- 29th June 2018
- Posted by: Edward Kirkby
- Category: Venture Capital Trusts
The Venture Capital Trust (VCT) Scheme is designed to encourage indirect investment in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange. Individuals who make an investment do so through Venture Capital Trusts.
Venture Capital Trusts (VCTs) can be likened to investment trusts and are run by fund managers who are usually members of larger investment groups. VCTs invest in companies admitted to trading on a regulated market. By investing in trading companies, VCTs help to provide them with the funds they need to develop and grow.
Investors can subscribe for, or buy, shares in a VCT. By doing so, their investment risk is spread over a number of companies. In return for their investment, investors can benefit from the following Tax Reliefs:
- Dividend Relief – Exception from Income Tax on dividends from ordinary shares in VCTs. Dividend Relief can be received for both newly issued shares and second-hand shares acquired, for example, through the Stock Exchange.
- Income Tax Relief at 30% of the amount subscribed for any shares issued in the 2006-07 Tax Year and onwards. This relief can be received for the tax year in which the shares were issued as long as you subscribed for the shares on your own behalf, the shares were issued to you and they are held for at least 5 years. The shares must be new ordinary shares and must not carry any preferential rights or rights of redemption at any time within 5 years from the date of issue.
- The Income Tax Relief at 30% can be set against any Income Tax Liability that is due, whether at the lower, basic or higher rate.
- Disposal Relief – Exemption from Capital Gains Tax on any gain made when you dispose of your VCT shares. Disposal Relief can be received for both newly issued shares and second-hand shares acquired, for example, through the Stock Exchange.
In order to qualify for the above Tax Reliefs under the VCT Scheme, you must invest in a company which has been approved as a VCT. For HMRC to approve a company as a VCT, the company must meet the following conditions:
- Its income for its most recent accounting period must have been wholly or mainly from shares or securities.
- Throughout the accounting period, at least 70% of its investments must have been ‘qualifying holdings’. Qualifying holdings are shares or securities in companies which meet the conditions of the scheme and which were issued to the company and have been held by it ever since.
- Throughout the accounting period, at least 70% of its qualifying holdings must have been holdings of ordinary shares with limited preferential rights to dividends or to the company’s assets on its winding up, and no right to be redeemed.
- At no time in the period must its holding in any company have represented more than 15% of its investments.
- Throughout the accounting period, its ordinary shares must have been listed on a recognised Stock Exchange.
- It must not have retained more than 15% of the income it derived in that period from shares or securities.
- Throughout that period the VCT has not made an investment in any company which exceeds the £5 million maximum annual investment which the company is permitted to receive via any government support measure approved as compatible with the European Community Guidelines on Risk Capital Investments in Small and Medium-sized Enterprises.
- To retain approval, the company must continue to satisfy all the conditions during each later accounting period.
If a company issues any of its shares or securities to a VCT, it must meet certain conditions if those shares or securities are to form part of the VCTs qualifying holdings. These conditions concern both the type of company and the size and mix of investment. These conditions include the following:
VCT Unquoted Status
The company must be unquoted for VCT purposes. This means that none of its shares, stocks, debentures or other securities can be listed on a recognised stock exchange. Companies whose shares and securities are dealt in solely on the Alternative Investment Market (AIM) of the London Stock Exchange or on two of the Plus Markets are unquoted companies. Shares or securities in a company which ceases to be unquoted can continue to be treated as being comprised in the VCT’s qualifying holdings for the following five years.
VCT Trading Activities
The company must exist for the purpose of carrying on a ‘qualifying trade’ or be the parent company of a trading group whose business as a whole meets the scheme’s rules. The company must also have a permanent establishment in the UK. Most trades qualify, provided that they are conducted on a commercial basis with a view to making profits. A trade will not qualify if one or more excluded activities together make up a ‘substantial part’ of that trade (more than around 20%). The main excluded activities are:
- Dealing in land, financial instruments, or in goods other than in an ordinary trade of retail or wholesale distribution.
- Financial activities, property development, or providing legal or accountancy services.
- Leasing or letting assets on hire.
- Receiving royalties or licence fees.
- Farming, market gardening, or forestry.
- Operating or managing hotels, guest houses, hostels, nursing or residential care homes.
- Providing services to another company in certain circumstances where the other company’s trade consists to a substantial extent in excluded activities.
- Shipbuilding, producing coal or steel.
- Generating or exporting electricity which will attract a Feed-in Tariff.
VCT Gross Assets
The value of the company’s gross assets must not exceed £15 million immediately before the VCT makes its investment, and £16 million immediately afterwards. If the company is a member of a group, the limits apply to the gross assets of the group, taken as a whole.
The company must not be controlled by another company or another company and a person connected with that company. Nor must there be any arrangements for such control.
A company in which a VCT invests may have subsidiaries providing it meets the following conditions:
- In the case of each subsidiary, the company must directly or indirectly own more than 50% of the ordinary share capital of the subsidiary and the subsidiary must not be controlled by any person other than the company invested in or another of its subsidiaries.
- Any subsidiary whose business consists wholly or mainly of holding or managing land or property deriving its value from land must be at least 90% owned directly by the company invested in.
- If the money invested in the company by the VCT is to be used by a subsidiary, then that subsidiary must be at least 90% owned directly by the company invested in. The trading activity for which the money was raised may be transferred between such subsidiaries and the company invested in.
A company intending to accept an investment from a VCT can contact the Small Company Enterprise Centre (SCEC) to seek an assurance that the investment will be a qualifying holding. The company will need to provide all relevant information, including:
- Latest available accounts for the company and any subsidiary company.
- Details of all trading or other activities carried on, or to be carried on, by the company or any subsidiary.
- A share issue prospectus or business plan if available.
- An up-to-date copy of the Memorandum and Articles of Association of the company and of any subsidiary, and details of any changes to be made.
- Details of how the money invested in it by the VCT will be used.
- Details of any subscription agreement or other side agreement to be entered into by the VCT.
The Inspector at the SCEC will provide written confirmation that they are satisfied, on the basis of the information provided, that the conditions of the VCT Scheme which apply to the company and the shares will be met.
We can help with VCT, SEIS and EIS advance assurance so do not hesitate to contact us.