• reduce the minimum period investors must hold VCT shares to qualify for income tax relief from 5 years to 3 years;

• make it easier for companies whose trade consists in receiving royalties and licence fees to qualify under the Scheme;

• align the definition of ‘research and development’ with that used for capital allowances and research and development tax credits;

• preserve relief where a company in which a VCT has invested goes into receivership and;

• provide a power to make regulations preserving relief in certain circumstances where new shares or securities are received by VCTs in exchange for shares or securities previously comprised in the VCT’s "qualifying holdings".

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1. Clause 64 provides for Schedule 18 to make amendments to the provisions of the VCT scheme. Part I of the Schedule reduces various periods relating to reliefs available under the scheme and Part II makes amendments about qualifying holdings.

 

DETAILS OF SCHEDULE

VENTURE CAPITAL TRUST SCHEME: AMENDMENTS

 

PART I: REDUCTION OF APPLICABLE PERIODS

 

2. Paragraph 1 provides for the VCT legislation in Schedule 15B of the Taxes Act 1988 to be amended to:

• change the definition of ‘the relevant period’ for the purposes of denying relief for loan-linked investments to a period ending immediately before the third anniversary of the date of issue of the shares;

• reduce the period within which a disposal of VCT shares will trigger the withdrawal or reduction of investment relief from 5 years to 3 years beginning with the issue of shares; and

• change the definition of ‘eligible shares’ so that the period during which the conditions must be met by the shares begins with the issue of the shares and ends after 3 years instead of 5 years.

 

1. Paragraph 2 provides for the VCT legislation in Schedule 5C TCGA 1992 to be amended to reduce from 5 years to 3 years the period during which a disposal of VCT shares will revive a gain that has been deferred in respect of the investment.

 

2. Paragraph 3 provides for the changes in Part I to have effect for shares issued by a VCT on or after 6 April 2000.

 

PART II: QUALIFYING HOLDINGS

3. Paragraph 4 provides for amendment of the VCT legislation in Schedule 28B of the Taxes Act 1988.

 

Receipt of royalties or licence fees

 

4. Paragraph 5 replaces the existing provision for companies which receive royalties or licence fees from research and development or film production by a wider provision which allows any trade which consists to a substantial extent of receiving royalties or licence fees attributable to the exploitation of relevant intangible assets. The whole or the greater part of the intangible asset in terms of value must have been created by the company carrying on the trade or by a company which was the parent company of the company carrying on the trade or a subsidiary company of that parent company.

5. In the case of an intangible asset which is intellectual property, "created" means creation in circumstances where the right to exploit it vests in the company, either alone or jointly with others. An intangible asset means any asset so treated under normal accountancy practice applying to UK companies. Intellectual property means any patent, trade mark, registered design, copyright, design right, performer’s right or plant breeder’s right and extends to corresponding rights of countries outside the UK. What is meant by ‘parent company’ and ‘qualifying subsidiary’ is also defined with the changes having effect in determining whether the shares or securities issued on or after 6 April 2000 are to be comprised in the VCT’s qualifying holdings.

 

Meaning of research and development

 

6. Paragraph 6 changes the definition of research and development for the purposes of the Scheme to align it with the definition used for capital allowances and research and development tax credits. This change applies in determining whether the shares or securities issued on or after 6 April 2000 are comprised in the VCT’s qualifying holding, but does not affect shares or securities issued before that date.

 

Company in administration or receivership

 

7. Paragraph 7 provides that where a company in which the VCT has invested, or a qualifying subsidiary of that company, goes into administration or receivership, then the company is not to be regarded as ceasing to exist, or ceasing to have existed, for the purpose of carrying on a qualifying trade or trades by reason of anything done as a consequence of it being in administration or receivership. This is provided that the making of the order for administration or receivership, and everything done as a consequence, is done for bona fide commercial reasons and not as part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax. ‘In administration’ and ‘in receivership’ are defined by reference to the relevant provisions of the Insolvency Act 1986 and any corresponding order under the law of Northern Ireland or the law of any country or territory outside the UK. The paragraph provides that the change applies in determining whether shares or securities are comprised in a VCT’s qualifying holding on or after 21 March 2000.

 

Company reorganisations etc. involving exchange of shares

 

8. Paragraph 8 allows the Treasury to make provision in regulations for cases where a VCT exchanges shares or securities comprised in its qualifying holdings for other shares or securities, the exchange of shares or securities is for bona fide commercial reasons and not as part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax and the new shares or securities do not satisfy the requirements of Schedule 28B. New shares and securities that are received by a VCT and which are within the scope of the regulation will be treated as meeting those requirements. The regulations may specify the exchanges of shares or securities for which provision is to be made, the conditions relating to the new shares or securities that can be treated as met, for how long, and make any necessary administrative provisions. The paragraph applies to exchanges of shares or securities on or after 21 March 2000.

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BACKGROUND

 

Venture Capital Trusts

9. VCTs are companies listed on the Stock Exchange, which specialise in investing in small higher-risk unquoted trading companies of the same kind as those which qualify under the EIS. By investing in a VCT, individuals are 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 ordinary shares up to an annual limit of £100,000 provided that for shares issued on or after 6 April 2000 they are retained for at least 3 years (shares issued before 6 April 2000 must be retained for at least 5 years);

• deferral of capital gains tax on a chargeable gain from the disposal of any asset where the gain is invested in shares for which income tax relief is obtained;

• exemption from capital gains tax on the disposal of any ordinary shares;

• exemption from income tax on dividends on ordinary shares.

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