VCT guide

5 THE VCT LANDSCAPE The VCT landscape Purpose Venture Capital Trusts (VCTs) are specialised investment companies that are listed on the London Stock Exchange (LSE) (VCTs are permitted to be listed on any European regulated market but all current VCTs are listed on the LSE). The government grants various tax reliefs to VCT investors to encourage investment into portfolios of small and medium-sized enterprises (SMEs) in the UK. SMEs are recognised as vital contributors to economic growth and job creation. They are generally deemed to be risky investments and therefore the government offers incentives to investors in VCTs in the form of tax advantages. The VCT scheme is not a tax avoidance scheme that operates by taking advantage of legal loopholes. It is a statutory scheme that uses tax reliefs to incentivise investors to invest in a vital part of the UK economy. Types of VCT VCTs commonly fall into THREE broad categories: GENERALIST - investing in unquoted companies across a range of sectors; SPECIALIST SECTORS - for example, technology or healthcare; AIM - shares listed on the Alternative Investment Market. in the Autumn Budget 2017 that the 2017/18 Finance Bill would include a new ‘principles based approach’ to identify lower risk activities that should not benefit from the tax reliefs. In accordance with the Finance Act 2018, the ‘risk-to-capital condition’ applies to investments made on or after 15 March 2018. The Autumn Budget 2017 also included a welcome boost for VCT investments into knowledge-intensive companies. Knowledge-intensive companies (explained in greater detail in later sections) are those which are carrying out significant levels of research and development (R&D); these can qualify for higher amounts of VCT (and EIS) funding than other companies. As a result, for VCT investments in knowledge-intensive companies made from 6 April 2018: • The 12-month investment limits are doubled (from £5 million to £10 million per company). • Greater flexibility has been provided to knowledge-intensive companies over how the age limit is applied. Additional measures for all VCTs include: 1. VCTs are no longer able to invest in companies under rules in place at the time funds were raised (but will have to invest under the rules currently in place); and 2. VCTs have to invest more money in qualifying holdings. There is more detail on these changes in later sections. Some VCTs previously operated as limited life VCTs. These aimed to invest capital and then wind up within 5-10 years. Given the new ‘risk-to-capital’ condition (explained later on) most VCTs now operate in one of the three sectors mentioned. Despite the variety, the investment strategies employed by VCT managers do differ. We will discuss the different types in more detail in further sections. History and main developments VCTs were first announced in the November 1993 Budget and, following a short consultation, introduced in the Finance Act 1995 to stimulate investment in small businesses. Since then, over £8 billion has been raised by VCTs and today there are typically more than 30 VCTs raising funds in any given year. This is widely seen as a great success and the scheme has enjoyed the support of successive governments. The majority of changes that have been introduced to the rules governing VCTs, have been made with the intention of ensuring the schemes continue to support high growth companies. The scheme was expanded in 2011 and 2012 to allow greater levels of investment into larger companies. Further changes to the VCT scheme were made in 2015 to ensure that the VCT reliefs continued to comply with EU State Aid rules. Overlapping with changes made to EIS qualification, these changes had the effect of restricting the types of companies that qualify for VCT investment. In the Finance Act 2016, changes were made with regard to the permitted non-qualifying investments a VCT can make, limiting such investments to a narrower list of permitted investments required only for liquidity management purposes (including short-term deposits and shares or securities acquired on a European regulated stock market). Autumn Budget 2017 In addition, and in line with similar rules introduced for EIS and SEIS, it was announced £8bn invested into VCTs 1995 2019 SIZE OF VCT QUALIFYING COMPANIES up to 50 full-time equivalent employees up to 250 full-time equivalent employees PRIOR TO 6 APRIL 2012 ON OR AFTER 6 APRIL 2012 None of these recent changes should be interpreted as the government changing their support of VCTs and the associated tax reliefs. However, it should be noted that some of these targeted changes will result in a greater proportion of VCTs’ funds being invested in smaller, higher risk trading companies. In meeting these requirements, VCTs will hold lower amounts of cash and liquid resources.