The Government and HM Revenue & Customs do not like limited life venture capital trusts and have not done for some time, because they are essentially companies that get tax breaks for no apparent reason.
They have made several attempts to tighten the rules around where tax breaks are permitted. But they have been a bit more heavy-handed recently, after HMRC guidance made it appear VCTs would lose their tax efficient status if they issued new shares.
All VCT managers have been pretty nervous about this specific guidance and it has resulted in them issuing no shares so far this tax year.
This could be a bit of a blunder on behalf of the Revenue – which is obviously not helpful for either VCT providers or investors – although some managers I have spoken to think this is a deliberate move.
Regardless, VCTs have a duty of care to investors.
Many people have invested at the start of the tax year so that they can achieve a particular tax code. The HMRC wording puts this in jeopardy and VCTs are currently failing to communicate this to investors.
They should be writing to everyone stating why they cannot currently issue new shares, the background of the HMRC guidance and what they intend to happen in future.
If the rules stay as they are, it will be disastrous for VCTs. Nobody will want to launch new VCTs because they do not really work any more.
Top-ups on existing VCTs under the old guidance are great but setting up new ones is not as straightforward as it used to be
Ben Yearsley is head of investment research at Charles Stanley Direct