SJP - VCT Guide

22 RULES FOR VCTS The qualifying trading companies in which VCTs invest must also meet a number of detailed rules, as described on page 25. A trade is NOT a qualifying trade if it consists of certain ‘excluded activities’. Excluded activities are explained further on page 25 . Returning capital to shareholders A VCT must NOT return capital to shareholders within three years of the end of the accounting period during which the shares were issued. If it does, this is a prohibited payment and could result in the VCT losing its qualifying status. In addition, certain arrangements that previously allowed investors to sell and then buy back shares in the same VCT, thus qualifying for another round of tax relief, are now excluded. If an investor buys shares within six months of a disposal of shares in the same VCT, the shares will not qualify for a new round of tax relief. This applies whether the disposal takes place before or after the purchase of shares in the same VCT. Qualifying companies lntroducing the rules In order to ensure that VCTs are meeting their objective of financing small to medium-sized businesses that might otherwise struggle to obtain investment from other sources, there are stringent criteria that govern whether a company and its proposed share issue is a qualifying investment for a VCT. These criteria change from time to time. A VCT may well have a portfolio of existing investments that would not currently qualify if being made as new investments (such as renewable energy investments, hotels and care homes) and such investments are effectively ‘grandfathered’ from the current rules (although no new investments in such trades can be made by the VCT). This section sets out the rules as they stand today and also details some of the most recent changes. Risk-to-capital condition Announced at the Autumn Budget 2017, the risk-to-capital condition applies to all investments made on or after Royal Assent of the Finance Act 2018 on 15 March 2018. However, HMRC has applied to test for all advance assurance applications submitted from December 2017. From this point, HMRC has declined to provide advance assurances for investments that, taking into account all the facts available to them, appear likely to fail the risk-to-capital condition. The government is keen to stress that the Venture Capital Schemes are intended to support early-stage, entrepreneurial companies that have the potential to grow in the long term. The company must be set up to carry out trade on an ongoing basis, not to carry out a single project before being wound up. Following the government’s 2017 consultation, ’Financing growth in innovative firms’, the enactment of the 2018 Finance Bill on 15 March 2018 saw the introduction of new conditions. The conditions are intended to exclude tax- motivated investments, where the tax relief provides most of the return for an investor or with a limited risk to the original investment (that is, preserving an investor’s capital). The condition depends on HMRC taking a ’reasonable view’ as to whether an investment has been structured to provide a low risk return for investors. THE RISK-TO-CAPITAL CONDITION HAS TWO PARTS: 1. Whether the company has objectives to grow and develop over the long term (which broadly mirrors an existing test with the schemes); and 2. Whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return. The condition requires all relevant factors about the investment to be considered in the round. The legislation contains a non-exhaustive list of the factors that may be considered. Even if one or more indicators of potential capital preservation are present, this does not necessarily mean that the risk-to-capital condition will not be met in a particular case. A judgement about whether capital preservation activity is taking place will depend on the overall context of the investment. Likewise, even if none of the indicators listed in the legislation are present, the risk-to- capital condition may NOT be met if the wider circumstances of a case suggest that capital preservation is taking place. Ultimately, a judgement will depend on the level of risk posed to investors’ capital and whether the company has genuine intent to grow and develop in the long term. Following Royal Assent of the Finance Act 2018 on 15 March 2018, the new risk-to-capital condition will sit above the other existing eligibility requirements for the venture capital schemes. Even if the new condition is met, all other requirements must also be met for an investment to be eligible for tax relief under the schemes. RULES FOR VCTS 23 Timeline of share acquisition and disposal in a single VCT by a single investor VCT shares subscribed for FEBRUARY 1 Investor sells their VCT shares on 1 February having qualified for income tax relief AUGUST 1 AUGUST 2 4 years 6 years 1 year 5 years Period during which no tax relief is available if the investor buys additional shares in the VCT