourcing Limited t/a Intelligent Office) Alloa Wooshii is a global video production agency using technology to manage a geographically distributed network of creative professionals. The company offers clients the convenience and quality of a traditional video marketing agency combined with cutting edge video management tools. It has an impressive client list including Coca Cola, Google, Microsoft and Amazon. www.wooshiivideoagency.com Cost: £2,440,000 Valuation: £3,162,000 Date of initial investment: May 2019 Equity held: 13.3% Valuation basis: Revenue multiple Dividends: £90,074 (2020 £64,978) 2021\* 2020\* Year ended 31 March £million £million Revenue 2.63 2.18 LBITA (1.07) (1.73) Loss before tax (1.24) (1.87) Retained losses (4.52) (3.39) Net liabilities (2.95) (1.83) \* Unaudited Wooshii Limited London ![Graphics]() 30 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT Elucidat provides a cloud-based e-learning authoring platform which allows its customers to drive down the cost of producing business-critical training. The company has impressive customer retention and a client list including Tesco, Target and Walmart. www.elucidat.com Cost: £1,800,000 Valuation: £2,926,000 Date of initial investment: May 2019 Equity held: 8.1% Valuation basis: Revenue multiple Interest: £20,000 (2020 £877) 2020 2019\* Year ended 31 December £million £million Revenue 3.00 1.42 LBITA (0.49) (0.24) Loss before tax (0.92) (0.41) Retained losses (1.12) (0.40) Net assets 2.41 3.12 \* unaudited 7 months to 31 December 2019. Elucidat Ltd Brighton SharpCloud provides a leading decision making platform for managers. It provides the ability to aggregate fragmented data into easily interpretable top-down output that shortens decision making cycles and eliminates decision waste. www.sharpcloud.com Cost: £2,271,000 Valuation: £2,927,000 Date of initial investment: October 2019 Equity held: 13.0% Valuation basis: Revenue multiple 2020\* 2019\* Year ended 31 December £million £million Revenue 1.65 1.24 LBITA (2.09) (0.58) Loss before tax (2.20) (0.74) Retained losses (3.25) (0.87) Net assets 0.74 3.12 \* Unaudited SharpCloud Software Limited London Force24 provides cloud-based personalised marketing automation technology trusted by over 350 businesses including household brands such as Michelin, Tarmac and Children In Need. www.force24.co.uk Cost: £1,600,000 Valuation: £2,773,000 Date of initial investment: November 2020 Equity held: 11.4% Valuation basis: Revenue multiple 2020 2019 Year ended 31 December £million £million Revenue 3.48 2.98 (LBITA) EBITA (0.38) 0.23 Loss before tax (0.66) (0.01) Retained (losses) profits (0.22) 0.63 Net assets 3.59 0.82 Force24 Ltd Leeds ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 31 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information ACC Aviation is the market leader in airline-to-airline “wet lease” brokerage and associated services. The company serves clients globally in all aspects of aircraft charter, leasing, interiors, and aviation support. www.accaviation.com Cost: £145,000 Valuation: £2,450,000 Date of initial investment: November 2014 Equity held: 18.5% Valuation basis: Earnings multiple Dividends: £nil (2020 £1,934,000) 2020 2019 Year ended 31 December £million £million Revenue 34.91 175.90 (LBITA) EBITA (0.67) 12.24 (Loss) profit before tax (3.75) 9.27 Retained profits 12.28 8.04 Net assets 12.30 26.21 ACC Aviation Group Limited Reigate KeTech specialises in the provision of enhanced, real- time information systems for transport operators and passengers. It offers a range of products including train safety and passenger information systems. Clients include mainline train operators and London Underground. www.ketech.com Better Informed Journeys Cost: £10,000 Valuation: £1,976,000 Date of initial investment: November 2015 Equity held: 15.8% Valuation basis: Earnings multiple Interest: £50,987 (2020 £93,472) Dividends: £44,198 (2020 £48,300) 2020 2019 Year ended 31 August £million £million Revenue 5.43 6.01 EBITA 0.87 1.06 Profit before tax 0.30 0.82 Retained profits 0.17 0.67 Net assets 0.67 0.90 KeTech Enterprises Limited Nottingham ![Graphics]() 32 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT The Board carries out a regularreview of the risk environment inwhich the Company operates. The #### emerging and principal risks anduncertainties identified by the Boardand techniques used to mitigate these #### risks are set out in this section. The Covid-19 pandemic and the current conflict in Ukraine created heightened uncertainty for the Company, but the Board do not consider that it has changed the nature of the principal risks. The Board considers that the present processes for mitigating those risks remain appropriate. The Board seeks to mitigate its emerging and principal risks by setting policy, regularly reviewing performance and monitoring progress and compliance. In the mitigation and management of these risks, the Board rigorously applies the principles detailed in section 4: “Audit, Risk and Internal Control” of The UK Corporate Governance Code issued by the Financial Reporting Council in July 2018. Details of the Company’s internal controls are contained in the Corporate Governance Internal Control section on pages 47 and 48 and further information on exposure to risks, including those associated with financial instruments, can be found in note 16a of the financial statements. ## RiskFactors Loss of Approval as a VCT Risk – The Company must comply with Chapter 3 Part 6 of the Income Tax Act 2007, which allows it to be exempted from corporation tax on capital gains. Any breach of these rules may lead to the Company losing its approval as a VCT, which would result in qualifying shareholders who have not held their shares for the designated holding period having to repay the income tax relief they obtained, while future dividends paid by the Company would be subject to tax. The Company would also lose its exemption from corporation tax on capital gains. Mitigation – One of the Key Performance Indicators monitored by the Company is the compliance with legislative tests. These tests are closely monitored by the Manager on an ongoing basis and regularly reported to and reviewed by the Board. The Company also makes use of external experts, who review the Company’s compliance with VCT rules on a regular basis. Details of how the Company manages these requirements can be found under the heading “Compliance with VCT Legislative Tests” on pages 14 and 15. Economic Risk – Events such as recession and interest rate fluctuations could affect investee companies’ performance and valuations. Mitigation – As well as the response to the ‘Investment and Strategic’ risk below, the Company has a clear investment policy (summarised on page 10) and a diversified portfolio operating in a range of sectors. The Manager actively monitors investee company performance, which provides quality information for monthly reviews of the portfolio. The Manager ensures that the portfolio has plans to manage the impact of economic risk. Investment and Strategic Risk – Inappropriate strategy, poor asset allocation or consistently weak stock allocation may lead to underperformance and poor returns to shareholders. The quality of enquiries, investments, investee company management teams and monitoring, and the risk of not identifying investee company difficulties may lead to underperformance by the Company and poor returns to shareholders. Mitigation – The Board reviews strategy annually. At each of the Board meetings, the directors review the appropriateness of the Company’s objectives and stated strategy in response to changes in the operating environment and peer group activity. The Manager carries out due diligence on potential investee companies and their management teams and utilises external reports where appropriate to assess the viability of investee businesses before investing. Wherever possible, a non- executive director will be appointed to the board of the investee company on behalf of the Company. ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 33 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Regulatory Risk – The Company is required to comply with the Companies Act 2006, the rules of the UK Listing Authority, the Financial Conduct Authority’s Prospectus Rules and UK adopted international accounting standards; it is also subject to the AIFMD EU Exit Regulations. Breach of any of these might lead to suspension of the Company’s Stock Exchange listing, financial penalties or a qualified audit report. Mitigation – The Manager and the Company Secretary have procedures in place to ensure recurring Listing Rules requirements are met and actively consult with brokers, solicitors and external compliance advisers as appropriate. The Manager ensures that it hires suitably qualified members of staff who are experienced with regulatory requirements and relevant accounting standards. The key controls around regulatory compliance are explained on pages 47 and 48. Reputational Risk – Inadequate or failed controls might result in breaches of regulations or loss of shareholder trust. Mitigation – The Board is comprised of directors with suitable experience and qualifications who report annually to the shareholders on their independence. The Manager is well-respected, with a proven track record. It has a formal recruitment process to employ experienced investment staff. Allocation rules relating to co-investments with other funds managed by the Manager have been agreed between the Manager and the Company. Advice is sought from external advisors where required. Both the Company and the Manager maintain appropriate insurances. Operational Risk – Failure of the Manager’s and administrator’s accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring. Mitigation – The Manager has a documented business continuity plan, which provides for back-up services in the event of a system breakdown. The Manager’s systems are protected against viruses and other cyber-attacks. The Manager implemented its business continuity plan through the Covid-19 pandemic with no loss of service. Cyber/IT Risk – Inadequate IT systems and controls might lead to business interruption, the inability of the Manager to provide accurate reporting and monitoring or the loss of Company records. Mitigation – The Manager has in place significant cybersecurity controls, including two factor authentication, email protection software, monitored firewalls and regularly updated electronic devices. The Manager is Cyber Essentials Plus certified. Staff at the Manager regularly receive training in relation to their cybersecurity obligations. ![Graphics]() 34 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT #### RiskFactors(continued) Climate Risk – The Company, the Manager and the portfolio companies may fail to positively contribute towards, and adapt to, the global transition towards decarbonisation, which could result in regulatory breaches, reduced investor and/or employee attraction and the reduced ability of portfolio companies to attract lending to fund their growth. Mitigation – In 2021, the Manager published its first Sustainable Investment Report, detailing the steps it has taken in this area to date. The Manager is a signatory of the UN’s Principles for Responsible Investment; it has published its Sustainable Investment Principles; and has rewritten its Ethical Policy. Its investment process now includes a set of over 50 thematic ESG KPIs, with which it is now tracking its portfolio over time across four key areas: Improve our Society; Protect our Environment; Grow our Economy; and Value our People. Further details can be found on pages 21 to 23. Financial Risk – Inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to misreporting or breaches of regulations. Mitigation – The Company’s internal control and risk management processes are described on pages 47 and 48. Market/Liquidity Risk – Lack of liquidity in both the venture capital and public markets. By their nature, investments in unquoted companies involve a higher degree of risk than investments in companies trading on public markets. In particular, smaller companies often have limited product lines, markets or financial resources; they may be dependent on a smaller number of key individuals. For quoted companies, the fact that a share is traded on the public market does not guarantee its liquidity. The spread between the buying and selling price of such shares may be wide and thus the price used for valuation may not be achievable. In addition, smaller companies’ shares are often less liquid than larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such stock. Mitigation – Overall liquidity risks are monitored on an ongoing basis by the Manager and on a quarterly basis by the Board. The Company’s valuation methodology takes account of potential liquidity restrictions in the markets in which it invests. For any publicly listed investments, accounting standards require an ongoing assessment of the liquidity of the stock. The Manager regularly reviews its exit plans for investee companies to allow the assets to be optimised to identify a willing buyer. As part of a planned exit, the assistance of a third party adviser will normally be sought, with a view to identifying the largest number of possible purchasers. ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 35 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Section 172 Statement This Section 172 Statement should be read in conjunction with the other contents of the Strategic Report, on pages 6 to 36. Section 172 of the Companies Act 2006 requires that a director must act in the way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: > The likely consequences of any decision in the long term; > The interests of the company's employees; > The need to foster the company's business relationships with suppliers, customers and others; > The impact of the company's operations on the community and the environment; > The desirability of the company maintaining a reputation for high standards of business conduct; and > The need to act fairly as between members of the company. The Company takes a number of steps to understand the views of investors and other key stakeholders and considers these, along with the matters set out above, in Board discussions and decision making. Key Stakeholders As an investment company with no employees, the Company’s key stakeholders are its investors, its service providers and its portfolio companies. Investors The Board engages and communicates with shareholders in a variety of ways. The Company encourages shareholders to attend its Annual General Meeting (AGM), but unfortunately the 2021 AGM had to be held as a “closed” meeting due to the restrictions on social gatherings at the time. It was not possible to hold the AGM electronically because such general meetings were not yet permitted by the Company’s Articles of Association and the legislation permitting electronic general meetings had not been passed at the time. A resolution was presented and passed at the 2021 AGM to allow electronic general meetings to be held in future. Along with British Smaller Companies VCT plc, the Company normally holds an annual Investor Workshop, which is always well attended. As with the 2021 AGM, it was not possible to hold this in its normal format, so two online workshops were held, in June 2021 and December 2021, which were attended by almost 200 shareholders. The Manager also carried out a shareholder survey during 2021. Maintaining the Company’s status as a VCT is critical to meeting the Company’s objective to maximise Total Return and provide investors with an attractive long-term tax-free dividend yield. The Company receives regular reports on this issue from the Manager and has taken various steps in the year to ensure that the relevant tests are met. The Board also aims for investors to continue to have tax efficient opportunities to invest in the Company, and to generate tax-free returns from both capital appreciation and ongoing dividends. After carefully considering its funding needs, the Company announced a non-prospectus offer to raise up to £7.1 million on 2 February 2021. At the same time, the Company issued an unaudited net asset value per ordinary share as at 31 December 2020, following the material increase in the final quarter of 2020. The related allotment took place on 11 March 2021 following which your Company received net proceeds of £6.8 million. On 22 September 2021, the Company issued a prospectus, alongside British Smaller Companies VCT plc, to raise up to £60 million in aggregate for the 2021/22 tax year. The related allotment took place on 7 January 2022, following which the Company received net proceeds of £24.2 million. During the year the Board kept its arrangements for dividends, share buy-backs and the dividend re- investment scheme under constant review. Along with normal dividends totalling 3.0 pence per ordinary share, a special dividend of 5.0 pence per ordinary share was paid in November 2021, following the partial realisation of the Company’s investment in Matillion. Manager The Company’s most important service provider is its Manager. There is regular contact with the Manager, and members of the Manager’s board attend all of the Company’s Board meetings. There is also an annual strategy meeting with the Manager, alongside the board of British Smaller Companies VCT plc. ## Other Matters ![Graphics]() 36 British Smaller Companies VCT2 plc Annual Report & Accounts STRATEGIC REPORT The Manager maintains strong relationships with relevant media publications and a wide range of distributors for the Company’s shares, including wealth managers, independent financial advisers and execution-only brokers. RAM Capital acts as a promoter of the Company’s shares to smaller distributors. The Company is a member of the Association of Investment Companies which promotes the interests of investment companies, including VCTs. The Manager is a founder member of the Venture Capital Trust Association, which promotes the interests of VCTs in a variety of ways. Portfolio Companies The Company holds minority investments in its portfolio companies and has delegated the management of the portfolio to the Manager. The Manager provides the Board with regular updates on the performance of each portfolio company at least quarterly and the Board is made aware of all major issues. The Manager has a dedicated Portfolio team to assist the portfolio companies with the challenges that they face as fast-growing companies. The Manager promotes ongoing, sustainable growth within the businesses; this often involves improving systems and processes, as well as significant job creation. The Covid-19 pandemic highlighted the Manager’s ongoing commitment to support its portfolio companies. At the start of the pandemic, the Manager put in place weekly monitoring reviews, as well as providing the portfolio with regular updates on the availability of government funding initiatives. Cash flow forecasts were kept under constant review and additional funding was provided where appropriate. Employees The Company has no employees. The Board is composed of one female non-executive director and two male non-executive directors. For a review of the policies used when appointing directors to the Board of the Company, please refer to the Directors’ Remuneration Report. Environment and Community The Company seeks to ensure that its business is conducted in a manner that is responsible to the environment. The management and administration of the Company is undertaken by the Manager, YFM Private Equity Limited, who recognises the importance of its environmental responsibilities and has signed up to the United Nations’ Principles for Responsible Investment. More details of the work that the Manager has done in this area are set out on pages 21 to 23. Its Sustainable Investment Policy can be found at www.yfmep.com/who- we-are/our\_impact/. Business Conduct The Company has a zero tolerance approach to bribery. The following is a summary of its policy: > It is the Company’s policy to conduct all of its business in an honest and ethical manner. The Company is committed to acting professionally, fairly and with integrity in all its business dealings and relationships; > The directors of the Company, the Manager and any other service providers must not promise, offer, give, request, agree to receive or accept financial or other advantage in return for favourable treatment, to influence a business outcome or gain any business advantage on behalf of the Company or encourage others to do so; > The Company has communicated its anti-bribery policy to the Manager and its other service providers and, in turn, the Manager ensures that portfolio companies implement appropriate policies of their own; and > The Manager has its own Anti-Bribery and Anti- Slavery policies and ensures that portfolio companies adopt a similar policy. The Strategic Report on pages 6 to 36 is approved by order of the Board. Peter Waller Chairman 21 March 2022 #### Other Matters(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 37 Peter Charles Waller Chairman Peter Waller (appointed 1 November 2010) Chair of the board - is an experienced chairman and director with extensive UK and international executive experience in the IT technology, software and services sector. He initially worked with IBM and Hitachi then with Spring plc, at that time one of the UK’s largest recruitment and training businesses. He was appointed as Chair of the Company in May 2019. Peter is also Chair of KeyPoint Technologies (UK) Limited and the Director and Founder of Turnberry Management Company Limited. Over the past two decades Peter has worked as a board member with multiple private and public companies. His particular skills are in sales and marketing and working with companies to develop successful sales growth strategies. Barbara Lawson Anderson (appointed 1 October 2020) - is an experienced Non- Executive Director and Chair who has worked extensively with SMEs, third sector and PLCs in regulated sectors, international private companies and venture capital specialists. Amongst other roles, Barbara is currently Non-Executive Director and Chair of Audit & Risk at Sovereign Housing Association, Independent Board Member and Chair of Audit & Risk at SmartDCC Ltd and Non-Executive Director and Chair of the Remuneration Committee at British Business Bank plc. Her expertise includes innovation for growth and sustainability including ESG, strategic planning, start-up acceleration and