Two pieces of news have hit the venture capital trust arena in the last few weeks – the Treasury and HMRC have issued a technical consultation covering share buy-backs and the first VCT fund raising of the current tax year has been launched with Northern Venture Managers seeking £50m across their three VCTs.
As mentioned in the 2013 Budget, the Government has become concerned about the use of certain share buy-back and re-investment arrangements between VCTs and their investors. It has decided that action is necessary to limit what it sees as the potentially damaging effect of these arrangements and to ensure that upfront tax relief is given only for genuine new investment in VCTs.
The technical consultation document sets out the background and rationale for this policy change, before describing in some detail proposals for reform and seeking views.
General company law allows companies such as VCTs to repurchase their own shares. The Government recognises that VCTs may repurchase shares for a variety of commercial reasons – for example, to allow investors to exit their investment – so it does not intend to prevent VCTs from repurchasing their own shares generally.
Having considered a range of options, the Government believes that an effective approach would be to impose a restriction either :
- where an investor subscribes for shares in a VCT within a certain period of a sale of shares held in that VCT or another VCT managed by the same fund management group; or
- where a VCT’s re-purchase of shares is subject to any understanding that the investor will re-invest in the same VCT or another from the same fund management group.
There are potential unintended consequences of major rule changes, both on investors and the second-hand market for VCT shares. The second-hand market is vital to the continued success of the VCT market.
But the Government is under the belief that “these practices are increasingly leading to investor expectations that they will always be able to sell their shares after a period of five years and to “refresh” their tax relief at that point by immediately re-investing in the same VCT”.
We do not recognise that view and it must be pointed out that annual buybacks – where the board has put in place a buyback policy – rarely exceed 10 per cent of shares in issue in that VCT. The take-up of enhanced buybacks in the last tax year has averaged mid-teen percentages of shares eligible – hardly a rush to take advantage of extra tax relief.
We have always seen HMRC as very supportive of the VCT area and we welcomed the 2011 new “disqualifying arrangements” test as giving HMRC the ability to address particular issues through a general test rather than specific rules.
If action must be taken, we urge the Treasury and HMRC to implement a simple rule restricting tax relief on new shares issued as part of arrangements involving share buybacks when the repurchase of shares is connected with investors re-investing in the same VCT within a short space of time.
Martin Churchill is editor of Tax Efficient Review