VCTs – Stopping the tax relief abuses

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

The Government has published its response to the public consultation on share buy-backs in Venture Capital Trusts (VCTs). In particular the proposals put forward were aimed at stopping “Enhanced Share Buy-Backs” where VCTs were buying back shares from investors and immediately reinvesting the cash paid to investors in a new shares issued to the same investors, thus enabling them to obtain tax relief on the same original cash more than once.

There was a general acknowledgement in the responses to the consultation (you can see ShareSoc’s response on our web site), that this was an abusive use of a generous tax relief provision aimed at encouraging investment in smaller companies. You can see the full Government’s response here:

In essence the Government did not accept most of the comments from respondents which were quite varied, but they have conceded that individual VCT companies will be treated as independent so it will be possible to sell shares in a company from one VCT in the stable of a VCT manager, and then subscribe for new shares in a separate one from the same manager. But the restriction of 6 months from when you can sell and then buy shares as originally proposed will remain when some argued it should be a shorter period. It will mean VCT investors will have to be quite careful when these vehicles are already quite complex tax wise.

It is surely the case that investors should not subscribe for shares in these companies, or buy them in the secondary market, without a good understanding of the ways these companies operate, the tax rules and how to differentiate between the good ones and the bad ones (in terms of past performance). But it seems unlikely that many investors in these companies have that knowledge. Indeed the proposal to allow the use of nominee accounts when issuing shares will encourage the sales of such shares via on-line “platforms” where only a few clicks will be needed to make a commitment to purchase.

Another point worthy of note in the Government’s response was that it seems some VCTs have been abusing the rules by issuing shares on which tax relief has been obtained, and by the creation of a share premium account then almost immediately returning some of the cash subscribed to shareholders as a dividend. Which they can then no doubt use to subscribe for more such shares on which again tax relief is obtained. Yes there are some very bright people in the financial world are there not? But how anyone could see this is morally right is surprising. Anyway the Government is quite rightly planning to put a stop to this practice and will be undertaking a further consultation on that issue.

Let me not dissuade you from considering VCTs though if you can take advantage of the tax reliefs and understand the risks involved by the comments above. They have been very successful vehicles for promoting investment in SMEs in the UK. Hopefully as the sector matures we might see more consolidation in the sector with larger VCTs and lower fund management and administration costs. 

Roger Lawson

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