business transformation. Roger Steven McDowell Roger McDowell (appointed 6 March 2019) Chair of the Audit & Risk Committee - has considerable experience as a chairman and non-executive director of a wide range of technology, business services and manufacturing businesses. Following the flotation of his family’s business and subsequent trade sale, he began his plural career in 2000, when he took board roles in three private equity backed technology businesses. He is Chairman of Hargreaves Services Plc, Avingtrans Plc, Flowtech Fluidpower Plc and Brand Architekts Group Plc and Non-Executive Director of Tribal Group Plc and Proteome Sciences Plc. Roger is Chairman of the Audit & Risks Committee at Proteome Sciences. ## Directors CORPORATE GOVERNANCE #### Secretary The City Partnership (UK) Limited 110 George Street Edinburgh EH2 4LH Registered No: SC269164 #### Registered Officeof the Company 5th Floor Valiant Building 14 South Parade Leeds LS1 5QS Registered No: 04084003 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information ![Graphics]() 38 British Smaller Companies VCT2 plc Annual Report & Accounts #### The directors present their report andaudited financial statements ofBritish Smaller Companies VCT2 plc #### ("the Company") for the year ended31 December 2021. Principal Activity The Company is a public limited company incorporated and domiciled in the United Kingdom. The address of the registered office and principal place of business is 5th Floor, Valiant Building, 14 South Parade, Leeds, LS1 5QS. The Company has its primary, and sole, listing on the London Stock Exchange. The principal activity of the Company is the making of long term equity and loan investments, mainly in unquoted businesses. The Company operates as a venture capital trust (“VCT”) and has been approved by HM Revenue & Customs as an authorised venture capital trust under Chapter 3 Part 6 of the Income Tax Act 2007. It is the directors’ intention to continue to manage the Company’s affairs in such a manner as to comply with Chapter 3 Part 6 of the Income Tax Act 2007. Business Performance and Future Prospects A detailed and fair review of the Company’s business, its development, its financial performance during and at the end of the financial year, and its future prospects is set out in the Strategic Report on pages 6 to 36. The principal risks and uncertainties the Company faces are detailed on pages 32 to 34. Results and Dividends The Statement of Comprehensive Income is set out on page 60. The profit before and after taxation for the year amounted to £20,389,000 (2020: £4,251,000). During the year the Company paid a total of £11,015,000 (2020: £4,538,000) in dividends totalling 8.0 pence per ordinary share (2020: 3.5 pence). A detailed review can be found in note 5 on page 73. The net asset value per ordinary share at 31 December 2021 was 61.5 pence (2020: 55.0 pence). The transfer to and from reserves is given in the Statement of Changes in Equity on page 62. Going Concern The directors have carefully considered the issue of going concern in view of the Company’s activities and associated risks. The Company has a well-diversified portfolio with businesses in a variety of sectors, many of which are well funded. Some portfolio companies may require additional funding in the near- to medium-term in order to manage the impact of the Covid-19 pandemic; the Company is well placed to provide this, where appropriate. The Company has a significant level of liquidity, further enhanced by the recent fundraising post-period-end. In addition, the Board has control over the Company’s major outgoings, which predominantly comprise investments, dividends and share buybacks. The directors have also assessed whether material uncertainties exist and their potential impact on the Company’s ability to continue as a going concern; They have concluded that no such material uncertainties exist. The directors have carefully considered the issue of going concern and are satisfied that the Company has sufficient resources to meet its obligations as they fall due for a period of at least 12 months from the date of this report. As at 31 December 2021, the Company held cash balances and fixed term deposits with a combined value of £21,189,000 and raised additional net proceeds of £24,216,000 from the recent fundraising. Cash flow projections show the Company has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of share buy- backs and the dividend policy. In the year ended 31 December 2021, the Company’s costs and discretionary expenditures were: £’000 Administrative expenses (before incentive fee) 1,909 Share buybacks 1,942 Dividends (before DRIS) 11,015 Total 14,866 Taking all of the above into consideration, the directors are satisfied that the Company has sufficient resources to meet its obligations for at least 12 months from the date of this report and therefore believe that it is appropriate to continue to apply the going concern basis of accounting in preparing the financial statements. ## Directors’Report #### For the year ended 31 December 2021 CORPORATE GOVERNANCE ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 39 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Statement on Long-term Viability The AIC’s Code of Corporate Governance requires the Board to assess the Company’s viability over an appropriate period. The directors believe that a period of three years is appropriate to assess the Company’s viability because the Company is required to invest funds raised within this timeframe in order to retain its status as a VCT. In making their assessment, the directors have reviewed the types of investment that the Company will be able to make under the current VCT legislation and they believe that the existing portfolio and future investments will be able to deliver the Company’s objective “to maximise total return and provide investors with a long-term tax free dividend yield whilst maintaining the Company’s status as a venture capital trust”. The directors have also taken into account the emerging and principal risks and their mitigation identified in the strategic report on pages 32 to 34, the nature of the Company’s business, including its substantial reserves of cash following the recent fundraising, the potential of its venture capital portfolio to generate returns in the future and, as noted above, the ability of the directors to minimise the level of cash outflows, should this be necessary. Taking into account the Company’s current position and principal risks, the directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over that period. Corporate Governance The statement on corporate governance set out on pages 42 to 48 is included in the Directors’ Report by reference. Directors’ and Officers’ Liability Insurance The Company has, as permitted by the Companies Act 2006, maintained insurance cover on behalf of the directors, indemnifying them against certain liabilities which may be incurred by any of them in relation to the Company. Provision of Information to the External Auditor The directors confirm that so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and that each of the directors has taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. Share Capital As shown in note 11 of the financial statements, the Company has only one class of share, being ordinary shares of 10 pence each. Buy-Back and Issue of Ordinary Shares Under the existing authority, which expires on the conclusion of the Company’s Annual General meeting in 2022 or on 7 May 2022, whichever is the later, the Company has the power to purchase shares up to 14.99 per cent of the Company’s ordinary share capital as at 22 March 2019, being 16,379,154 ordinary shares. This authority will be renewed at the forthcoming AGM. During the year, the Company purchased 3,553,377 ordinary shares of 10 pence each in the market (as disclosed in the table below), for aggregate consideration (including costs) of £1,942,000. These shares are held in treasury. The buyback was in accordance with the Company’s buy-back policy, and under the authority set out above. The directors have unconditional authority to allot shares in the Company or to grant rights to subscribe for or to convert any security into ordinary shares in the Company up to an aggregate nominal amount of £10,000,000 (equivalent to 100,000,000 shares), expiring on 10 September 2022. This authority will be replaced by a new authority to issue shares up to an aggregate nominal amount of £10,000,000 at this year’s Annual General Meeting. 12,756,951 shares were issued during the year arising from the Company’s March 2021 fundraising. Further details are given in note 11 on page 83. A further 40,224,521 shares were issued on 7 January 2022 arising from the January 2022 fundraising. In addition, the directors have authority to allot shares and waive pre-emption rights in the Company in connection with the Company’s Dividend Re-investment Scheme (DRIS), up to an aggregate nominal amount of £2,000,000 (equivalent to 20,000,000 shares) until 7 May 2024. During the year to 31 December 2021, a total of 3,995,494 ordinary shares were issued under the Company’s DRIS. ![Graphics]() 40 British Smaller Companies VCT2 plc Annual Report & Accounts CORPORATE GOVERNANCE #### Directors’Report(continued) Capital Disclosures The following information has been disclosed in accordance with Schedule 7 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended): > The Company’s capital structure is summarised in note 11 to the financial statements. Each ordinary share carries one vote. There are no restrictions on voting rights or any agreement between holders of securities that result in restrictions on the transfer of securities or on voting rights; > There are no securities carrying special rights with regard to the control of the Company; > The Company does not have an employee share scheme; > The rules concerning the appointment and replacement of directors, amendments to the Articles of Association and powers to issue or buy- back the Company’s shares are contained in the Articles of Association of the Company and the Companies Act 2006; > With the exception of the Manager’s Incentive Agreement, there are no agreements to which the Company is party that take effect, alter or terminate upon a change in control following a takeover bid; and > There are no agreements between the Company and its directors providing for compensation for loss of office that may occur because of a takeover bid. Environment The Company is a low energy user and is therefore exempt from the reporting obligations under the Companies (Director’s Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018. The Company has no greenhouse gas emissions to report from the operations of the Company, nor does it have responsibility for any emissions producing sources including those within its underlying investment portfolio under part 7 of schedule 7 to the Large and Medium- sized Companies and Groups (Accounts and Reports) Regulations 2008, as amended. Directors and their Interests The directors of the Company at 31 December 2021, their interests and contracts of significance are set out in the Directors’ Remuneration Report on pages 49 to 51. Substantial Shareholdings The directors are not aware of any substantial shareholdings representing 3 per cent or more of the Company's issued share capital as at 31 December 2021 and the date of this report. Independent Auditor BDO LLP has indicated its willingness to continue in office and a resolution concerning its re-appointment will be proposed at the Annual General Meeting. The only audit-related assurance service provided by BDO LLP during the year was a review of the unaudited interim report for the six months ended 30 June 2021. Buy-back of Shares Number of Percentage Consideration Ordinary shares of issued paid per of 10p share capital ordinary Date bought back at that date share (pence) 25 March 2021 1,488,378 1.04% 51.33 24 June 2021 736,420 0.52% 53.04 27 September 2021 675,308 0.48% 59.40 15 December 2021 653,231 0.46% 57.69 ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 41 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Financial Instruments Details of the financial instruments held by the Company and the risks associated with them are set out on pages 84 to 89 and this information is accordingly incorporated into the Directors’ Report by reference. Employment Policies The employment policies of the Company are set out on page 50. Events after the Balance Sheet Date The Company announced a new share offer on 22 September 2021, alongside British Smaller Companies VCT plc, with the intention of raising up to £40 million, in aggregate with an over-allotment facility of £20 million, in aggregate. This was fully subscribed and closed on 12 November 2021. The related allotment of 40,224,521 ordinary shares took place post year-end, on 7 January 2022, following which the Company received net proceeds of £24.2 million. Annual General Meeting Shareholders will find the Notice of the Annual General Meeting on pages 91 to 94 of these financial statements. Ordinary Resolution Resolution 7 is proposed to ensure the directors retain the authority to allot shares in the Company until the later of 13 September 2023 or the date of the 2023 Annual General Meeting up to an aggregate nominal amount of £10,000,000 (representing approximately 55 per cent of the issued ordinary share capital of the Company as at 21 March 2022, excluding treasury shares). Special Resolutions Resolution 8 is proposed to empower the directors to allot shares under the authority granted by resolution 7 and to sell treasury shares without regard to any rights of pre-emption on the part of the existing shareholders. Resolution 9 is proposed to amend the Articles of Association to increase the cap on aggregate director fees to £110,000 in order to provide greater flexibility on the future composition of the Board. Resolution 10 is proposed to empower the directors to buy back up to 27,338,720 ordinary shares. This report was approved by the Board on 21 March 2022 and signed on its behalf by Peter Waller Chairman British Smaller Companies VCT2 plc Registered number 04084003 ![Graphics]() 42 British Smaller Companies VCT2 plc Annual Report & Accounts CORPORATE GOVERNANCE #### The Board is committed to theprinciple and application of soundcorporate governance and confirms that the Company has taken steps,appropriate to a venture capital trustand relevant to its size and #### operational complexity, to complywith the principles andrecommendations of the Association #### of Investment Companies’ Code ofCorporate Governance issued inFebruary 2019 (“AIC Code”) available #### on the AIC website www.theaic.co.uk. The AIC Code addresses all the principles set out in the UK Corporate Governance Code issued by the Financial Reporting Council (“FRC”), as well as setting out additional principles and recommendations on issues which are of specific relevance to the Company. The UK Corporate Governance Code can be found on the website of the FRC at www.frc.org.uk. The Board considers that reporting against the principles and recommendations of the AIC will provide better information to shareholders. The Company is committed to maintaining the highest standards of corporate governance and during the year to 31 December 2021 complied with the recommendations of the AIC Code and relevant provisions of the UK Corporate Governance Code, except as set out below. The UK Corporate Governance Code includes provisions relating to the appointment of a chief executive and a recognised senior independent non- executive director, those relating to the establishment of an independent Remuneration Committee, the presumption concerning the Chairman’s independence and the need for an internal audit function. For reasons set out in the AIC Code, and in the introduction to the UK Corporate Governance Code, the Board considers these provisions are not relevant to the position of British Smaller Companies VCT2 plc, which is an externally advised venture capital trust. The Company has therefore not reported further in respect of these provisions. Role of the Board An agreement between the Company and YFM Private Equity Limited sets out the matters over which the Manager has authority. This includes monitoring of the Company’s assets and the provision of accounting, company secretarial, administration and some marketing services. All other matters are reserved for the approval of the Board. A formal schedule of matters reserved to the Board for decision has been approved. This includes determination and monitoring of the Company’s investment objectives and policy and its future strategic direction, gearing policy, management of the capital structure, appointment and removal of third party service providers, review of key investment and financial data and the Company’s corporate governance, risk control and custody arrangements. The Board meets at least quarterly; additional meetings are arranged as necessary. Full and timely information is provided to the Board to enable it to function effectively and to allow directors to discharge their responsibilities. There is an agreed procedure for directors to take independent professional advice if necessary, at the Company’s expense. This is in addition to the access that every director has to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that applicable rules and regulations are complied with and that Board procedures are followed. The Company indemnifies its directors and officers and has purchased insurance to cover its directors. Neither the insurance nor the indemnity provide cover if the director has acted fraudulently or dishonestly. Board Composition The Board consists of three non-executive directors, all of whom are regarded by the Board as independent of each other and also of the Company’s Manager, including the Chairman. The independence of the Chairman was assessed upon his appointment. Although The UK Corporate Governance Code presumes that the chairman of a company is deemed ## CorporateGovernance ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 43 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information not to be an independent director, the remaining directors, having considered the nature of the role in the Company, are satisfied that Mr P C Waller fulfils the criteria for independence as a non-executive director. The directors have a breadth of investment, business and financial skills and experience relevant to the Company’s business and provide a balance of power and authority including recent and relevant financial experience. Brief biographical details of each director are set out on page 37. A review of Board composition and balance is included as part of the annual performance evaluation of the Board, details of which are given below. There are no executive officers of the Company. Given the structure of the Board and the fact that the Company’s administration is conducted by YFM Private Equity Limited, the Company has not appointed a chief executive officer or a senior independent non-executive director. In addition, the directors consider that the role of a senior independent non-executive director is taken on by all of the directors. Shareholders are therefore able to approach any director with any queries they may have. Boardroom Diversity The Board is committed to ensuring that the Company is run in the most effective manner. Consequently the Board monitors the diversity of all directors to ensure an appropriate level of experience and qualification. The Board believes in the value and importance of diversity in the boardroom but does not consider that it is appropriate or in the best interests of the Company and its shareholders to set prescriptive targets for gender or nationality on the Board. Diversity of thought, experience and approach are all important and the directors will always seek to appoint on merit against objective criteria. Tenure Directors are initially appointed until the following Annual General Meeting when, under the Company’s Articles of Association, it is required that they be elected by shareholders. Thereafter, it is the Board’s policy that a director’s appointment will run for a term of one year until the next Annual General Meeting. Subject to the performance evaluation carried out each year, the Board will agree whether it is appropriate for the director to seek a further term. The Board, when making a recommendation, will take into account the ongoing requirements of The UK Corporate Governance Code, including the need to refresh the Board and its Committees. The Board seeks to maintain a balance of skills and the directors are satisfied that as currently composed the balance of experience and skills of the individual directors is appropriate for the Company, in particular with regards to investment appraisal and investment risk management. The terms and conditions of directors’ appointments are set out in formal letters of appointment, copies of which are available for inspection on request at the Company’s registered office and at the Annual General Meeting. Mr P C Waller’s, Mr R S McDowell’s and Ms B L Anderson’s appointment are terminable by either the director or the Company on three months’ notice. The directors recommend the re-election of Mr P C Waller, Ms B L Anderson, and Mr R S McDowell at this year’s Annual General Meeting, because of their commitment, experience and contribution to the Company. Meetings and Committees The Board delegates certain responsibilities and functions to Committees. Directors who are not members of Committees may attend at the invitation of the Chairman. The table on page 44 details the number and function of the meetings attended by each director. During the year there were nine formal Board meetings, three Audit & Risk Committee meetings, two Nominations & Remuneration Committee meetings, one Allotment Committee meeting and one General meeting. The directors met via video, telephone and electronic conferences on 30 other occasions. ![Graphics]() 44 British Smaller Companies VCT2 plc Annual Report & Accounts CORPORATE GOVERNANCE Meetings Attended Mr P C Mr R S Ms B L Director Waller McDowell Anderson Total Board meetings 9 9 9 9 Audit & Risk Committee 3 3 3 3 Nominations & Remuneration Committee 2 2 2 2 Allotment Committee 1 - - 1 Video, telephone & electronic conferences 30 30 30 30 General meeting\* 1 - - 1 Total 46 44 44 46 \* only the Chairman was permitted to attend due to government restrictions In addition, there were three DRIS