VCT guide

26 RULES FOR VCTS The growth and development test This was introduced in the 2015 Budget, based upon an examination of the business plan. Generic indicators of a focus on the growth and development of a business include proposals to: • Increase revenues over time; • Increase its customer base; • Increase the number of employees. In essence, the money must be employed to deliver something that enables the company to grow rather than preserve the status quo such as simply paying pre-existing day to day expenditure. As part of the advance assurance process, companies need to state in their business plans how they meet the growth and development requirement. Advance assurance Companies can apply to HMRC in advance of issuing shares to a VCT to check that the proposed share issue meets the qualifying criteria for VCT purposes and that, once issued, the investment will be regarded as a ‘qualifying holding’ for the VCT. Requests for such assurances are made to the Venture Capital Reliefs Team (VCRT) of HMRC. The advance assurance service is discretionary and non-statutory. There is no requirement for a company to obtain an advance assurance before receiving an investment or issuing shares to investors. The advance assurance service allows the company to provide information about its intentions; about its structure and activities, about the proposed investment and about how the monies raised will be used. As mentioned, there is no obligation upon firms to go through this advance assurance process, but it does provide an opportunity to spot any problems before the shares are issued and an assurance from the VCRT is useful for companies to show to potential investors. Advance assurance is NOT a guarantee that a share issue qualifies or that the company will continue to qualify. If something important was not disclosed to the VCRT or, if between receiving advance assurance and the share issue something changes, it may be that the share issue or company is no longer qualifying. However, if nothing has changed, advance assurance is normally considered binding on HMRC (although VCT tax reliefs are also subject to the circumstances of the individual investor, which HMRC will not opine on in advance). From early 2018, HMRC has declined to consider speculative applications. Confirmation of who the likely investors are is required before HMRC will give an opinion. If details can’t be provided HMRC rejects the application. HMRC has also confirmed that it does not intend to identify which companies qualify as knowledge-intensive companies at the time of advance assurance review unless this status is relevant to the proposed investment (for example if a prospective investor is interested in investing over £1 million into the company in a single tax year, or if the company is raising more than £5 million from VCT investors in a tax year). Rules for VCT-qualifying companies The Government wants to ensure that the venture capital schemes are focused towards its original objective of supporting investment in companies with high growth potential - and not tax motivated investments structured to provide limited risk. MAXIMUM AGE No limit 7 years unless total investment represents more than 50% of the company’s average turnover over the preceding 5 years and the company is using the funds to enter a new product or geographic market, or it received previous risk finance within its first 7 years LIFETIME CAP FROM ANY COMBINATION OF VCT, EIS OR CERTAIN OTHER GOVERNMENT INCENTIVES No limit £12m GROWTH AND DEVELOPMENT TEST No requirement Requirement that all investments are made with the intention to grow and develop business 12-MONTH INVESTMENT LIMIT (ALL TAX ADVANTAGED VC) £5m £5m EMPLOYEE LIMIT (FTE) Fewer than 250 FTE Fewer than 250 FTE THE USE OF VCT MONEY FOR ACQUISITIONS OF BUSINESS Allowed New rules to prevent VCT funds being used to acquire existing businesses or part of a business (including intangible assets that have already been used in a trade) MAXIMUM NUMBER OF TRADING YEARS No limit 10 years. From 6 April 2018, a knowledge-intensive company is able to use the date fromwhich its annual turnover exceeded £200,000, instead of the date of its first commercial sale, when determining the date fromwhich the end of the initial investing period is calculated 12-MONTH INVESTMENT LIMIT (ALL TAX ADVANTAGED VC) £5m £10m LIFETIME CAP (ALL TAX ADVANTAGED VC) No limit £20m EMPLOYEE LIMIT Fewer than 250 FTE Fewer than 500 FTE KNOWLEDGE-INTENSIVE Pre-November 2015 Today RULES FOR VCTS 27