Policy paper

Income Tax: Venture Capital Trusts - limiting the effect of anti-abuse provisions on commercial mergers

Published 22 November 2017

Who is likely to be affected

Individuals who have invested in Venture Capital Trusts (VCTs) and VCT fund managers.

General description of the measure

This measure limits the scope of an anti-abuse rule relating to share buy-backs by VCTs.

The rule restricts income tax relief where a VCT buys back shares from an investor and the investor subscribes for new shares in the same VCT within a 6 month period, a form of ‘bed and breakfasting’. It also restricts income tax relief for investors who sell shares in a VCT and subscribe for new shares in another VCT within a 6 month period, where those VCTs merge.

This measure will ensure that income tax relief may no longer be withdrawn where the relevant VCTs merge more than 2 years after the latest subscription for shares, or do so where it is not one of the main purposes of the merger to obtain a tax advantage. It will take effect for VCT subscriptions made on or after 6 April 2014.

Policy objective

The measure ensures that an existing anti-abuse rule for VCTs works as intended and addresses arrangements most likely intended to provide a tax advantage. The anti-abuse rule is intended to prevent multiple claims to income tax relief on what is, in effect, the same investment. However, the rule is not intended to apply to investors who subscribe for shares in a VCT, and sell shares in a different VCT, before there is any arrangement made for the VCTs to merge.

The changes mean that the scheme is well targeted to incentivise new investment by individuals and does not unduly restrict the commercial activities of VCTs.

Background to the measure

This measure was announced at Autumn Budget 2017.

The problem was raised by a representative body after it was contacted by a VCT planning a merger.

Detailed proposal

Operative date

The measure will have effect in relation to relief claims in respect of VCT shares issued on or after 6 April 2014.

Current law

Current law for VCTs is contained in Part 6 of the Income Tax Act (ITA) 2007.

Section 264A restricts income tax relief where, within a 6 month period, an investor sells shares in a VCT and subscribes for shares in either the same VCT, or another VCT where those VCTs merge.

There is currently no limit on the merger condition, which means that income tax relief may be withdrawn even where the merger takes place several years after the subscription, or where the merger takes place solely for commercial reasons and the investor was not aware at the time of subscription that the merger would occur.

Proposed revisions

Legislation will be introduced in Finance Bill 2017-18 to limit the scope of section 264A ITA 2007.

Section 264A will be amended to include new provisions which limit the scope of section 264A(5). Where the date of restructuring or merger in section 264A(7) is more than 2 years after the date of the subscription of shares, section 264A(5)(b) will not apply.

Where the date of restructuring or merger is less than 2 years after the date of the subscription of shares section 264A(5)(b) will also not apply if at the time of the subscription the individuals subscribing for the shares could not reasonably be expected to know that the merger or restructuring was likely to take place, or if it is not one of the main purposes of the merger to obtain a tax advantage.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
negligible	negligible	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

This measure would ensure that individual investors in VCTs who have subscribed for shares in one VCT, and sold shares in another VCT within a 6 month period since 2014 will not be required to pay back tax relief where the VCTs merge only for commercial reasons. The number of individuals affected is not known but is likely to be fewer than 1,000.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The changes to the schemes are not likely to change the impacts of this measure on any group. There are no impacts on groups of people sharing protected characteristics differently to other groups, and has not identified any equalities impacts.

From the data available it is reasonable to conclude that these changes will not have any further impact on those groups affected by equality legislation.

Impact on business including civil society organisations

This measure affects VCT fund managers. It will ensure that the anti-abuse rules work as intended and will not unduly restrict the commercial activities of VCTs. The measure is expected to have a negligible impact on VCT fund managers’ administrative burdens. One-off costs include familiarisation with the anti-abuse provision updates. It is not expected that there will be any on-going costs.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

This measure would have no operational impact on HMRC. It would save resource costs in identifying affected investors and recovering the tax due.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The effect of the changes will be monitored. An evaluation of the Enterprise Investment Scheme (EIS) and the VCT scheme will be carried out in accordance with the State aid evaluation requirements.

Further advice

If you have any questions about this change, please contact Martin Trott on telephone: 03000 585619 or email: [email protected].