allotment meetings which the directors were not required to attend, but which were attended by the Company Secretary. Training and Appraisal On appointment, the Manager and Company Secretary provide all directors with induction training. Thereafter, regular briefings are provided on changes in regulatory requirements that affect the Company and its directors. Directors are encouraged to attend industry and other seminars covering issues and developments relevant to VCTs. The performance of the Board has been evaluated in respect of the financial year ended 31 December 2021. The Board, led by the Chairman, has conducted a performance evaluation to determine whether it and individual directors are functioning effectively. The factors taken into account were based on the relevant provisions of The UK Corporate Governance Code and included attendance and participation at Board and Committee meetings, commitment to Board activities and the effectiveness of their contribution. The results of the overall evaluation process are communicated to the Board. Performance evaluation continues to be conducted on an annual basis. The Chairman has confirmed that the performance of the other directors being proposed for re-election continues to be effective and that they continue to show commitment to the role. The independent directors have similarly appraised the performance of the Chairman. They considered that the performance of Mr P C Waller continues to be effective. Audit & Risk Committee The Audit & Risk Committee consists of the directors of the Company. It meets at least three times each year. The directors consider that it is currently appropriate that the Chairman of the Committee should be Mr R S McDowell due to his experience in the role. The members of the Committee consider that they have the requisite skills and experience to fulfil the responsibilities of the Committee, and that the Chair of the Committee meets the requirements of The UK Corporate Governance Code as to recent and relevant financial experience. The Audit & Risk Committee’s terms of reference include the following roles and responsibilities: > Monitoring and making recommendations to the Board in relation to the Company’s published financial statements (including in relation to the valuation of the Company’s unquoted investments) and other formal announcements relating to the Company’s financial performance; > Monitoring and making recommendations to the Board in relation to the Company’s internal control (including internal financial control) and risk management systems; > Annually considering the need for an internal audit function; > Making recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditor and approving the remuneration and terms of engagement of the external auditor; > Reviewing and monitoring the external auditor’s independence and objectivity and effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; > Monitoring the extent to which the external auditor is engaged to supply non-audit services; and > Ensuring that the Manager has arrangements in place for the investigation and follow-up of any concerns raised confidentially by staff in relation to the propriety of financial reporting or other matters. It reviews the terms of the investment agreement and examines the effectiveness of the Company’s internal control and risk management systems, receives information from the Manager’s compliance department and reviews the scope and results of the external audit, its cost effectiveness and the independence and objectivity of the external auditor. #### CorporateGovernance(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 45 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information The directors’ statement on the Company’s system of internal control is set out on pages 47 and 48. The Audit & Risk Committee has written terms of reference, which clearly define its responsibilities, copies of which are available for inspection on request at the Company’s registered office and at the Annual General Meeting, and also on the Company’s website at www.bscfunds.com. The Company does not have an independent internal audit function as it is not deemed appropriate given the size of the Company and the nature of the Company’s business. However, the Committee considers annually whether there is a need for such a function and, if so, would recommend this to the Board. During the year ended 31 December 2021 the Audit & Risk Committee discharged its responsibilities by: > Reviewing and approving the external auditor’s terms of engagement, remuneration and independence; > Reviewing the external auditor’s plan for the audit of the Company’s financial statements, including identification of key risks; > Reviewing YFM Private Equity Limited’s statement of internal controls operated in relation to the Company’s business and assessing the effectiveness of those controls in minimising the impact of key risks; > Reviewing reports on the effectiveness of the Manager’s compliance procedures; > Reviewing the appropriateness of the Company’s accounting policies; > Reviewing the Company’s draft annual financial statements, half yearly results statement and interim management statements prior to Board approval, including the proposed fair value of investments as determined by the directors; > Reviewing the external auditor’s detailed reports to the Audit & Risk Committee on the annual financial statements; and > Recommending to the Board and shareholders the re-appointment of BDO LLP as the Company’s external auditor. The key areas of risk that have been identified and considered by the Audit & Risk Committee in relation to the business activities and financial statements of the Company are as follows: > Valuation of unquoted investments; and > Compliance with HM Revenue & Customs’ conditions for maintenance of approved venture capital trust status. These issues were discussed with the Manager and the auditor at the pre-year-end audit planning meeting and at the conclusion of the audit of the financial statements. Valuation of Unquoted Investments The Audit & Risk Committee reviewed the estimates and judgements made in the investment valuations and was satisfied that they were appropriate. The Manager confirmed to the Audit & Risk Committee that the investment valuations had been carried out consistently with prior periods and in accordance with published industry guidelines, including IPEV’s Special Valuation Guidance issued in March 2020 in response to the impact of the Covid-19 pandemic, taking account of the latest available information about investee companies; current market data; and a report from the auditor, including key audit findings in respect of the valuations. Venture Capital Trust Status The Manager confirmed to the Audit & Risk Committee that the conditions for maintaining the Company’s status as an approved venture capital trust had been complied with throughout the year. The position was also reviewed by the Company’s advisers. Financial Statements The Manager confirmed to the Audit & Risk Committee that it was not aware of any material unadjusted misstatements. Having reviewed the reports received from the Manager and the auditor, the Audit & Risk Committee is satisfied that the key areas of risk and judgement have been appropriately addressed in the financial statements and that the significant assumptions used in determining the value of assets and liabilities and revenue recognition have been properly appraised and are sufficiently robust. ![Graphics]() 46 British Smaller Companies VCT2 plc Annual Report & Accounts CORPORATE GOVERNANCE #### CorporateGovernance(continued) Relationship with the Auditor As part of the review of audit effectiveness and independence, BDO LLP has confirmed that it is independent of the Company and has complied with applicable auditing standards. BDO LLP was appointed as the result of a competitive tendering process in 2016. As a consequence, this is their sixth year of office as auditor; in accordance with professional guidelines the initial engagement partner was rotated off the audit after five years; as such, this is the first year of the current partner’s tenure. Having completed its review, the Audit & Risk Committee is satisfied that BDO LLP remained effective and independent in carrying out its responsibilities up to the date of signing this report and its recommendation for reappointment is endorsed by the Board. The only audit- related assurance services provided by BDO LLP during the year was a review of the unaudited interim report for the six months ended 30 June 2021. Nominations & Remuneration Committee The Company has a Nominations & Remuneration Committee, which consists of the directors, all of whom are considered by the Board to be independent of the Manager. The Chairman of the Board acts as Chairman of the Nominations & Remuneration Committee. In considering appointments to the Board, the Nominations & Remuneration Committee takes into account the ongoing requirements of the Company and the need to have a balance of skills and experience within the Board. Meetings are held as and when required. There were two Nominations & Remuneration Committee meetings during the year. The Board considers succession planning at least annually, especially in relation to the positions of the Chairman and the Chairman of the Audit & Risk Committee. The Directors’ Remuneration Report may be found on pages 49 to 51. The Director’s Remuneration Report on page 49 includes details of how directors’ remuneration is set. Investment Committee The Board has determined that, due to the investment procedures currently in place, in its opinion there is no role for an independent Investment Committee. Allotment Committee The Company has an Allotment Committee, which consists of the directors, all of whom are considered by the Board to be independent of the Manager. The quorum for Committee meetings is one director, unless otherwise determined by the Board. In addition, the Company Secretary has an authority to allot shares under the DRIS. The Committee considers and, if appropriate, authorises the allotment of shares. The Committee ensures that the total number of shares to be issued does not exceed the authority given by the shareholders. There are no written terms of reference. Relations with Shareholders The Board regularly monitors the shareholder profile of the Company. It aims to provide shareholders with a full understanding of the Company’s activities and performance, and reports formally to shareholders at least twice a year by way of the Annual Report and the Interim Report. This is supplemented by the daily publication of the Company’s share price and the publication of the net asset value of the Company for the two quarters of the year where an Annual or Interim Report is not normally issued (31 March and 30 September), through the London Stock Exchange. All shareholders have the opportunity, and are encouraged, to attend the Company’s Annual General Meeting, at which the directors and representatives of the Manager are available in person to meet with and answer shareholders’ questions. In addition, representatives of the Manager periodically hold shareholder workshops which review the Company’s performance and industry developments, and which give shareholders a further opportunity to meet members of the Board and chief executives or chairpersons of some of the investee companies. During the year, the Company’s Manager has held regular discussions with shareholders. A shareholder’s survey was undertaken ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 47 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information during the year and the directors are made fully aware of shareholders’ views. The Chairman and directors make themselves available, as and when required, to address shareholder queries. The directors may be contacted through the Company Secretary, whose details are shown on page 37. The Company’s Annual Report is published in time to give shareholders at least 21 clear days’ notice of the Annual General Meeting. Shareholders wishing to raise questions in advance of the meeting are encouraged to write to the Company Secretary at the address shown on page 37. Separate resolutions are proposed for each separate issue. Proxy votes will be counted and the results announced at the Annual General Meeting for and against each resolution. Internal Control and Risk Management Under an agreement dated 28 November 2000, superseded by an agreement dated 31 October 2005 and as varied by agreements dated 8 December 2010, 26 October 2011, 16 November 2012, 17 October 2014, 7 August 2015 and 13 November 2019, certain functions of the Company have been sub-contracted to YFM Private Equity Limited. The Board receives operational and financial reports on the current state of the Company and on appropriate strategic, financial, operational and compliance issues. These matters include, but are not limited to: > A clearly defined investment strategy for the Manager to the Company; > All decisions concerning the acquisition or disposal of investments are ratified by the Board; > Regular reviews of the Company’s investments, liquid assets and liabilities, revenue and expenditure; > Regular reviews of compliance with the VCT regulations to retain its status; and > The Board receives copies of the Company’s management accounts on a regular basis showing comparisons with budget. These include a report by the Manager with a review of performance. Additional information is supplied on request. The Board confirms the procedures to implement the guidance detailed in Principle O of the AIC Code were in place throughout the year ended 31 December 2021 and up to the date of this report. A detailed review of the risks faced by the Company and the techniques used to mitigate these risks can be found in the Strategic Report on pages 32 to 34. The Board acknowledges that it is responsible for overseeing the Company's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board arranges its meeting agenda so that risk management and internal control is considered on a regular basis and a full robust risk and control assessment takes place no less frequently than twice a year. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. This process has been in place for longer than the year under review and up to the date of approval of the Annual Report. The process is formally reviewed bi-annually by the Board. However, due to the size and nature of the Company, the Board has concluded that it is not necessary at this stage to set up an internal audit function. This decision will be kept under review. The directors are satisfied that the systems of risk management that they have introduced are sufficient to comply with the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. In particular the Board, together with the Audit & Risk Committee, is responsible for overseeing and reviewing internal controls concerning financial reporting. In addition to those controls sub-contracted as listed above, the following controls have been in place throughout the year: > A robust system of internal control is maintained by the Manager over the preparation and reconciliation of investment portfolio valuations; > Monthly reconciliation of assets held as cash or on fixed term deposit; > Independent review of the valuations of portfolio investments by the Board (quarterly); ![Graphics]() 48 British Smaller Companies VCT2 plc Annual Report & Accounts CORPORATE GOVERNANCE #### CorporateGovernance(continued) > The Audit & Risk Committee’s review of financial reporting and compliance (as set out on pages 44 to 46); > The Board reviews financial information including the Annual Report, Interim Report and interim management statements prior to their external communication; and > The Board reviews the financial information in any prospectus or offer for subscription issued by the Company in connection with the issue of new share capital. The Company was registered with the FCA as a Small Registered Alternative Fund Manager until 24 March 2020 and up to that date held its own investments. From that date, the Manager became the Company’s Alternative Investment Fund Manager and took over responsibility for the custody of the Company’s investments. All certificates and other documents evidencing title (whether or not in registered form) will be received by the Company and will be held in the Company’s name and held in custody by the Manager. No third party custodian has been appointed. The Company will take legal ownership of its assets. The Board has reviewed the effectiveness of the Company’s systems of internal control and risk management for the year and up to the date of this Report. The Board is of the opinion that the Company’s systems of internal, financial, and other controls are appropriate to the nature of its business activities and methods of operation given the size of the Company, and the Board has a reasonable expectation that the Company will continue in operational existence for the foreseeable future. Conflicts of Interest The directors have declared any conflicts or potential conflicts of interest to the Board, which has the authority to authorise such situations if appropriate. The Company Secretary maintains the Register of Directors’ Interests, which is reviewed quarterly by the Board, when changes are notified, and the directors advise the Company Secretary and the Board as soon as they become aware of any conflicts of interest. Directors who have conflicts of interest which have been approved by the Board do not take part in discussions or decisions which relate to any of their conflicts. Corporate Governance in Relation to Investee Companies The Company delegates responsibility for monitoring its investments to its Manager whose policy, which has been noted by the Board, is as follows: YFM Private Equity Limited is committed to introducing corporate governance standards into the companies in which its clients invest. With this in mind, the Company’s investment agreements contain contractual terms specifying the required frequency of management board meetings and of annual shareholders’ meetings, and for representation at such meetings through YFM Private Equity Limited. In addition, provision is made for the preparation of regular and timely management information to facilitate the monitoring of an investee company performance in accordance with best practice in the private equity sector. Co-Investment Typically, the Company invests alongside other venture capital funds and other private equity funds managed by the Manager, such syndication spreading investment risk. Details of the amounts invested in individual companies are set out in the Strategic Report. Co- investments are detailed in note 7 to the financial statements on page 80. Management The Board has delegated the monitoring of the investment portfolio to the Manager. This report was approved by the Board on 21 March 2022 and signed on its behalf by Peter Waller Chairman British Smaller Companies VCT2 plc Registered number 04084003 ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 49 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information #### The Board has prepared this report inaccordance with the requirements ofthe Large and Medium Sized Companies and Groups (Accountsand Reports) (Amendment)Regulations 2013. An ordinary #### resolution for the approval of thisreport will be put to the members atthe forthcoming Annual GeneralMeeting. The law requires the Company’s auditor, BDO LLP, to audit certain information included in this report. Where disclosures have been audited, they are indicated as such. The auditor’s opinion is included in the Independent Auditor’s Report on pages 53 to 59. Directors’ Remuneration Policy This statement of the Directors’ Remuneration Policy took effect following approval by shareholders at the Annual General Meeting held on 16 June 2020. A resolution to approve the Directors’ Remuneration Policy will be put to shareholders every three years. The Board comprised three directors, all of whom are non-executive. The Board does not have a separate Remuneration Committee due to the size of the Board and the remuneration procedures currently in place. In the directors’ opinion and under the Listing Rules, there is no requirement for an independent Remuneration Committee. The Board has not retained external advisors in relation to remuneration matters but has access to information about directors’ fees paid by other companies of a similar size and nature and this is used as a reference when setting directors’ renumeration. Shareholders’ views in respect of the directors’ remuneration are communicated at the Company’s AGM and are taken into consideration in formulating the Directors’ Remuneration Policy. At the last Annual General Meeting, 95 per cent of shareholders who exercised their voting rights voted for the resolution approving the Directors’ Remuneration Report, showing significant shareholder approval. The Board’s policy is that the remuneration of non- executive directors should reflect the experience of the Board as a whole, to be fair and comparable to that of other relevant venture capital trusts that are similar in size and have similar investment objectives and structures. Furthermore, the level of remuneration should be sufficient to attract and retain the directors needed to properly oversee the Company and to reflect the duties and responsibilities of the directors and the value and amount of time committed to the Company’s affairs. It is not considered appropriate that directors’ remuneration should be performance-related, and as such the directors are not eligible for bonuses, share options, pension benefits, long-term incentive schemes or other benefits in respect of their services as non- executive directors of the Company. It is the Board’s policy that directors do not have service contracts, but new directors are provided with a letter of appointment. The terms of directors’ appointments provide that directors should retire and be subject to election at the first Annual General Meeting after their appointment. Thereafter, it has been agreed that all directors will offer themselves for re-election on an annual basis. All director’s appointments are terminable by each director or the Company on three months’ notice. Any director who ceases to hold office is not entitled to receive any payment other than accrued fees (if any) for past services. There were no payments for loss of office made during the period. The policy will continue