EXPLANATORY NOTE

This clause amends the rules which provide income tax exemption for distributions made by Venture Capital Trusts (VCTs) to ensure that the rules operate as intended. The change made by the Clause means that exemption is not available in cases where the VCT shares are acquired as part of a scheme or arrangement whose purpose is the avoidance of tax, but will not affect bona fide investments in a VCT. The amendment applies where shares are acquired on or after 9 March 1999.

______________________

Subsection (1) provides for an amendment to be made to paragraph 7(3) of Schedule 15B ICTA 1988, which gives the meaning of a "relevant distribution" for the purposes of determining whether dividends paid by a VCT are exempt from income tax.

The amendment introduces a further requirement to paragraph 7(3)(a). For a distribution to be a "relevant distribution", the VCT shares must be acquired for bona fide commercial purposes and not as part of a scheme or arrangement whose purpose is tax avoidance.

Subsection (2) provides that the change will apply in relation to shares acquired on or after 9 March 1999.

_____________________

The VCT scheme encourages individuals to invest collectively in small higher-risk trading companies through investment funds which are listed on the Stock Exchange, and so provides such companies with money for development and expansion. VCTs are exempt from corporation tax on any gains arising on the disposal of their investments By investing in a VCT, the individual investor is able to spread the risk over a number of such qualifying companies. The investor is entitled to various income tax and capital gains tax reliefs, including:

income tax relief (at 20 per cent) on the amount invested in new VCT shares up to an annual limit of £100,000;

deferral of capital gains tax on a chargeable gain from the disposal of an asset where the gain is invested in new VCT shares;

exemption from capital gains tax on the disposal of ordinary shares in VCTs, whether or not they were new shares when acquired;

exemption from income tax on dividends paid by VCTs.

The amendment made by the Clause concerns the rules which determine whether dividend income received from a VCT by an individual investor is exempt from income tax. The amendment corrects a defect which allows dividend income on VCT shares to be exempt from income tax if the shares were acquired under a tax avoidance scheme rather than for bona fide commercial reasons.