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LIQUIDITY AND LIMITED
LIFE VCTs
We examine them in more detail on
page 38, but Limited Life VCTs address
the issue of liquidity from a slightly
different perspective. Rather than
operate a buyback policy, they will
seek to liquidate the VCT and return
capital and income to investors after a
predefined period (never less than five
years). To do this they invest in assets
that they reasonably expect to be
able to sell at a profit within that time
frame, rather than growth companies,
so investors have to sacrifice some
potential returns in exchange for more
certainty around their exit. For many
investors, this is a perfectly acceptable
sacrifice when they take the tax benefits
into account.
LOSS OF VCT QUALIFYING
STATUS
If a VCT were to lose its status as
a qualifying investment because it
breached the rules, investors would
lose the tax breaks they had been
enjoying - potentially leaving them in
an investment where they did not feel
compensated for the risks they were
bearing and certainly out of pocket. To
date no VCT has ever lost its status, but
Oxford Technology did come close due
to an inadvertent breach back in 2014
when HMRC withdrew qualifying status
from Oxford Technology following a
breach of one of the VCT rules; the 15%
maximum threshold that a VCT fund
can invest in any one company. Oxford
Technology crossed this threshold with
its holdings in AIM-listed, oncology
specialist, Scancell. Scancell has a
vaccine for melanoma which is in clinical
trials and is quoted on AIM.
In 1999, Oxford Technology invested
in Scancell Holdings Plc when it was a
start-up company. In December 2003,
by which time some progress had been
made within the company, Oxford
Technology invested a further £150,000
in Scancell. They made subsequent
investments to support the growth of
Scancell and in August 2013 took up
rights to purchase additional shares in
Scancell as part of a discounted rights
issue. This brought the total invested
by Oxford Technology to £400,000,
less than 10% of the total capital
raised by OT3VCT. However, because
Scancell’s share price had increased
significantly, this investment resulted
in a breach of the 15% rule. This rule
is not a simple as it sounds. Under the
rule Oxford Technology had to revalue
all the early shares to the value of the
latest investment. Because the share
price had increased so much due to
the company’s success, this caused
the value of their holding as a whole to
breach the limit. If Scancell had done
badly and had had a low share price,
there wouldn’t have been a problem.
And any other VCT could have invested
in Scancell with no problem. Oxford
Technology reported the breach to
HMRC as soon as they realised what had
happened.
On 13 March 2014 HMRC took the
(somewhat extreme) decision to revoke
VCT status on account of the breach.
However, the decision didn’t last long.
A formal appeal was filed by the end of
March and Oxford Technology entered
discussions with HMRC to renegotiate
qualifying status. In June, HMRC
announced that it would reconsider the
decision and VCT status was temporarily
restored. Permanent VCT status was
reinstated for Oxford Technology in
September 2014.
An Oxford Technology statement
read: “We are now pleased to be able
to confirm that the corrective steps
proposed by our legal advisors have
been successfully completed and HMRC
have been so informed.
We have received formal
acknowledgement from HMRC that
the corrective action taken has been
sufficient and that we will now retain
VCT status going forward subject to
continued compliance with VCT rules.”
The reality is that the risk of a VCT losing
its qualifying status is very low. The
Oxford Technology example is the only
one in twenty years of the scheme’s
operation, and their appeal was upheld.
Note: a VCT can hold more than 15% in
a company if it is a result of the firm’s
organic growth.
SUMMING UP
This overview of the risks means that we
can now weigh up the investment case.
INVESTMENT CASE:
Growth
Income
Tax Reliefs
Support SMEs
RISKS:
Investment risk
Lack of liquidity
We’ll examine the investment case, the
risks and how they can be mitigated in
more detail in the following two sections
- this is where we really try and get into
the nuts and bolts of VCTs and after
reading these two sections advisers
should be in a strong position to make
informed decisions about how they will
approach the VCT market.
“Planned Exit VCTs typically
make investments in the form
of equity and secured loans to
qualifying companies. While
this limits the upside it also
allows the manager greater
control over the timing of exits
from the fund’s investments
and therefore a greater ability
to achieve cash distributions
to investors, on a defined
time horizon”
Eliot Kaye, Puma
Investments
“The abolition of stamp duty on purchases of AIM stocks has inevitably led to greater demand
for shares in quality companies, which works to the advantage of those investors who identify
them early”
Oliver Bedford, Hargreave Hale