to be applied in the forthcoming year. Brief biographical notes on the directors are given on page 37. Statement by the Chairman of the Nominations Committee The directors’ fees payable by the Company have been fixed from 1 April 2018 by the Board at £40,000 per annum for the Chairman and £24,000 per annum for the other directors. The directors have reviewed the level of director’s fees and agreed that with effect from 1 March 2022, they will be increased to £42,500 per annum for the Chairman and £26,500 per annum for the other directors. In accordance with the Directors’ Remuneration Policy, the directors have agreed that they should be reviewed again in March 2023. The cap on aggregate fees is £100,000. As noted on page 41, the Board proposes to increase the cap on aggregate fees to £110,000 in order to provide greater flexibility on the future composition of the Board. ## Directors’Remuneration Report ![Graphics]() 50 British Smaller Companies VCT2 plc Annual Report & Accounts CORPORATE GOVERNANCE Directors’ Remuneration for the year ended 31 December 2021 (audited) The directors who served in the year and the previous year received the following emoluments in the form of fees, which represent the entire remuneration payable to directors (see Table A): There are no executive directors (2020: none). Table A Total Fees Paid (audited) 2021 2020 £ £ P C Waller 40,000 40,000 B L Anderson 24,000 6,000 R S McDowell 24,000 24,000 R M Pettigrew - 24,000 88,000 94,000 The annual salary of Ms B L Anderson from the date of her appointment as a non-executive director on 1 October 2020 is £24,000. There has been no change to the annual salaries of any of the directors in the year. Directors and their Interests (audited) The directors of the Company at 31 December 2021 and their beneficial interests in the share capital of the Company (including those of immediate family members) were as shown in Table B: Table B Directors and their interests (audited) Number of Percentage of ordinary shares at: voting rights: 31 December 31 December 31 December 31 December 2021 2020 2021 2020 P C Waller 44,439 44,439 0.03% 0.04% B L Anderson 9,112 - 0.01% - R S McDowell 266,391 266,391 0.19% 0.21% None of the directors held any options to acquire additional shares at the year end. The number of ordinary shares allotted to the directors on 7 January 2022 as a result of the fundraising were as shown in Table C: Table C Cumulative Number of number of ordinary ordinary shares shares held P C Waller 9,617 54,056 B L Anderson 323,920 333,032 R S McDowell 322,259 588,650 The Company has not set out any formal requirement or guidelines concerning their ownership of shares in the Company. Relative Importance of Spend on Pay Directors’ remuneration, dividend distribution and share buy-backs are shown in Table D. Table D Relative Importance of Pay 2021 2020 £ £ Dividends 11,015,000 4,538,000 Share buy-backs 1,942,000 1,508,000 Total directors fees 88,000 94,000 Consideration of Employment Conditions of Non-director Employees The Company does not have any employees. Accordingly, the disclosures required under paragraph 38 and 39 of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 are not required. #### Directors’Remuneration Report(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 51 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Company Performance The Board is responsible for the Company’s investment strategy and performance, although the management of the Company’s investment portfolio is delegated to the Manager through the advisory agreement, as referred to in the Directors’ Report. Net asset value Total Return (calculated by reference to the net asset value and cumulative dividends paid, as set out in note 13 of these financial statements and excluding tax reliefs received by shareholders) is the primary recognised measure of performance in the VCT industry. This measure is shown on page 12. The graph above shows a comparison over the last ten years of the movements in both the Company’s Share Price Total Return and the Share Price Total Return for an index of generalist VCTs which are members of the AIC (based on figures provided by Morningstar). In line with the index all the relative performance measures have been rebased to 100 as at December 2011. The directors consider this to be the most appropriate published index on which to report on comparative performance. This report was approved by the Board and signed on its behalf on 21 March 2022. Peter Waller Chairman VCT Generalist Share Price Total Return (Source: Index compiled by Morningstar)\* BSC2 - Share Price Total Return\* \* assumes dividends re-invested 100 150 200 250 300 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Percentage movement per ordinary share ![Graphics]() 52 British Smaller Companies VCT2 plc Annual Report & Accounts CORPORATE GOVERNANCE #### The directors are responsible forpreparing the annual report and thefinancial statements in accordance #### with international accountingstandards in conformity with therequirements of the Companies Act #### 2006 and applicable law andregulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. Under Company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss for the Company for that period. In preparing these financial statements, the directors are required to: > Select suitable accounting policies and then apply them consistently; > Make judgements and accounting estimates that are reasonable and prudent; > State whether they have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006, subject to any material departures disclosed and explained in the financial statements; > Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and > Prepare a directors’ report, a strategic report and directors’ remuneration report which comply with the requirements of the Companies Act 2006. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, and understandable and provide the information necessary for shareholders to assess the performance, business model and strategy. Website Publication The directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company’s website www.bscfunds.com in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein. Directors’ Responsibilities Pursuant to DTR4 The directors confirm to the best of their knowledge: > The financial statements have been prepared in accordance with accounting standards in conformity with the requirements of the Companies Act 2006 and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company; and > The annual report includes a fair review of the development and performance of the business and the financial position of the Company, together with a description of the principal risks and uncertainties that they face. The names and functions of all the directors are stated on page 37. This statement was approved by the Board and signed on its behalf on 21 March 2022. Peter Waller Chairman ## Directors’ ResponsibilitiesStatement ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 53 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Opinion on the financial statements In our opinion the financial statements: > give a true and fair view of the state of the Company’s affairs as at 31 December 2021 and of its profit for the year then ended; > have been properly prepared in accordance with UK adopted international accounting standards; and > have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements of British Smaller Companies VCT2 plc (the ‘Company’) for the year ended 31 December 2021 which comprise the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Statement of Cash Flows and the notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international accounting standards. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit opinion is consistent with the additional report to the audit committee. Independence Following the recommendation of the audit committee, we were appointed by the Board of Directors and subsequently by the shareholders at the AGM on 10 May 2017 to audit the financial statements for the year ending 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement including retenders and reappointments is 6 years, covering the years ending 31 December 2016 to 31 December 2021. We remain independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services prohibited by that standard were not provided to the Company. Conclusions relating to going concern In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the Directors’ assessment of the Company’s ability to continue to adopt the going concern basis of accounting included: > Evaluating the appropriateness of the Directors’ method of assessing the going concern assumption by reviewing the information used by the Directors in completing their assessment; and > Challenging Directors’ assumptions and judgements made in their base case and stress tested forecasts including consideration of current cash levels, future expenses with reference to historic expenditure and cash ouflows relating to new investments in order to continue meeting VCT compliance rules. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In relation to the Company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report. ## IndependentAuditor’s Report #### to the members of British Smaller Companies VCT2 plc INDEPENDENT AUDITOR’S REPORT ![Graphics]() 54 British Smaller Companies VCT2 plc Annual Report & Accounts Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How the scope of our audit addressed the key audit matter Valuation of unquoted investments (Note 1 and Note 7) We consider the valuation of unquoted investments to be the most significant audit area as there is a high level of estimation uncertainty involved in determining the unquoted investment valuations. There is an inherent risk of management override arising from the unquoted investment valuations being prepared by the Manager, who is remunerated based on factors including the net asset value of the Company. Our sample for the testing of unquoted investments was stratified according to risk considering, inter alia, the value of individual investments, the nature of the investment, the extent of the fair value movement and the subjectivity of the valuation technique. Our investments sample comprised those valued using more subjective techniques (earnings and revenue multiples). For all investments in our sample we: > Recalculated the value attributable to the Company, having regard to the application of enterprise value across the capital structures of the investee companies; > Challenged whether the valuation methodology was the most appropriate in the circumstances under the International Private Equity and Venture Capital Valuation (“IPEV”) Guidelines. We tested the key assumptions made in the valuation as described below; INDEPENDENT AUDITOR’S REPORT #### IndependentAuditor’s Report(continued) Overview 2021 2020 Key audit matters Valuation of Unquoted Investments 3 3 Materiality £1,400,000 (2020: £980,000) based on 2% (2020: 2%) of value of investments An overview of the scope of our audit Our audit was scoped by obtaining an understanding of the Company and its environment, including the Company’s system of internal control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement. As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of the valuation of investments which have a high level of estimation uncertainty involved in determining the unquoted investment valuations. ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 55 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Key audit matter How the scope of our audit addressed the key audit matter > Challenged and corroborated the inputs to the valuation with reference to management information of investee companies, market data and our own understanding, and assessed the impact of the estimation uncertainty concerning these assumptions and the disclosure of these uncertainties in the financial statements; > Reviewed the historical financial statements and any recent management information available to support assumptions about maintainable revenues and earnings used in the valuations; > Considered the revenue or earnings multiples applied by reference to observable listed company market data; and > Challenged the consistency and appropriateness of adjustments made to such market data in establishing the earnings multiple applied in arriving at the valuations adopted by obtaining independent multiples and performing sensitivity analysis on the investment valuations. Where appropriate, we performed a sensitivity analysis by developing our own point estimate where we considered that alternative input assumptions could reasonably have been applied and we considered the overall impact of such sensitivities on the portfolio of investments in determining whether the valuations as a whole are reasonable and free from bias. Key observations Based on the procedures performed we did not identify any indicators which may suggest that the unquoted investment valuations are inappropriate considering the level of estimation uncertainty. ![Graphics]() 56 British Smaller Companies VCT2 plc Annual Report & Accounts INDEPENDENT AUDITOR’S REPORT #### IndependentAuditor’s Report(continued) Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows: Company financial statements 2021 2020 £’000 £’000 Materiality 1,400 980 Basis for determining 2% (2020: 2%) of materiality investments Rationale for the As a Venture Capital benchmark applied Trust, the value of investments is the key measure of performance. Performance materiality 1,000 740 Basis for determining 75% (2020: 75%) of performance materiality materiality based on our knowledge and experience of the client, history of errors identified and low level of expected misstatements. Lower testing threshold We determined that for Revenue return before tax, a misstatement of less than materiality for the financial statements as a whole, could influence users of the financial statements as it is a measure of the Company’s performance of income generated from its investments after expenses. We have set a lower testing threshold for those items impacting revenue return of £190,000 (2020: £166,000) which is based on 10% of total expenditure excluding the incentive fee (2020: 10% of total expenditure excluding the credit risk fair value movement). Reporting threshold We agreed with the audit committee that we would report to them all individual audit differences in excess of £70,000 (2020: £49,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. Other information The directors are responsible for the other information. The other information comprises the information included in the Annual Report other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Corporate governance statement The Listing Rules require us to review the Directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit. ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 57 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Going concern and > The Directors’ statement with regards to the appropriateness of longer-term viability adopting the going concern basis of accounting and any material uncertainties identified; and > The Directors’ explanation as to their assessment of the Company’s prospects, the period this assessment covers and why the period is appropriate. Other Code provisions > Directors’ statement on fair, balanced and understandable; > Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks; > The section of the annual report that describes the review of effectiveness of risk management and internal control systems; and > The section describing the work of the audit committee. Other Companies Act 2006 reporting Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. Strategic report and In our opinion, based on the work undertaken in the course of the audit: Directors’ report > The information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and > The Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report. Directors’ remuneration In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. Matters on which we are required We have nothing to report in respect of the following matters in relation to to report by exception which the Companies Act 2006 requires us to report to you if, in our opinion: > Adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or > The Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or > Certain disclosures of Directors’ remuneration specified by law are not made; or > We have not received all the information and explanations we require for our audit. ![Graphics]() 58 British Smaller Companies VCT2 plc Annual Report & Accounts Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Extent to which the audit was capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non- compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below: We gained an understanding of the legal and regulatory framework applicable to the Company and the industry in which it operates from enquiries with management and from our sector knowledge, and considered the risk of acts by the Company which were contrary to applicable laws and regulations, including fraud. These included but were not limited to compliance with Companies Act 2006, the FCA listing and DTR rules, the principles of the AIC Code of Corporate Governance, industry practice represented by the AIC SORP, UK adopted international accounting standards, and qualification as a VCT under UK tax legislation as any breach of this would lead to the Company losing various deductions and exemptions from corporation tax. The engagement partner has assessed and confirmed that the engagement team collectively had the appropriate competence and capabilities to identify or recognize non-compliance with laws and regulations. We communicated relevant identified laws and regulations and potential fraud risks to all engagement team members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Our procedures included: > Agreement of the financial statement disclosures to underlying supporting documentation; > Enquiries of management and those charged with governance to confirm whether they are aware of any fraud or non-compliance with laws and regulations; > Review of minutes of Board and other Committee meetings throughout the period for instances of non-compliance with laws and regulations and fraud; > Obtaining an understanding of the control environment in monitoring compliance with laws and regulations; and > Obtaining the VCT compliance reports during the year and as at year end and reviewing their calculations to check that the Company was meeting its requirements to retain VCT status INDEPENDENT AUDITOR’S REPORT #### IndependentAuditor’s Report(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 59 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information We assessed the susceptibility of the financial statements to material misstatement, including fraud and determined the areas most susceptible to fraud to be management override of controls and the valuation of investments. Our procedures include those set out in the Key Audit Matters section above. We also: > Recalculated investment management fees in total; and > Obtained independent confirmation of bank balances. In addressing the risk of management override of internal controls we tested a sample of journals based on risk criteria and agreed these journals to supporting documentation and evaluated whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it. A further description of our responsibilities is available on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Vanessa-Jayne Bradley (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London, UK 21 March 2022 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). ![Graphics]() 60 British Smaller Companies VCT2 plc Annual Report & Accounts 2021 2020 Revenue Capital Total Revenue Capital Total Notes £000 £000 £000 £000 £000 £000 Gain on disposal of investments 7 - 5,342 5,342 - 1,669 1,669 Gains on investments held at fair value 7 - 20,702 20,702 - 1,615 1,615 Gain arising from the portfolio - 26,044 26,044 - 3,284 3,284 Income 2 661 - 661 2,752 - 2,752 Total income 661 26,044 26,705 2,752 3,284 6,036 Administrative expenses: Manager’s fee (374) (1,118) (1,492) (301) (903) (1,204) Incentive fee - (4,407) (4,407) - - - Other expenses (417) - (417) (581) - (581) 3 (791) (5,525) (6,316) (882) (903) (1,785) (Loss) profit before taxation (130) 20,519 20,389 1,870 2,381 4,251 Taxation 4 - - - - - - (Loss) profit for the year (130) 20,519 20,389 1,870 2,381 4,251 Total comprehensive (expense) income for the year (130) 20,519 20,389 1,870 2,381 4,251 Basic and diluted (loss) earnings per ordinary share 6 (0.09p) 14.80p 14.71p 1.44p 1.83p 3.27p The accompanying notes on pages 65 to 90 are an integral part of these financial statements. The Total column of this statement represents the Company’s Statement of Comprehensive Income, prepared in accordance with UK adopted international accounting standards. The supplementary Revenue and Capital columns are prepared under the Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (issued in April 2021 – “SORP”) published by the AIC. ## Statement ofComprehensive Income #### For the year ended 31 December 2021 FINANCIAL STATEMENTS ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 61 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information 2021 2020 Notes £000 £000 ASSETS Non-current assets at fair value through profit or loss Financial assets at fair value through profit or loss 7 70,019 49,115 Accrued income and other assets 8 493 444 70,512 49,559 Current assets Accrued income and other assets 8 217 511 Current asset investments 9 1,988 1,988 Cash and cash equivalents 9 19,201 19,002 21,406 21,501 LIABILITIES Current liabilities Trade and other payables 10 (4,543) (131) Net current assets 16,863 21,370 Net assets 87,375 70,929 Shareholders’ equity Share capital 11 15,808 14,133 Share premium account 24,122 16,735 Capital redemption reserve 88 88 Other reserves 2 2 Merger reserve 5,525 5,525 Capital reserve 12,818 22,461 Investment holding gains and losses reserve 7 28,009 9,254 Revenue reserve 1,003 2,731 Total shareholders’ equity 87,375 70,929 Net asset value per ordinary share 12 61.5p 55.0p The accompanying notes on pages 65 to 90 are an integral part of these financial statements. The financial statements were approved and authorised for issue by the Board of Directors and were signed on its behalf on 21 March 2022. Peter Waller Chairman #### At 31 December 2021 ## Balance Sheet ![Graphics]() 62 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS ## Statement ofChanges in Equity #### For the year ended 31 December 2021 Investment Share holding gains Share premium Other Capital and losses Revenue Total capital account reserves\* reserve reserve reserve equity £000 £000 £000 £000 £000 £000 £000 Balance at 31 December 2019 14,041 16,436 5,615 25,223 9,948 1,070 72,333 Revenue return for the year -----1,870 1,870 Expenses charged to capital - - - (903) - - (903) Investment holding gain on investments held at fair value ----1,615 - 1,615 Realisation of investments in the year - - - 1,669 - - 1,669 Total comprehensive income for the year - - - 766 1,615 1,870 4,251 Issue of shares – DRIS 92 319 - - - - 411 Issue costs \*\* - (20) - - - - (20) Purchase of own shares - - - (1,508) - - (1,508) Dividends - - - (4,329) - (209) (4,538) Total transactions with owners 92 299 - (5,837) - (209) (5,655) Realisation of prior year investment holding gains - - - 2,309 (2,309) - - Balance at 31 December 2020 14,133 16,735 5,615 22,461 9,254 2,731 70,929 Revenue return for the year -----(130) (130) Expenses charged to capital - - - (5,525) - - (5,525) Investment holding gain on investments held at fair value ----20,702 - 20,702 Realisation of investments in the year - - - 5,342 - - 5,342 Total comprehensive (expense) income for the year - - - (183) 20,702 (130) 20,389 Issue of share capital 1,276 5,774 - - - - 7,050 Issue of shares – DRIS 399 1,851 - - - - 2,250 Issue costs \*\* - (238) - (48) - - (286) Purchase of own shares - - - (1,942) - - (1,942) Dividends - - - (9,456) - (1,559) (11,015) Total transactions with owners 1,675 7,387 - (11,446) - (1,559) (3,943) Realisation of prior year investment holding gains - - - 1,986 (1,947) (39) - Balance at 31 December 2021 15,808 24,122 5,615 12,818 28,009 1,003 87,375 The accompanying notes on pages 65 to 90 are an integral part of these financial statements. ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 63 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Reserves available for distribution Under the Companies Act 2006 the capital reserve and the revenue reserve are distributable reserves. The table below shows amounts that are available for distribution. Capital Revenue reserve reserve Total £000 £000 £000 Distributable reserves as shown on previous page 12,818 1,003 13,821 Less: income not yet distributable - (968) (968) Reserves available for distribution\*\*\* 12,818 35 12,853 \* Other reserves include the capital redemption reserve, the merger reserve and the other reserve, which are non-distributable. The other reserve was created upon the exercise of warrants, the capital redemption reserve was created for the purchase and cancellation of own shares, and the merger reserve was created on the merger with British Smaller Technologies Company VCT plc. \*\* Issue costs include both fundraising costs and costs incurred from the Company’s DRIS. \*\*\* Following the circulation of the Annual Report to shareholders. The merger reserve was created to account for the difference between the nominal and fair value of shares issued as consideration for the acquisition of the assets and liabilities of British Smaller Technology Companies VCT plc. The reserve was created after meeting the criteria under section 131 of the Companies Act 1985 and the provisions of the Companies Act 2006 for merger relief. The merger reserve is a non-distributable reserve. The capital reserve and revenue reserve are both distributable reserves. The reserves total £13,821,000, representing a decrease of £11,371,000 during the year. The directors also take into account the level of the investment holding gains and losses reserve and the future requirements of the Company when determining the level of dividend payments. Of the potentially distributable reserves of £13,821,000 shown above, £968,000 relates to income not yet distributable. The Company held a General Meeting on 25 February 2022, at which shareholders approved the cancellation of the Company’s share premium account, subject to the sanction of the High Court. If approved,total share premium cancelled (including that arising from the fundraising allotment on 7 January 2022) will be available for distribution from the following dates: £000 Once relevant accounts incorporating the share premium cancellation have been filed 4,351 1 January 2023 12,085 1 January 2024 299 1 January 2025 7,387 Share premium account at 31 December 2021 24,122 1 January 2026 20,193 Cancelled share premium not yet distributable 44,315 #### For the year ended 31 December 2021 ![Graphics]() 64 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 2021 2020 Notes £000 £000 Net cash (outflow) inflow from operating activities (1,419) 938 Cash flows generated from (used in) investing activities Purchase of financial assets at fair value through profit or loss 7 (6,092) (3,997) Proceeds from sale of financial assets at fair value through profit or loss 7 11,182 5,772 Deferred consideration 7 471 - Net cash inflow from investing activities 5,561 1,775 Cash flows from (used in) financing activities Issue of ordinary shares 7,050 - Costs of ordinary share issues\* (286) (20) Purchase of own ordinary shares (1,942) (1,508) Dividends paid 5 (8,765) (4,127) Net cash outflow from financing activities (3,943) (5,655) Net increase (decrease) in cash and cash equivalents 199 (2,942) Cash and cash equivalents at the beginning of the year 19,002 21,944 Cash and cash equivalents at the end of the year 9 19,201 19,002 \* Issue costs include both fundraising costs and expenses incurred from the Company’s DRIS #### Reconciliation of Profit before Taxation to Net Cash (Outflow) Inflow fromOperating Activities 2021 2020 £000 £000 Profit before taxation 20,389 4,251 Increase (decrease) in trade and other payables 4,412 (35) (Increase) decrease in accrued income and other assets (117) 65 Gain on disposal of investments (5,342) (1,669) Gains on investments held at fair value (20,702) (1,615) Capitalised income (59) (59) Net cash (outflow) inflow from operating activities (1,419) 938 The accompanying notes on pages 65 to 90 are an integral part of these financial statements. ## Statement ofCash Flows #### For the year ended 31 December 2021 ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 65 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information 1. Principal Accounting Policies Basis of Preparation The accounts have been prepared on a going concern basis and in accordance with UK adopted international accounting standards. The directors’ assessment of going concern is set out in the Director’s Report on page 38. The financial statements have been prepared under the historical cost basis as modified by the measurement of investments at fair value through profit or loss. The accounts have been prepared in compliance with the recommendations set out in the Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ issued by the Association of Investment Companies (issued in April 2021 – “SORP”) to the extent that they do not conflict with International Accounting Standards in conformity with the Companies Act 2006. The financial statements are prepared in accordance with UK adopted international accounting standards (IFRSs) and interpretations in force at the reporting date. New standards coming into force during the year have not had a material impact on these financial statements. The Company has carried out an assessment of accounting standards, amendments and interpretations that have been issued by the IASB and that are effective for the current reporting period. The Company has determined that the transitional effects of the standards do not have a material impact. The financial statements are presented in sterling and all values are rounded to the nearest thousand (£000), except where stated. Financial Assets held at Fair Value through Profit or Loss - Investments Financial assets designated as at fair value through profit or loss (“FVPL”) at inception are those that are managed and whose performance is evaluated on a fair value basis, in accordance with the documented investment strategy of the Company. Information about these financial assets is provided internally on a fair value basis to the Company’s key management. The Company’s investment strategy is to invest cash resources in venture capital investments as part of the Company’s long-term capital growth strategy. Consequently, all investments are classified as held at fair value through profit or loss. All investments are measured at fair value on the whole unit of account basis with gains and losses arising from changes in fair value being included in the Statement of Comprehensive Income as gains or losses on investments held at fair value. Transaction costs on purchases are expensed immediately through profit or loss. Redemption premiums are designed to protect the value of the Company’s investment. These are accrued daily on an effective rate basis and included within the capital valuation of the investment (and thus classified under “Gains on investments held at fair value” in the Statement of Comprehensive Income). Although the Company holds more than 20 per cent of the equity of certain companies, it is considered that the investments are held as part of the investment portfolio, and their value to the Company lies in their marketable value as part of that portfolio. These investments are therefore not accounted for using equity accounting, as permitted by IAS 28 ‘Investments in associates’ and IFRS 11 ‘Joint arrangements’ which give exemptions from equity accounting for venture capital organisations. Under IFRS 10 “Consolidated Financial Statements”, control is presumed to exist when the Company has power over an investee (whether or not used in practice); exposure or rights; to variable returns from that investee, and ability to use that power to affect the reporting entities returns from the investees. The Company does not hold more than 50 per cent of the equity of any of the companies within the portfolio. The Company does not control any of the companies held as part of the investment portfolio. It is not considered that any of the holdings represent investments in subsidiary undertakings. ## Notes to theFinancial Statements ![Graphics]() 66 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 1. Principal Accounting Policies (continued) Valuation of Investments Unquoted investments are valued in accordance with IFRS 13 “Fair Value Measurement” and using the International Private Equity and Venture Capital Valuation Guidelines (“the IPEV Guidelines”) updated in December 2018. A detailed explanation of the valuation policies of the Company is included below. Initial Measurement The best estimate of the initial fair value of an unquoted investment is the cost of the investment. Unless there are indications that this is inappropriate, an unquoted investment will be held at this value within the first three months of investment. Subsequent Measurement Based on the IPEV Guidelines we have identified six of the most widely used valuation methodologies for unquoted investments. The Guidelines advocate that the best valuation methodologies are those that draw on external, objective market-based data in order to derive a fair value. Unquoted Investments > Revenue multiples. An appropriate multiple, given the risk profile and revenue growth prospects of the underlying company, is applied to the revenue of the company. The multiple is adjusted to reflect any risk associated with lack of marketability and to take account of the differences between the investee company and the benchmark company or companies used to derive the multiple. > Earnings multiple. An appropriate multiple, given the risk profile and earnings growth prospects of the underlying company, is applied to the maintainable earnings of the company. The multiple is adjusted to reflect any risk associated with lack of marketability and to take account of the differences between the investee company and the benchmark company or companies used to derive the multiple. > Net assets. The value of the business is derived by using appropriate measures to value the assets and liabilities of the investee company. > Discounted cash flows of the underlying business. The present value of the underlying business is derived by using reasonable assumptions and estimations of expected future cash flows and the terminal value, and discounted by applying the appropriate risk-adjusted rate that quantifies the risk inherent in the company. > Discounted cash flows from the investment. Under this method, the discounted cash flow concept is applied to the expected cash flows from the investment itself rather than the underlying business as a whole. > Price of recent investment. This may represent the most appropriate basis where a significant amount of new investment has been made by an independent third party. This is adjusted, if necessary, for factors relevant to the background of the specific investment such as preference rights and will be benchmarked against other valuation techniques. In line with the IPEV Guidelines the price of recent investment will usually only be used for the initial period following the round and after this an alternative basis will be found. Due to the significant subjectivity involved, discounted cash flows are only likely to be reliable as the main basis of estimating fair value in limited situations. Their main use is to support valuations derived using other methodologies and for assessing reductions in fair value. One of the valuation methods described above is used to derive the gross attributable enterprise value of the company. This value is then apportioned appropriately to reflect the respective debt and equity instruments in the event of a sale at that level at the reporting date. #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 67 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Quoted Investments Quoted investments are valued at active market bid price. An active market is defined as one where transactions take place regularly with sufficient volume and frequency to determine price on an ongoing basis. Income Dividends and interest are received from financial assets measured at fair value through profit or loss and are recognised on the same basis in the Statement of Comprehensive Income. This includes interest and preference dividends rolled up and/or payable at redemption. Interest income is also received on cash, cash equivalents and cash deposits. Dividend income on unquoted equity shares is recognised at the time when the right to the income is established. Expenses Expenses are accounted for on an accruals basis. Expenses are charged through the Revenue column of the Statement of Comprehensive Income, except for the Manager’s fee and incentive fees. Of the Manager’s fees, 75 per cent are allocated to the Capital column of the Statement of Comprehensive Income, to the extent that these relate to an enhancement in the value of the investments and in line with the Board’s expectation that over the long term 75 per cent of the Company’s investment returns will be in the form of capital gains. Tax relief is allocated to the Capital Reserve using a marginal basis. Incentive Fee The incentive fee is accounted for on an accruals basis. As further detailed in note 3, the incentive fee is calculated as 20 per cent of the amount by which the cumulative dividends per ordinary share paid as at the last business day in December in any year, plus the average of the Company’s middle market price per ordinary share on the five dealing days prior to that day, exceeds the Hurdle (as defined on page 71), multiplied by the number of ordinary shares issued and the ordinary shares under option. At the end of each reporting period, an accrual is recognised based upon the cumulative dividends per ordinary share paid to the reporting date, plus the average of the Company’s middle market price per ordinary share on the five dealing days prior to the reporting date. The incentive fee is charged wholly through the Capital column. Cash and Cash Equivalents Cash and cash equivalents include cash at hand as this meets the definition in IAS 7 ‘Statement of cash flows’ of a short term highly liquid investment that is readily convertible into known amounts of cash and subject to insignificant risk of change in value. Balances held in fixed term deposits are not classified as cash and cash equivalents, unless they are due for maturity within three months, as they do not meet the definition in IAS 7 ‘Statement of cash flows’ of short-term highly liquid investments. Cash flows classified as “operating activities” for the purposes of the Statement of Cash Flows are those arising from the Revenue column of the Income Statement, together with the items in the Capital column that do not fall to be easily classified under the headings for “Investing Activities” given by IAS 7 ‘Statement of cash flows’, being Manager’s fees and incentive fees payable to the Manager. The capital cash flows relating to acquisition and disposal of investments are presented under “investing activities” in the Statement of Cash Flows in line with both the requirements of IAS 7 and the positioning given to these headings by general practice in the industry. ![Graphics]() 68 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 1. Principal Accounting Policies (continued) Share Capital and Reserves Share Capital This reserve contains the nominal value of all shares allotted under offers for subscription. Share Premium Account This reserve contains the excess of gross proceeds less issue costs over the nominal value of shares allotted under offers for subscription, to the extent that it has not been cancelled. Capital Redemption Reserve The nominal value of shares bought back and cancelled is held in this reserve, so that the Company’s capital is maintained. Capital Reserve The following are included within this reserve: > Gains and losses on realisation of investments; > Realised losses upon permanent diminution in value of investments; > 75 per cent of the Manager’s fee expense, together with the related taxation effect to this reserve in accordance with the policy on expenses in note 1 of the financial statements; > Incentive fee payable to the Manager; > Capital dividends paid to shareholders; > Purchase and holding of the Company’s own shares; and > Credits arising from the cancellation of any share premium account. Investment Holding Gains and Losses Reserve Increases and decreases in the valuation of investments held at the year-end are accounted for in this reserve, except to the extent that the diminution is deemed permanent. Revenue Reserve This reserve includes all income from investments along with any costs associated with the running of the Company – less 75 per cent of the Manager’s fee expense as detailed in the Capital Reserve above. Taxation Due to the Company’s status as a venture capital trust and the continued intention to meet the conditions required to comply with Chapter 3 Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company’s investments which arises. Deferred tax is recognised on all temporary differences that have originated, but not reversed, by the balance sheet date. Deferred tax assets are only recognised to the extent that they are regarded as recoverable. Deferred tax is calculated at the tax rates that are expected to apply when the asset is realised. Deferred tax assets and liabilities are not discounted. Dividends Payable Dividends payable are recognised only when an obligation exists. Interim and special dividends are recognised when paid and final dividends are recognised when approved by shareholders in general meetings. #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 69 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Segmental Reporting In accordance with IFRS 8 ‘Operating segments’ and the criteria for aggregating reportable segments, segmental reporting has been determined by the directors based upon the reports reviewed by the Board. The directors are of the opinion that the Company has engaged in a single operating segment - investing in equity and debt securities within the United Kingdom - and therefore no reportable segmental analysis is provided. Critical Accounting Estimates and Judgements The preparation of financial statements in conformity with generally accepted accounting practice requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results may ultimately differ from those estimates. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are those used to determine the fair value of investments at fair value through profit or loss, as disclosed in note 7 to the financial statements. The fair value of investments at fair value through profit or loss is determined by using valuation techniques. As explained above, the Board uses its judgement to select from a variety of methods and makes assumptions that are mainly based on market conditions at each balance sheet date. The Board does not consider that there is any particular impact of climate change that would materially affect the estimate of fair value. 