New VCT Rule Changes?

There are rumours circulating within the VCT industry that rule changes could be around the corner, specifically in the upcoming Autumn budget and Patient Capital Review.

VCT investors, managers and investee companies are no strangers to rule changes; some of the most notable in recent years being:

  • Tax relief received by an investor falling from 40% to 30% from the 2006/07 tax year.
  • VCT qualifying investments having an age limit of seven years (ten years for knowledge intensive companies) and no longer being able to use VCT money to invest into management buyouts or renewable energy companies.
  • A VCT qualifying company only being able to receive a lifetime maximum of £12m (£20m for knowledge-intensive companies) of venture capital investments

Why change the rules?

Although these rule changes impose greater restrictions on all parties, they are implemented with the everyday taxpayer in mind. In the 2016/17 tax year, £542m was invested into VCTs, the second highest year on record, meaning that HMRC paid out £162.6m in income tax relief to investors.*

This seems like a lot of money, but the idea behind VCTs is they fill the investment gap inhabited by very small UK companies which are too small and risky for a bank to offer finance, and too large for most single investors to accept the investment risk.

VCTs try to find the companies with the greatest potential for growth and offer finance and guidance to those companies. A growing company will most likely take on more employees, who in turn will pay more in taxes. For HMRC this is an investment which should, in the long term, return more than they have paid.

The rules that VCTs must invest by changed when HMRC deemed certain investments should not qualify for the 30% income tax relief which it offers. This will usually be because a change in the investment landscape has meant a certain investment, which was VCT qualifying, does not now take enough risk to continue to be acceptable – a good example of this are the renewable energy companies, which relied on state subsidies, effectively giving the investor a double reward for investing.

What could change in the Patient Capital Review?

HMRC has the power to change the rules in any way it sees fit. The possibilities that have been most spoken about are:

  • Reducing the amount of income tax relief received by an investor from 30% down to 20%.
  • Toughening up the rules on what counts as a VCT qualifying investment

There are, however, a growing number of industry experts saying that there will be no changes brought into force at all - we will have to wait until the Patient Capital Review has been released in November to find out.

*http://www.theaic.co.uk/aic/news/press-releases/vct-fundraising-for-201617-the-second-highest-on-record

Published on 13/10/2017