2. Income 2021 2020 £000 £000 Dividends from unquoted companies\* 328 2,237 Interest on loans to unquoted companies 273 391 Income from investments held at fair value through profit or loss 601 2,628 Interest on bank deposits 60 124 661 2,752 \* 2020 includes an ordinary dividend of £1.93 million received from ACC Aviation ![Graphics]() 70 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 3. Administrative Expenses 2021 2020 £000 £000 Manager's fee 1,492 1,204 Administration fee 70 69 1,562 1,273 Incentive fee 4,407 - Other expenses: Directors’ remuneration 96 105 General expenses 63 71 Listing and registrar fees 55 56 Auditor's remuneration - audit fees (excluding irrecoverable VAT) 41 35 Printing 34 33 Trail commission 33 60 Irrecoverable VAT 25 30 6,316 1,663 Fair value movement related to credit risk - 122 6,316 1,785 Ongoing charges figure 2.16% 2.45% Directors’ remuneration comprises only short term benefits including social security contributions of £8,000 (2020: £9,000). The directors are the Company’s only key management personnel. No fees are payable to the auditor in respect of other services (2020: £nil), apart from costs of £12,000 (2020: £nil) for audit-related assurance services which were charged to the share premium account. YFM Private Equity Limited has acted as Manager and performed administrative and secretarial duties for the Company under an agreement dated 28 November 2000, superseded by an agreement dated 31 October 2005 and as varied by agreements dated 8 December 2010, 26 October 2011, 16 November 2012, 17 October 2014, 7 August 2015 and 13 November 2019 (the “IA”). The agreement may be terminated by not less than twelve months’ notice given by either party at any time. Under an Investment Agreement dated 13 November 2019, YFM Private Equity Limited was appointed as the Company’s Alternative Investment Fund Manager. As a result, the Company was de-registered by the Financial Conduct Authority as a Small Registered Alternative Fund Manager on 24 March 2020 and responsibility for the custody of the Company’s investments passed to YFM Private Equity Limited on that date. The key features of the agreement are: > YFM Private Equity Limited receives a Manager’s fee, payable quarterly in advance, calculated at half-yearly intervals as at 30 June and 31 December. The fee is allocated between capital and revenue as described in note 1; #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 71 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information > The annual Manager’s fee payable to the Manager is 1.0 per cent on all surplus cash, defined as all cash above £10 million, unless the Hurdle has been met triggering an incentive payment in which case the amount determined to be surplus will be the excess over £5 million. The annual fee on all other assets is 2.0 per cent of net assets per annum. Based on the Company’s net assets at 31 December 2021 of £87,375,000, cash of £21,189,000 at that date, and the incentive payment for the year ended 31 December 2021 being made prior to 30 June 2022 this equates to approximately £1,611,000 per annum; > YFM Private Equity Limited shall bear the annual operating costs of the Company (including the Manager’s fee set out above but excluding any payment of the performance incentive fee, details of which are set out below and excluding VAT and trail commissions) to the extent that those costs exceed 2.9 per cent of the net asset value of the Company; and > Under the IA YFM Private Equity Limited also provides administrative and secretarial services to the Company for a fee of £46,000 per annum plus annual adjustments to reflect movements in the Retail Prices Index. This fee is charged fully to revenue, and totalled £70,000 for the year ended 31 December 2021 (2020: £69,000). When the Company makes investments into its unquoted portfolio, the Manager charges that investee an advisory fee. With effect from 1 October 2013, if the average of relevant fees exceeds 3.0 per cent of the total invested into new portfolio companies and 2.0 per cent into follow-on investments over the Company’s financial year, this excess will be rebated to the Company. As at 31 December 2021, the Company was due a rebate from the Manager of £nil (2020: £nil). Monitoring and directors’ fees the Manager receives from the investee companies are limited to a maximum of £40,000 (excluding VAT) per annum per company. The total remuneration payable to YFM Private Equity Limited under the IA in the year was £1,562,000 (2020: £1,273,000). Under the IA, YFM Private Equity Limited is entitled to receive fees from investee companies in respect of the provision of non-executive directors and other advisory services. YFM Private Equity Limited is responsible for paying the due diligence and other costs incurred in connection with proposed investments which for whatever reason do not proceed to completion. In the year ended 31 December 2021 the fees receivable by YFM Private Equity Limited from investee companies which were attributable to advisory and directors’ and monitoring fees amounted to £1,235,000 (2020: £1,009,000) of which £113,000 (2020: £93,000) was borne by the Company. Under the Subscription Rights Agreement dated 23 November 2001 between the Company, YFM Private Equity Limited and Chord Capital Limited (“Chord” formerly Generics Asset Management Limited), as amended by an agreement between those parties dated 31 October 2005, YFM Private Equity Limited and Chord have a performance-related incentive, structured so as to entitle them to an amount equivalent to 20 per cent of the amount by which the cumulative dividends per ordinary share paid as at the last business day in December in any year, plus the average of the middle market price per ordinary share on the five dealing days prior to that day, exceeds 120 pence per ordinary share, multiplied by the number of ordinary shares issued and the ordinary shares under option (if any) (the “Hurdle”). Under the terms of the Subscription Rights Agreement, once the Hurdle has been exceeded it is reset at that value going forward, which becomes the new Hurdle. Any subsequent exercise of these rights will only occur once the new Hurdle has been exceeded. The subscription rights are exercisable in the ratio 95:5 between the Manager and Chord Capital Limited. By a Deed of Assignment dated 19 December 2003 (together with a supplemental agreement dated 5 October 2005), the benefit of the YFM Private Equity Limited subscription right was assigned to YFM Private Equity Limited Carried Interest Trust (the “Trust”), an employee benefit trust formed for the benefit of certain employees of YFM Private Equity Limited and associated companies. Pursuant to a deed of variation dated 16 November 2012 between the Company, the trustees of the Trust and Chord, the Subscription Rights Agreement was varied so that the subscription rights will be exercisable in the ratio of 95:5 between the trustees of the Trust and Chord. Pursuant to a deed of variation dated 5 August 2014 the Subscription Rights Agreement was varied so that the recipient was changed from the Trust to YFM Private Equity Limited. Pursuant to a deed of variation dated 13 November 2019 the Subscription Rights Agreement was varied so that the recipients can elect to receive the incentive in the form of shares or cash. ![Graphics]() 72 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 3. Administrative Expenses (continued) As at 31 December 2021 the total of cumulative cash dividends paid and mid-market price was 135.5 pence per ordinary share. Consequently the Hurdle was exceeded and a performance related incentive of £4,407,000 is payable. The Hurdle for the year ending 31 December 2022 is reset at 135.5 pence per ordinary share. If the IA is terminated the beneficiaries of the Incentive Agreement will continue to be entitled to the Incentive Payment. The Incentive Payment will be modified so as to entitle the recipients to an Incentive Payment that is fair, having regard to all the circumstances. Under the terms of the offer launched with British Smaller Companies VCT plc on 2 February 2021, YFM Private Equity Limited was entitled to 2.5 per cent of gross subscriptions, less the cost of re-investment of intermediary commission. The net amount to be paid to YFM Private Equity Limited under this offer amounted to £176,000. Under the terms of the offer launched with British Smaller Companies VCT plc on 22 September 2021, YFM Private Equity Limited was entitled to 3.0 per cent of gross subscriptions, (3.5 per cent for Applications received from Applicants who did not invest their money through a financial intermediary advisor and invested directly into the Company) less the cost of re-investment of intermediary commission. The net amount to be paid to YFM Private Equity Limited under this offer amounted to £744,000. The details of directors’ remuneration are set out in the Directors’ Remuneration Report on page 50 under the heading “Directors’ Remuneration for the year ended 31 December 2021 (audited)”. 4. Taxation 2021 2020 Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 (Loss) profit before taxation (130) 20,519 20,389 1,870 2,381 4,251 (Loss) profit before taxation multiplied by standard rate of corporation tax in UK of 19% (2020 :19%) (25) 3,899 3,874 355 453 808 Effect of: UK dividends received (62) - (62) (412) - (412) Non-taxable profits on investments - (4,948) (4,948) - (624) (624) Deferred tax not recognised 87 1,049 1,136 57 171 228 Tax charge ------ The Company has no provided or unprovided deferred tax liability in either year. Deferred tax assets of £3,072,000 (2020: £1,198,000) calculated at 25% (2020: 19%) in respect of unrelieved management expenses (£12.29 million as at 31 December 2021 and £6.31 million as at 31 December 2020) have not been recognised as the directors do not currently believe that it is probable that sufficient taxable profits will be available against which assets can be recovered. Due to the Company’s status as a venture capital trust and the continued intention to meet with the conditions required to comply with Section 274 of the Income Tax Act 2007, the Company has not provided for deferred tax on any capital gains or losses arising on the revaluation or realisation of investments. #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 73 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information 5. Dividends Amounts recognised as distributions to equity holders in the period to 31 December: 2021 2020 Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 Interim dividend for the year ended 31 December 2021 of 1.5p (2020: 2.0p) per ordinary share - 1,934 1,934 189 2,409 2,598 Second interim dividend for the year ended 31 December 2021 of 1.5p (2020: 1.5p per ordinary share) 1,559 544 2,103 20 1,920 1,940 Third interim dividend for the year ended 31 December 2021 of 5.0p per ordinary share - 6,978 6,978 --- 1,559 9,456 11,015 209 4,329 4,538 Shares allotted under DRIS (2,250) (411) Dividends paid in Statement of Cash Flows 8,765 4,127 The first interim dividend of 1.5 pence per ordinary share was paid on 5 March 2021 to shareholders on the register as at 5 February 2021. The second interim dividend of 1.5 pence per ordinary share was paid on 25 October 2021 to shareholders on the register as at 24 September 2021. The third interim dividend of 5.0 pence per ordinary share was paid on 16 November 2021 to shareholders on the register as at 15 October 2021. An interim dividend of 1.5 pence per ordinary share in respect of the year ending 31 December 2022, amounting to approximately £2,700,000, will be paid on 6 May 2022. This dividend was not recognised in the year ended 31 December 2021 as the obligation did not exist at the balance sheet date. 6. Basic and Diluted Earnings per Ordinary Share The basic and diluted earnings per ordinary share is based on the profit after tax attributable to shareholders of £20,389,000 (2020: £4,251,000) and 138,592,343 (2020: 129,987,842) ordinary shares being the weighted average number of ordinary shares in issue during the year. The basic and diluted revenue (loss) earnings per ordinary share is based on the revenue (loss) profit for the year attributable to shareholders of £130,000 (2020: profit of £1,870,000) and 138,592,343 (2020: 129,987,842) ordinary shares being the weighted average number of ordinary shares in issue during the year. The basic and diluted capital earnings per ordinary share is based on the capital profit for the year attributable to shareholders of £20,519,000 (2020: £2,381,000) and 138,592,343 (2020: 129,987,842) ordinary shares being the weighted average number of ordinary shares in issue during the year. During the year the Company allotted 3,995,494 new ordinary shares in respect of its DRIS and 12,756,951 new ordinary shares from the fundraising. ![Graphics]() 74 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 6. Basic and Diluted Earnings per Ordinary Share (continued) The Company has also repurchased 3,553,337 of its own shares in the year, and these shares are held in the capital reserve. The total of 15,929,774 treasury shares has been excluded in calculating the weighted average number of ordinary shares for the period. The Company has no securities that would have a dilutive effect and hence basic and diluted earnings per ordinary share are the same. The Company has no potentially dilutive shares and consequently, basic and diluted earnings per ordinary share are equivalent in both the year ended 31 December 2021 and 31 December 2020. 7. Financial Assets at Fair Value through Profit or Loss - Investments IFRS 13, in respect of financial instruments that are measured in the balance sheet at fair value, requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: Level 1: quoted prices in active markets for identical assets or liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is defined as a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The quoted market price used for financial assets held by the Company is the current bid price. These instruments are included in level 1 and comprise AIM quoted investments and other fixed income securities classified as held at fair value through profit or loss. The Company held no such instruments in the current or prior year. Level 2: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. The Company held no such instruments in the current or prior year. Level 3: the fair value of financial instruments that are not traded in an active market (for example, investments in unquoted companies) is determined by using valuation techniques such as revenue or earnings multiples. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. All of the Company’s investments fall into this category at 31 December 2021. Each investment is reviewed at least quarterly to ensure that it has not ceased to meet the criteria of the level in which it is included at the beginning of each accounting period. The change in fair value for the current and previous year is recognised through profit or loss. There have been no transfers between these classifications in either period. All items held at fair value through profit or loss were designated as such upon initial recognition. Valuation of Investments Full details of the methods used by the Company are set out in note 1 of these financial statements. Where investments are held in quoted stocks, fair value is set at the market bid price. #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 75 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Movements in investments at fair value through profit or loss during the year to 31 December 2021 are summarised as follows: IFRS 13 measurement classification Level 3 Unquoted Investments £000 Opening cost 39,891 Opening investment holding gain 9,224 Opening fair value at 1 January 2021 49,115 Additions at cost 6,092 Capitalised income 59 Disposal proceeds (11,186) Net profit on disposal\* 5,237 Change in fair value 20,539 Foreign exchange gain 163 Closing fair value at 31 December 2021 70,019 Closing cost 42,037 Closing investment holding gain\*\* 27,982 Closing fair value at 31 December 2021 70,019 \* The net profit on disposal in the table above is £5,237,000 whereas that shown in the Statement of Comprehensive income is £5,342,000. The difference comprises deferred proceeds of £105,000 in respect of assets which have been disposed of in prior years and are not included in the portfolio at 1 January 2021 (see page 78). \*\* Following the merger between the Company and British Smaller Technologies Company VCT plc a total of £975,000 of negative goodwill was recognised in the investment holding gains and losses reserve in respect of the investments acquired. The relevant amount per investment is realised at the point of disposal to the capital reserve. At 31 December 2021 a total of £27,000 (2020: £30,000) was held on investments yet to be realised in the investment holdings gains and losses reserve. There were no individual reductions in fair value during the year that exceeded 5 per cent of the total assets of the Company (2020: £nil). Level 3 valuations include assumptions based on non-observable market data, such as discounts applied either to reflect changes in fair value of financial assets held at the price of recent investment, or to adjust revenue or earnings multiples. IFRS 13 requires an entity to disclose quantitative information about the significant unobservable inputs used. Of the Company’s investments, 78 per cent are held on a revenue multiple basis and 19 per cent on an earnings multiple basis, which have significant judgement applied to the valuation inputs. The table on page 76 sets out the range of Revenue Multiple (RM), Earnings Multiple (EM) and discounts applied in arriving at investments valued on these bases. The remaining 3 per cent are valued based on net asset value reviewed for change in fair value. ![Graphics]() 76 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 7. Financial Assets at Fair Value through Profit or Loss - Investments (continued) New Data & Retail & Software Revenue Multiple inputs Media Analytics Brands Applications 2021 Revenue Multiple Range 1.80-8.70 4.10-26.90 1.27 1.13-8.70 Revenue Multiple Weighted Average 6.96 21.68 1.27 8.07 2020 Revenue Multiple Range 5.4 6.50-15.30 1.47 3.50-6.50 Revenue Multiple Weighted Average 5.4 13.78 1.47 5.40 2021 Combined RM and/or Marketability Discount Range 60%-68% 19%-72% 44% 52%-76% Combined RM and/or Marketability Discount Weighted Average 64% 28% 44% 63% 2020 Combined RM and/or Marketability Discount Range 52%-60% 20%-72% 68% 60%-72% Combined RM and/or Marketability Discount Weighted Average 56% 28% 68% 67% New Data & Business Retail & Software Advanced Earnings Multiple inputs Media Analytics Services Brands Applications Manufacturing 2021 Earnings Multiple Range 10.16-15.15 13.66 6.90-15.15 15.00 10.76 11.73 Earnings Multiple Weighted Average 15.15 13.66 11.94 15.00 10.76 11.73 2020 EM Multiple Range 32.54 32.54-45.86 32.54 13.80 13.76 32.51 EM Multiple Weighted Average 32.54 39.10 32.54 13.80 13.76 32.51 2021 Combined EM and/or Marketability Discount Range 36%-64% 60% 20%-60% 24% 40% 60% Combined EM and/or Marketability Discount Weighted Average 64% 60% 44% 24% 40% 60% 2020 Combined EM and/or Marketability Discount Range 76% 60%-76% 72%-76% 76% 20% 76% Combined EM and/or Marketability Discount Weighted Average 76% 68% 76% 76% 20% 76% #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 77 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information The standard also requires disclosure, by class of financial instruments, if the effect of changing one or more inputs to reasonably possible alternative assumptions would result in a significant change to the fair value measurement. Each unquoted portfolio company has been reviewed in order to identify the sensitivity of the valuation methodology to using alternative assumptions. Where discounts have been applied (for example to revenue/earnings levels or multiple ratios) alternatives have been considered which still fall within the IPEV Guidelines (see page 66). For each unquoted investment, two scenarios have been modelled: more prudent assumptions (downside case) and more optimistic assumptions (upside case). Applying the downside alternative the value of the unquoted investments would be £3.6 million or 5.1 per cent lower. Using the upside alternative the value would be increased by £4.0 million or 5.7 per cent. Movements in investments at fair value through profit or loss during the previous year to 31 December 2020 are summarised as follows: IFRS 13 measurement classification Level 3 Unquoted Investments £000 Opening cost 37,995 Opening investment holding gain 9,918 Opening fair value at 1 January 2020 47,913 Additions at cost 3,997 Capitalised income 59 Disposal proceeds (6,138) Net profit on disposal 1,669 Change in fair value 1,801 Foreign exchange loss (186) Closing fair value at 31 December 2020 49,115 Closing cost 39,891 Closing investment holding gain 9,224 Closing fair value at 31 December 2020 49,115 ![Graphics]() 78 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 7. Financial Assets at Fair Value through Profit or Loss - Investments (continued) The following disposals took place in the year: Opening carrying Net proceeds value as at Profit (loss) from sale Cost 1 January 2021 on disposal £000 £000 £000 £000 Unquoted investments: Matillion Limited 5,946 321 2,539 3,407 Deep-Secure Ltd 3,279 500 1,966 1,313 KeTech Enterprises Limited 1,275 1,490 1,292 (17) Tissuemed Limited 599 48 65 534 Ncam Technologies Limited 87 87 87 - Macro Art Holdings Limited - 159 - - Friska Limited - 1,400 - - Total from unquoted investments 11,186 4,005 5,949 5,237 Deferred proceeds Business Collaborator Limited 300 - 300 - Bagel Nash Group Limited 100 - 66 34 Ness (Holdings) Limited 71 - - 71 Deferred proceeds received 471 - 366 105 Total proceeds received\* 11,657 4,005 6,315 5,342 \* The total from disposals in the year in the table above is £11,657,000 whereas that shown in the Statement of Cash Flows is £11,653,000. The difference comprises proceeds of £4,000 which were received after the year end. #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 79 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information The following disposals took place in the year to 31 December 2020: Opening carrying Net proceeds value as at Profit (loss) from sale Cost 1 January 2020 on disposal £000 £000 £000 £000 Unquoted investments: Business Collaborator Limited 5,390 1,340 3,458 1,932 RMS Group Holdings Limited 562 70 611 (49) Springboard Research Holdings Limited 120 120 120 - Bagel Nash Group Limited 66 630 280 (214) Total from unquoted investments 6,138 2,160 4,469 1,669 Significant Interests YFM Private Equity Limited, the Company’s Manager, also acts as manager to certain other funds that have invested in some of the companies within the current portfolio of the Company. Details of these investments are summarised in the following tables. At 31 December 2021 the Company held a significant holding of at least 20 per cent of the issued ordinary share capital, either individually or alongside commonly managed funds, in the following companies: Percentage Percentage of class held No of shares of class held by commonly held by the by the managed Company Principal activity Company Company\* funds\* ACC Aviation Group Limited Business Services 146,850 19% 69% Arcus Global Limited Software Applications 304,457 16% 37% Biz2Mobile Limited Data & Analytics 3,861,591 10% 26% DisplayPlan Holdings Limited New Media 1,260 12% 34% EL Support Services Limited\*\* Investment Company 3,500 50% 100% Elucidat Ltd Software Applications 2,301 8% 20% Force24 Ltd Software Applications 18,582 11% 34% Immunobiology Limited\*\* Lifesciences 62,485,280 27% 27% Intelligent Office UK (IO Outsourcing Limited t/a Intelligent Office) Business Services 106,609 18% 44% KeTech Enterprises Limited Data & Analytics 128,333 16% 47% Macro Art Holdings Limited New Media 100,000 13% 32% NB Technology Services Limited\*\* Investment Company 3,500 50% 100% Ncam Technologies Limited New Media 1,186,915 15% 51% OC Engineering Services Limited\*\* Investment Company 3,500 50% 100% Outpost VFX Limited New Media 2,389,486 8% 24% ![Graphics]() 80 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 7. Financial Assets at Fair Value through Profit or Loss - Investments (continued) Percentage Percentage of class held No of shares of class held by commonly held by the by the managed Company Principal activity Company Company\* funds\* Panintelligence (via Paninsight Limited) Data & Analytics 22,712 10% 35% Seven Technologies Holdings Limited Advanced Manufacturing 613,515 14% 60% SH Healthcare Services Limited\*\* Investment Company 3,500 50% 100% SharpCloud Software Limited Data & Analytics 26,340 13% 40% Sipsynergy (via Hosted Network Services Limited) Software Applications 6,093,201 20% 62% SP Manufacturing Services Limited\*\* Investment Company 3,500 50% 100% Springboard Research Holdings Limited Data & Analytics 171,892 13% 32% Tonkotsu Limited Retail & Brands 33,662 12% 38% Traveltek Group Holdings Limited Software Applications 36,190 15% 47% Unbiased EC1 Limited Software Applications 774,096 11% 30% Vuealta Group Limited Software Applications 2,207 7% 20% Vypr Validation Technologies Limited Data & Analytics 7,655 9% 22% Wakefield Acoustics (via Malvar Engineering Limited) Advanced Manufacturing 49,600 15% 37% Wooshii Limited New Media 972,207 13% 38% \* Fully diluted holding. \*\* The registered office of these significant holdings is given on the inside back cover. The amounts shown below are the net cost of investments as at 31 December 2021 and exclude those companies which are in receivership or liquidation. British Smaller British Smaller Other commonly Companies Companies managed VCT2 plc VCT plc funds Total £000 £000 £000 £000 ACC Aviation Group Limited 145 220 185 550 Arcus Global Limited 2,050 3,075 - 5,125 Arraco Global Markets Limited 1,620 2,430 - 4,050 Biz2Mobile Limited 1,265 1,898 - 3,163 DisplayPlan Holdings Limited 70 130 - 200 e2E Engineering Limited 600 900 - 1,500 Eikon Holdco Limited 500 750 250 1,500 EL Support Services Limited 500 500 - 1,000 Elucidat Ltd 1,800 2,700 - 4,500 #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 81 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information British Smaller British Smaller Other commonly Companies Companies managed VCT2 plc VCT plc funds Total £000 £000 £000 £000 Force24 Ltd 1,600 2,400 800 4,800 Frescobol Carioca Ltd 1,200 1,800 - 3,000 Intamac Systems Limited 905 302 - 1,207 Intelligent Office UK (IO Outsourcing Limited t/a Intelligent Office) 1,956 2,934 - 4,890 KeTech Enterprises Limited 10 10 10 30 Macro Art Holdings Limited 321 481 - 802 Matillion Limited 1,456 1,778 549 3,783 NB Technology Services Limited 500 500 - 1,000 Ncam Technologies Limited 1,675 2,512 1,577 5,764 OC Engineering Services Limited 500 500 - 1,000 Outpost VFX Limited 1,000 1,500 500 3,000 Panintelligence (via Paninsight Limited) 1,000 1,500 1,000 3,500 Seven Technologies Holdings Limited 1,221 1,677 6,046 8,944 SH Healthcare Services Limited 500 500 - 1,000 SharpCloud Software Limited 2,271 3,407 1,322 7,000 SP Manufacturing Services Limited 500 500 - 1,000 Springboard Research Holdings Limited 1,881 2,822 - 4,703 Sipsynergy (via Hosted Network Services Ltd) 1,636 2,163 1,201 5,000 TeraView Limited 377 377 - 754 Tonkotsu Limited 1,592 2,388 995 4,975 Traveltek Group Holdings Limited 1,163 1,715 3,577 6,455 Unbiased EC1 Limited 1,964 2,946 640 5,550 Vuealta Group Limited 1,399 2,099 428 3,926 Vypr Validation Technologies Limited 1,000 1,500 - 2,500 Wakefield Acoustics (via Malvar Engineering Limited) 720 1,080 - 1,800 Wooshii Limited 2,440 3,660 591 6,691 ![Graphics]() 82 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 8. Accrued income and other assets 2021 2020 £000 £000 Non-current assets: Accrued income on financial assets 493 444 Current assets: Accrued income on financial assets 107 479 Accrued income on cash, cash equivalents and cash deposits 3 3 Prepayments and accrued income 107 29 217 511 Non-current assets relates to income receivable on exit from the relevant investee company where this is expected to be more than one year from the balance sheet date. The carrying amounts of the Company’s accrued income are denominated in sterling. 9. Cash and Cash Equivalents 2021 2020 £000 £000 Cash at bank 19,201 19,002 Cash and Cash Equivalents 19,201 19,002 At 31 December 2021 a further £1.99 million (2020: £1.99 million) was also held in fixed term deposit accounts which were due to mature in April 2022. In accordance with the definition of cash and cash equivalents the amounts in both the current and prior year are shown separately as current asset investments on the face of the balance sheet. 10. Trade and Other Payables 2021 2020 £000 £000 Amounts payable within one year: Incentive fee 4,407 - Accrued expenses 136 131 4,543 131 #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 83 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information 11. Called-up Share Capital 2021 2020 Allotted, Allotted, called-up and called-up and fully paid fully paid £000 £000 Ordinary shares of 10 pence Issued 158,084,973 (2020: 141,332,528) including 15,929,774 shares held in treasury (2020: 12,376,437) 15,808 14,133 The movement in the year was as follows: Share Price Number Capital pence Date of shares £000 Total as at 1 January 2021 141,332,528 14,133 Issue of shares DRIS 53.5 5 Mar 2021 742,805 74 Issue of shares Fundraising 54.872-54.943 11 Mar 2021 12,756,951 1,276 Issue of shares DRIS 57.0 25 Oct 2021 760,733 76 Issue of shares DRIS 57.0 16 Nov 2021 2,491,956 249 As at 31 December 2021 (including treasury shares) 158,084,973 15,808 As at 31 December 2021 (excluding treasury shares) 142,155,199 The movement in the previous year to 31 December 2020 was as follows: Share Price Number Capital pence Date of shares £000 Total as at 1 January 2020 140,409,638 14,041 Issue of shares DRIS 44.56 21 Sep 2020 922,890 92 As at 31 December 2020 (including treasury shares) 141,332,528 14,133 As at 31 December 2020 (excluding treasury shares) 128,956,091 During the year the Company purchased 3,553,337 (2020: 3,067,345) of its own shares and these shares are held on the balance sheet in the Capital Reserve. Full details of the share purchases are set out in the Directors’ Report under the heading ‘Buy-Back and Issue of Shares’. The treasury shares have been included in calculating the number of ordinary shares in issue, and excluded in calculating the number of ordinary shares with voting rights in issue, at 31 December 2021 and 31 December 2020. ![Graphics]() 84 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 12. Basic and Diluted Net Asset Value per Ordinary Share The basic and diluted net asset value per ordinary share is calculated on attributable assets of £87,375,000 (2020: £70,929,000) and 142,155,199 (2020: 128,956,091) ordinary shares in issue at the year end. The treasury shares have been excluded in calculating the number of ordinary shares in issue at 31 December 2021. The Company has no potentially dilutive shares and consequently, basic and diluted net asset values per ordinary share are equivalent in both the years ended 31 December 2021 and 31 December 2020. 13. Total Return per Ordinary Share The Total Return per ordinary share is calculated on cumulative dividends paid of 78.0 pence per ordinary share (2020: 70.0 pence per ordinary share) plus the net asset value as calculated per note 12. 14. Financial Commitments There are no financial commitments at 31 December 2021 or 31 December 2020. 15. Events after the Balance Sheet Date The Company announced a new share offer on 22 September 2021, alongside British Smaller Companies VCT plc, with the intention of raising up to £40 million, in aggregate with an over-allotment facility of £20 million, in aggregate. This was fully subscribed and closed on 12 November 2021. The related allotment of 40,224,521 ordinary shares took place post year-end, on 7 January 2022, following which the Company received net proceeds of £24.2 million. 16. Financial Instruments The Company has no derivative financial instruments and has no financial asset or liability for which hedge accounting has been used in either year. The Company classifies its financial assets as either fair value through profit or loss or at amortised cost, and its financial liabilities, primarily accrued expenses, at amortised cost. It is the directors’ opinion that the carrying value of financial assets and liabilities approximates their fair value. Therefore, the directors consider all assets and liabilities to be carried at a valuation which equates to fair value. Investments are made in a combination of equity, fixed rate and variable rate financial instruments so as to comply with VCT legislation and provide potential future capital growth. Surplus funds are held in bank deposits until suitable qualifying investment opportunities arise. The Company has reviewed all contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain criteria set out in the standard. No embedded derivatives have been identified by the Company. #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 85 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information The accounting policies for financial instruments have been applied to the items below: Assets as per balance sheet 2021 2020 Assets at Assets at fair value fair value Other through profit Other through profit assets or loss assets or loss £000 £000 £000 £000 Non-current assets at fair value through profit or loss Financial assets - 70,019 - 49,115 Accrued income on financial assets - 493 - 444 Current assets Cash and cash equivalents 19,201 - 19,002 - Cash on fixed term deposit 1,988 - 1,988 - Accrued income on financial assets - 107 - 479 Accrued income on cash, cash equivalents and cash deposits 3-3- 21,192 70,619 20,993 50,038 Other assets – not financial instruments 107 - 29 - 21,299 70,619 21,022 50,038 Liabilities as per balance sheet 2021 2020 Other Other financial financial liabilities liabilities £000 £000 Trade and other payables (136) (131) Performance incentive fee (4,407) - (4,543) (131) Assets classified as fair value through profit or loss were designated as such upon initial recognition. The Company’s investing activities expose it to various types of risk that are associated with the financial instruments and markets in which it invests. The most important types of financial risk to which the Company is exposed are market risk, credit risk and liquidity risk. The nature and extent of the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Company are discussed below. There have been no changes since last year in the objectives, policies, and processes for managing and measuring risks facing the Company. ![Graphics]() 86 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 16. Financial Instruments (continued) 16a Market Risk Market Price Risk The Company invests in new and expanding businesses, the shares of which may not be traded on the stock market. Consequently, exposure to market factors, in relation to many investments, stems from market based measures that may be used to value unlisted investments. The market also defines the value at which investments may be sold. Returns are therefore maximised when investments are bought or sold at appropriate times in the economic cycle. Market price risk arises from uncertainty about the future prices of financial instruments held in accordance with the Company’s investment objectives. It represents the potential loss that the Company might suffer through holding market positions in the face of market movements. In addition, the ability of the Company to purchase or sell investments is also constrained by requirements set down for VCTs. All of the Company’s investments, are in unquoted companies held at fair value (2020: 100 per cent). The valuation methodology for these investments includes the application of externally produced revenue/earnings multiples. Therefore the value of the unquoted element of the portfolio is also indirectly affected by price movements on the listed markets. Investments have been valued in line with the valuation guidelines described within note 1. Those using revenue and earnings multiple methodologies include judgements regarding the level of discount applied to that revenue and earnings multiple. A 10 per cent decrease in the discount applied would have increased the net assets attributable to the Company's shareholders and the total profit for the year by £4,336,000 (5.0 per cent of net assets). An equal change in the opposite direction would have decreased net assets attributable to the Company's shareholders and the total profit for the year by £4,587,000 (5.2 per cent of net assets) . The largest single concentration of risk relates to the Company’s investment in Matillion Limited which constitutes 28.7 per cent of the net assets attributable to the Company’s shareholders. The Board seeks to mitigate this risk by diversifying the portfolio and monitors the status of all investments on an ongoing basis. The average investment, excluding those that have had their fair value reduced to nil, is 2.7 per cent (2020: 2.0 per cent) of the value of net assets. #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 87 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Comparison of Realised Proceeds to Unrealised Valuations The table below shows a comparison of the realised proceeds to the unrealised valuations one year prior to sale, for all disposals of unquoted investments over the last ten years. The uplift in valuation achieved by many portfolio companies partly reflects ongoing trading and also partly the removal of discounts on valuations due to decreasing risks relating to execution and marketability. Sale Valuation proceeds one year Increase Date of to date earlier (decrease) Disposal £000 £000 £000 Primal Pictures Limited Aug-12 1,916 1,008 908 Sirigen Group Limited Aug-12 1,962 517 1,445 Digital Healthcare Limited Aug-13 1,285 1,156 129 Waterfall Services Limited Jan-14 964 489 475 Insider Technologies (Holdings) Limited Oct-15 773 587 186 Callstream Group Limited Mar-16 785 773 12 Cambrian Park & Leisure Homes Limited Mar-17 - 1,251 (1,251) Ness (Holdings) Limited Mar-17 152 509 (357) Selima Holding Company Ltd May-17 1,406 462 944 Harvey Jones Holdings Limited Aug-17 559 617 (58) PowerOasis Limited Sep-18 - 365 (365) GTK (Holdco) Limited Dec-18 2,465 1,801 664 Mangar Health Limited Dec-18 3,675 2,641 1,034 Gill Marine Holdings Limited Dec-18 2,844 1,922 922 Leengate Holdings Limited Apr-19 1,291 1,179 112 The Heritage Window Company Holdco Limited Jun-19 - 280 (280) Eikon Holdco Limited (partial realisation) Oct-19 4,209 1,500 2,709 Business Collaborator Limited Mar-20 5,390 2,441 2,949 RMS Group Holdings Limited Jun-20 562 353 209 Bagel Nash Group Limited Oct-20 100 405 (305) Deep-Secure Ltd Jul-21 3,279 1,479 1,800 Tissuemed Limited Dec-21 599 65 534 34,216 21,800 12,416 Interest Rate Risk The Company’s venture capital investments include £3,755,000 (2020: £5,959,000) of loan stock in unquoted companies. The majority of this loan stock at 31 December 2021 is at fixed rates to guard against fluctuations in interest rates. As a result the Company is only exposed to cash flow interest rate risk on £611,000 (2020: £750,000) of its loan stock portfolio. ![Graphics]() 88 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 16. Financial Instruments (continued) The Company has some exposure to interest rates as a result of interest earned on bank deposits. Other financial assets (being accrued income) and other financial liabilities (being accrued expenses) attract no interest. A sensitivity analysis has not been performed as the amounts involved are not considered to be significant. 2021 2020 Weighted Weighted average average Weighted time for Weighted time for average which rate average which rate interest rate is fixed interest rate is fixed £000 % Months £000 % Months Fixed rate loan stock and preference shares 8,002 7.6 15 9,205 8.8 14 Cash on fixed term deposit 1,988 1.0 3 1,988 1.0 3 Combined 9,990 6.3 12 11,193 7.4 12 Exchange Rate Risk Of the Company’s financial assets through profit or loss, 35 per cent (2020: 26 per cent) are denominated in US dollars. A 5% increase in the £:$ exchange rate at 31 December 2021 would have decreased the net assets attributable to the Company’s shareholders and the total profit for the year by £1,193,000 (2020: £605,000). An equal change in the opposite direction would have increased the net assets attributable to the Company’s shareholders and the total profit for the year by £1,318,000 (2020: £668,000). 16b Credit Risk Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets excluding equity investments total £36,218,000 (2020: £34,339,000) which best represents the maximum credit risk exposure at the balance sheet date. The Company does not invest in floating rate instruments other than, on occasion, unquoted loan stock. Credit risk on unquoted loan stock held within unlisted investments is considered to be part of market risk as disclosed above. The fair value of other assets is not regarded as having changed due to the changes in credit risk in either year. Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk. Bankruptcy or insolvency of the broker may cause the Company’s rights with respect to securities held by the broker to be delayed or limited. The Manager monitors the Company’s risk by reviewing the broker’s internal control reports on a regular basis. The only significant assets not held at fair value are cash and cash equivalents and cash on fixed term deposit. The cash held by the Company is held across a number of banks to spread the risk. Bankruptcy or insolvency of these banks may cause the Company’s rights with respect to the cash held by the bank to be delayed or limited. The banks used by the Company are large and reputable. Should the credit quality or the financial position of the banks deteriorate significantly the Manager will move the cash holdings to another bank. #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 89 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information The maturities of the loan stock portfolio are as follows: 2021 2020 £000 £000 <1 year 1-2 years 2-5 years <1 year 1-2 years 2-5 years Unquoted loan investments 2,053 591 1,111 4,330 832 797 An aged analysis of the unquoted loan investments included above, which are past due but not individually impaired, is set out below. For this purpose these loans are considered to be past due when any payment due date under the loan’s contractual terms (such as payment of interest) is received late or missed. The full value of the loan is given even though, in some cases, the only default is in respect of interest. 2021 2020 £000 £000 < 1 year < 1 year < 1-2 years Loans to investee companies past due 400 1,332 400 Included within unquoted loan investments are £nil (2020: £nil) of loans which are past their due date but have been re-negotiated. 16c Liquidity Risk The risk to the Company relates to liabilities which fall due within one year. These liabilities are deemed immaterial and as such the risk associated with them is minimal. The Company needs to retain enough liquid resources to support the financing needs of its investment businesses. To meet this aim the Company places its surplus funds in bank interest deposit accounts. Investments in liquid funds are held for the purpose of liquidity whilst waiting for suitable qualifying investment opportunities to arise. The Company’s liquidity risk is managed on an ongoing basis by the Manager in accordance with policies and procedures in place. The cash requirements of the Company in respect of each investment are assessed at monthly portfolio meetings. The Company’s overall liquidity risks are monitored on a quarterly basis by the Board. The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses. Of the Company’s assets 22.0 per cent (2020: 26.8 per cent) are in the form of liquid cash. There are no undrawn committed borrowing facilities at either year end. The Company does not have a material amount of liabilities at the year end. ![Graphics]() 90 British Smaller Companies VCT2 plc Annual Report & Accounts FINANCIAL STATEMENTS 17. Capital Management The Company’s objectives when managing capital are: > To safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and > To ensure sufficient liquid resources are available to meet the funding requirements of its investments and to fund new investments where identified. The Company has no external debt; consequently all capital is represented by the value of share capital, distributable and other reserves. Total shareholder equity at 31 December 2021 was £87,375,000 (2020: £70,929,000). In order to maintain or adjust its capital structure the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets. There have been no changes in capital management objectives or the capital structure of the business from the previous year. The Company is not subject to any externally imposed capital requirements. 18. Related Party Transactions Fees payable during the year to the directors and their interests in the shares of the Company are disclosed within the Directors’ Remuneration Report on page 50. There were no amounts outstanding and due to the directors at 31 December 2021 (2020: £nil). #### Notes to theFinancial Statements(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 91 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information #### BRITISH SMALLER COMPANIES VCT2 PLCNo: 04084003 ## Notice of theAnnual General Meeting Ordinary Resolutions (1) That the annual report and accounts for the year ended 31 December 2021 be received. (2) That the Directors' Remuneration Report for the year ended 31 December 2021 be approved other than the part of such report containing the Directors’ Remuneration Policy. (3) That Mr P C Waller be re-elected as a director. (4) That Ms B L Anderson be re-elected as a director. (5) That Mr R S McDowell be re-elected as a director. (6) That BDO LLP be re-appointed as auditor to the Company to hold office until the conclusion of the next general meeting at which accounts are laid before the Company and that the directors be authorised to fix their remuneration. (7) That the directors be and are hereby generally and unconditionally authorised in accordance with Section 551 of the Companies Act 2006 (the "Act") to exercise all the powers of the Company to allot shares in the Company or to grant rights to subscribe for or to convert any security into shares in the Company up to an aggregate nominal amount of £10,000,000, during the period commencing on the passing of this Resolution and expiring on the later of 15 months from the passing of this Resolution or the next Annual General Meeting of the Company (unless previously revoked, varied or extended by the Company in general meeting), but so that this authority shall allow the Company to make before the expiry of this authority offers or agreements which would or might require shares in the Company to be allotted, or rights to subscribe for or to convert any security into shares to be granted, after such expiry and that all previous authorities given to the directors be and they are hereby revoked, provided that such revocation shall not have retrospective effect. Special Resolutions (8) That the directors be and are hereby empowered in accordance with Section 570(1) of the Act during the period commencing on the passing of this Resolution and expiring at the conclusion of the Company's next Annual General Meeting, or on the expiry of 15 months following the passing of this Resolution, whichever is the later, (unless previously revoked, varied or extended by the Company in general meeting), to allot equity securities (as defined in Section 560 of the Act) for cash pursuant to the general authority conferred upon the directors in Resolution 7 above as if Section 561 of the Act did not apply to any such allotment provided that this power is limited to the allotment of equity securities in connection with the allotment for cash of equity securities up to an aggregate nominal amount of £10,000,000, but so that this authority shall allow the Company to make offers or agreements before the expiry and the directors may allot securities in pursuance of such offers or agreements as if the powers conferred hereby had not so expired. This power applies in relation to a sale of shares which is an allotment of equity securities by virtue of Section 560(3) of the Act as if in the first paragraph of this Resolution the words "pursuant to the general authority conferred upon the directors in Resolution 7 above" were omitted. (9) That the Articles of Association of the Company be amended to increase the limit on the aggregate remuneration of the non-executive directors from £100,000 to £110,000 by replacing the figure of £100,000 appearing in Article 128 with £110,000. NOTICE IS HEREBY GIVEN that the ANNUAL GENERAL MEETING of the Company will be held at 33 St James Square, London SW1Y 4JS on 13 June 2022 at 12:00 noon for the following purposes: To consider and, if thought fit, pass the following Resolutions: COMPANY INFORMATION ![Graphics]() 92 British Smaller Companies VCT2 plc Annual Report & Accounts (10) That in substitution for any existing authority but without prejudice to the exercise of any such power prior to the date hereof, the Company be generally and unconditionally authorised to make market purchases (within the meaning of Section 693(4) of the Act) of ordinary shares of 10 pence in the capital of the Company provided that: [1] the maximum aggregate number of ordinary shares that may be purchased is 27,338,720, being 14.99 per cent of the issued ordinary shares as at 21 March 2022; [2] the maximum price (excluding expenses) which may be paid for an ordinary share is an amount equal to the maximum amount permitted to be paid in accordance with the rules of the UK Listing Authority in force as at the date of purchase; [3] the minimum price (excluding expenses) which may be paid for an ordinary share is its nominal value; [4] this authority shall take effect from 13 June 2022 and shall expire on the conclusion of the Company’s Annual General Meeting in 2025 or on 13 June 2025, whichever is the later; and [5] the Company may make a contract or contracts to purchase ordinary shares under this authority before the expiry of the authority, which will or may be executed wholly or partly after the expiry of the authority and may make a purchase of ordinary shares in pursuance of any such contract or contracts. By order of the Board The City Partnership (UK) Limited Company Secretary 21 March 2022 Registered office: 5th Floor, Valiant Building, 14 South Parade, Leeds LS1 5QS Information regarding the Annual General Meeting, including the information required by section 311A of the Companies Act 2006, is available from www.bscfunds.com. COMPANY INFORMATION #### Notice of theAnnual General Meeting(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 93 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Notes: (a) Any member of the Company entitled to attend and vote at the Annual General Meeting is also entitled to appoint one or more proxies to attend, speak and vote instead of that member. Any such appointment can only be made using the procedures set out in these notes and the notes of the Form of Proxy. A member may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A proxy may demand, or join in demanding, a poll. A proxy need not be a member of the Company but must attend the Annual General Meeting in order to represent their appointer. A member entitled to attend and vote at the Annual General Meeting may appoint the Chairman or another person as their proxy although the Chairman will not speak for the member. A member who wishes their proxy to speak for them should appoint their own choice of proxy (not the Chairman) and give instructions directly to that person. If you are not a member of the Company but you have been nominated by a member of the Company to enjoy information rights, you do not have a right to appoint any proxies under the procedures set out in these notes. Please read note (k) below. Under section 319A of the Companies Act 2006, the Company must answer any question a member asks relating to the business being dealt with at the Annual General Meeting unless: • answering the question would interfere unduly with the preparation for the Annual General Meeting or involve the disclosure of confidential information; • the answer has already been given on a website in the form of an answer to a question; or • it is undesirable in the interests of the Company or the good order of the Annual General Meeting that the question be answered. (b) To be valid, a Form of Proxy must be completed and signed and with the power of attorney or other written authority, if any, under which it is signed or an office or notarially certified copy or a copy certified in accordance with the Powers of Attorney Act 1971 of such power and written authority, must be delivered to Link Group, PXS1 Central Square, Wellington Street, Leeds, LS1 4DL not less than 48 hours (excluding weekends and public holidays) before the time appointed for holding the Annual General Meeting or adjourned meeting at which the person named in the Form of Proxy proposes to vote. In the case of a poll taken more than 48 hours (excluding weekends and public holidays) after it is demanded, the document(s) must be delivered as aforesaid not less than 24 hours (excluding weekends and public holidays) before the time appointed for taking the poll, or where the poll is taken not more than 48 hours (excluding weekends and public holidays) after it was demanded, be delivered at (and prior to the commencement of) the meeting at which the demand is made. If no voting indication is given in the Form of Proxy, your proxy will vote (or abstain from voting) as they think fit in relation to any matter put to the Annual General Meeting. (c) To be valid, any Form of Proxy or other instrument appointing a proxy, must be returned by no later than 12:00 noon on 9 June 2022 through any one of the following methods: i) by post, courier or (during normal business hours only) hand to the Company’s UK registrar at: Link Group PXS1 Central Square Wellington Street Leeds LS1 4DL; ii) electronically through the website of the Company’s UK registrar at www.signalshares.com; or iii) in the case of shares held through CREST, via the CREST system (see note (p) below). (d) If you return more than one proxy appointment, either by paper or electronic communication, the appointment received last by the Registrar before the latest time for the receipt of proxies will take precedence. You are advised to read the terms and conditions of use carefully. Electronic communication facilities are open to all shareholders and those who use them will not be disadvantaged. (e) The return of a completed Form of Proxy, electronic filing or any CREST Proxy Instruction (as described in note (p) below) will not prevent a shareholder from attending the Meeting and voting in person if they wish to do so. (f) In order to revoke a proxy instruction a member will need to inform the Company by sending a signed hard copy notice clearly stating the intention to revoke the proxy appointment to Link Group, PXS1, Central Square, Wellington Street, Leeds, LS1 4DL. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the revocation notice. The revocation notice must be received by Link Group before the Annual General Meeting or the holding of a poll subsequently thereto. If a member attempts to revoke their proxy appointment but the revocation is received after the time specified then, subject to note (g) directly below, the proxy appointment will remain valid. (g) Completion and return of a Form of Proxy will not preclude a member of the Company from attending and voting in person. If a member appoints a proxy and that member attends the Annual General Meeting in person, the proxy appointment will automatically be terminated. (h) Copies of the directors’ Letters of Appointment, the Register of Directors’ Interests in the ordinary shares of the Company, a copy of the amended articles of association (marked up to show the changes) and a copy of the current articles of association of the Company will be available for inspection at the registered office of the Company during usual business hours on any weekday (weekends and public holidays excluded) from the date of this Notice, until the end of the Annual General Meeting and at the Annual General Meeting venue itself for at least 15 minutes prior to and during the meeting. ![Graphics]() (i) Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, the Company has specified that only those holders of the Company’s shares registered on the Register of Members of the Company as at close of business on 9 June 2022 or, in the event that the Annual General Meeting is adjourned, on the Register of Members at close of business on the day two days before the time of any adjourned meeting, shall be entitled to attend and vote at the said Annual General Meeting in respect of such shares registered in their name at the relevant time. Changes to entries on the Register of Members after close of business on 9 June 2022 or, in the event that the Annual General Meeting is adjourned, on the Register of Members less than 48 hours before the time of any adjourned meeting, shall be disregarded in determining the right of any person to attend and vote at the Annual General Meeting. (j) As at 21 March 2022 the Company's issued share capital comprised 182,379,720 ordinary shares of 10 pence each with a further 15,929,774 shares held in treasury. Those treasury shares represented 8.0 per cent of the total issued share capital (including treasury shares) at the aforementioned date. Each ordinary share carries one voting right at the Annual General Meeting of the Company and so the total number of voting rights in the Company as at 21 March 2022 was 182,379,720. The website referred to above will include information on the number of ordinary shares and voting rights. (k) If you are a person who has been nominated under section 146 of the Companies Act 2006 to enjoy information rights (“Nominated Person”): • You may have a right under an agreement between you and the member of the Company who has nominated you to have information rights (“Relevant Member”) to be appointed or to have someone else appointed as a proxy for the Annual General Meeting; • If you either do not have such a right or if you have such a right but do not wish to exercise it, you may have a right under an agreement between you and the Relevant Member to give instructions to the Relevant Member as to the exercise of voting rights; • Your main point of contact in terms of your investment in the Company remains the Relevant Member (or, perhaps your custodian or broker) and you should continue to contact them (and not the Company) regarding any changes or queries relating to your personal details and your interest in the Company (including any administrative matters). The only exception to this is where the Company expressly requests a response from you. (l) A company which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers as a member provided that no more than one corporate representative exercises powers over the same share. (m) In the case of joint members, any one of them may sign the Form of Proxy. The vote of the person whose name stands first in the register of members of the Company will be accepted to the exclusion of the votes of the other joint holders. (n) A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given on the Form of Proxy, the proxy will vote or abstain from voting at their discretion. The proxy will vote (or abstain from voting) as they think fit in relation to any other matter which is put before the Annual General Meeting. (o) Members may not use any electronic address provided either in this Notice of Annual General Meeting, or any related documents (including the Chairman's letter and Form of Proxy), to communicate with the Company for any purposes other than those expressly stated. (p) CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland’s specifications, and must contain the information required for such instruction, as described in the CREST Manual (available via www.euroclear.com/CREST). The message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA10) not less than 48 hours (excluding weekends and public holidays) before the time of the Annual General Meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 94 British Smaller Companies VCT2 plc Annual Report & Accounts #### Notice of theAnnual General Meeting(continued) COMPANY INFORMATION ![Graphics]() To be used at the Annual General Meeting of the Company to be held at 33 St James Square, London SW1Y 4JS, on 13 June 2022 at 12:00 noon being a member/members of the above named Company entitled to attend and vote at the Annual General Meeting of the Company hereby appoint the Chairman of the Annual General Meeting or (see notes (2) to (6)) as my/our proxy to vote for me/us on my/our behalf at the Annual General Meeting of the Company to be held on 13 June 2022 at 12:00 noon and at any adjournment thereof. n Please tick here if this proxy is one of multiple proxy appointments being made (see note 2) My/our proxy is to vote on the resolutions as indicated below. Please indicate with an “x” how you wish your vote to be cast. If no voting indication is given, your proxy will vote or abstain from voting on the resolutions at their discretion. For Against Withheld Ordinary Resolutions 1. To receive the annual report and accounts n n n 2. To approve the Directors’ Remuneration Report n n n 3. To re-elect Mr P C Waller as a director n n n 4. To re-elect Ms B L Anderson as a director n n n 5. To re-elect Mr R S McDowell as a director n n n 6. To re-appoint BDO LLP as auditor n n n 7. To authorise the directors to allot shares n n n Special Resolutions 8. To waive pre-emption rights in respect of the allotment of shares n n n 9. To increase the limit on directors’ remuneration n n n 10. To authorise the Company to make purchases of its own shares n n n Please refer to notes overleaf. Please complete, sign and date, detach and return the Form of Proxy in the pre-paid envelope provided OR alternatively submit your proxy vote using the on-line facility at www.signalshares.com. You will be asked to enter your investor code, surname and postcode to be able to lodge your vote. Your investor code can be found on your share certificate or recent tax voucher. British Smaller Companies VCT2 plc Annual Report & Accounts 95 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information #### British Smaller Companies VCT2 plc ## Form of Proxy Signature I / We of Dated 2022 # ![Graphics]() 96 British Smaller Companies VCT2 plc Annual Report & Accounts COMPANY INFORMATION NOTES 1. The Notice of the Annual General Meeting is set out on pages 91 to 94 of the annual report. 2. Any member of the Company entitled to attend and vote at the Annual General Meeting is also entitled to appoint one or more proxies to attend, speak and vote instead of that member. Any such appointment can only be made using the procedures set out in these notes and set out in the Notice of the Annual General Meeting. A member may appoint more than one proxy in relation to the Annual General Meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A proxy may demand, or join in demanding, a poll. A proxy need not be a member of the Company but must attend the Annual General Meeting in order to represent their appointer. A member entitled to attend and vote at the Annual General Meeting may appoint the Chairman or another person as their proxy although the Chairman will not speak for the member. A member who wishes their proxy to speak for them should appoint their own choice of proxy (not the Chairman) and give instructions directly to that person. 3. If you wish to appoint a proxy of your own choice delete the words “the Chairman of the Annual General Meeting” and insert the name and address of the person whom you wish to appoint in the space provided. 4. To be valid, a Form of Proxy and the power of attorney or other written authority, if any, under which it is signed or an office or notarially certified copy or a copy certified in accordance with the Powers of Attorney Act 1971 of such power and written authority, must be delivered to Link Group, PXS1, Central Square, 29 Wellington Street, Leeds, LS1 4DL not less than 48 hours (excluding weekends and public holidays) before the time appointed for holding the Annual General Meeting or adjourned meeting at which the person named in the Form of Proxy proposes to vote. In the case of a poll taken more than 48 hours (excluding weekends and public holidays) after it is demanded, the document(s) must be delivered as aforesaid not less than 24 hours (excluding weekends and public holidays) before the time appointed for taking the poll, or where the poll is taken not more than 48 hours (excluding weekends and public holidays) after it was demanded, be delivered at (and prior to the commencement of) the meeting at which the demand is made. If you would like to submit your form of proxy using the web-based voting facility go to www.signalshares.com. You will be asked to enter your investor code, surname and postcode to be able to lodge your vote. Your investor code can be found on your share certificate or recent tax voucher. 5. Any alterations to the Form of Proxy must be initialled by the person who has signed the Form of Proxy. 6. In order to revoke a proxy instruction a member will need to inform the Company by sending a signed hard copy notice clearly stating the intention to revoke the proxy appointment to Link Group, PXS1, Central Square, 29 Wellington Street, Leeds, LS1 4DL. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the revocation notice. The revocation notice must be received by Link Group before the Annual General Meeting or the holding of a poll subsequently thereto. If a member attempts to revoke their proxy appointment but the revocation is received after the time specified then, subject to Note 9 below, the proxy appointment will remain valid. 7. In the case of a company, this Form of Proxy must be executed under its common seal or signed on its behalf by its attorney or a duly authorised officer of the company. 8. In the case of joint shareholders, any one of them may sign. The vote of the person whose name stands first in the register of members will be accepted to the exclusion of the votes of the other joint holders. 9. Completion and return of a Form of Proxy will not preclude a member of the Company from attending and voting in person. If a member appoints a proxy and that member attends the Annual General Meeting in person, the proxy appointment will automatically be terminated. 10. A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given, the proxy will vote or abstain from voting at their discretion on any other matter which is put before the Annual General Meeting. 11. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. Please complete, sign and date, detach and return the Form of Proxy in the pre-paid envelope provided. #### Form of Proxy(continued) ![Graphics]() British Smaller Companies VCT2 plc Annual Report & Accounts 97 Strategic Report Financial Overview Corporate Governance Independent Auditor’s Report Financial Statements Company Information Manager YFM Private Equity Limited 5th Floor, Valiant Building 14 South Parade Leeds LS1 5QS Registrars Link Group Central Square 29 Wellington Street Leeds LS1 4DL Solicitors Howard Kennedy LLP No.1 London Bridge London SE1 9BG Stockbrokers Panmure Gordon (UK) Limited One New Change London EC4M 9AF Promoter RAM Capital Partners LLP 4 Staple Inn London WC1V 7QH Independent Auditor BDO LLP 55 Baker Street London W1U 7EU VCT Status Adviser Philip Hare & Associates LLP Hamilton House 1 Temple Avenue London EC4Y 0HA Bankers Santander UK plc 44 Merrion Street Leeds LS2 8JQ Company Secretary The City Partnership (UK) Limited 110 George Street Edinburgh EH2 4LH ## Advisers tothe Company #### Registered Offices ofSignificant Holdings COMPANY INFORMATION Investment Companies EL Support Services Limited NB Technology Services Limited OC Engineering Services Limited SH Healthcare Services Limited SP Manufacturing Services Limited 5th Floor Valiant Building 14 South Parade Leeds, LS1 5QS Immunobiology Limited Babraham Research Campus Babraham Cambridge CB22 3AT Sipsynergy (via Hosted Network Services Limited) Wessex House Upper Market Street Eastleigh Hampshire SO50 9FD ![Graphics]() #### Transforming small businesses #### bscfunds.com #### Britis h #### Sma ll er Com p anies VCT2 plc 5t h F l oor, V a V V #### l ian t B ui ld in g 14 #### S out h P a r a d e L ee ds L S1 5 Q S T e T T #### l e ph one 0 11 3 244 1 00 0 #### Emai l i n f o@ f f yf mep. c om