What are VCTs?

A VCT is an investment vehicle whose shares are listed on a regulated market. A VCT must invest in and maintain a portfolio of qualifying trading companies.

VCT Rules:

• 30% of funds raised by VCTS must be invested in qualifying companies within 12 months of the end of the accounting period, which the funds were raised.
• VCTs must hold 80% of funds in qualifying companies for accounting periods beginning on and after the 9 April 2019.
• VCTs must derive their income wholly or mainly from shares and securities.
• VCTs cannot retain more than 15% of the income from shares or securities.
• VCTs cannot retain investment in a company that exceeds 15% of the VCT total investment value.
• VCTs cannot invest in a company that causes the company to receive more than £5m of state-aided investment (inc. SEIS/EIS.VCT) in the 12 months ending on the date of the investment (£10m for Knowledge-intensive companies) or more than £12m in companies lifetime (£20m  for KIC).
• VCT cannot invest in a company whose trade is more than seven years old ( 10 years for KIC).
• VCTs can only be minority investors; they must hold less than 50% in investee companies.
• VCTs cannot invest in companies that go on to use the VCT funds to acquire another company or business.
• VCTs must only invest in qualifying companies. However, specific non-qualifying holdings are allowed, i.e. cash and short-term deposits.
• At least 10% of a VCTs investment must be in eligible shares, i.e. ordinary shares with no preferential rights. The rest can comprise any class of shares or loans.

The VCT qualifying company conditions

HMRC has very specific criteria which companies must meet to qualify for EIS.

There are several conditions setting out the qualifying conditions for companies to be eligible for VCT investment.

• Be operating in a qualifying trade - preparing to trade and commence trading within two years, or conducting research and development. Most trades qualify, however, there are several exclusions.
• Excluded activities must not be a ‘substantial’ part of the company’s trade. HMRC take ‘substantial’ to mean more than 20% of the company’s activities.
• Not have been trading for more than seven years (ten years for a knowledge-intensive company) unless specific conditions are met.
• Have a permanent establishment in the UK.
• Have fewer than 250 employees (or less than 500 for KIC).
• Gross assets less than £15 million before investment and £16 million following the investment.
• Be unquoted at the point of investment, with no plans to list on a recognised exchange. (AIM is not a recognised exchange)
• Not be in financial difficultly.
• The company cannot be controlled by another company, meaning another company should not own over 30% of the company’s shares.
• The company cannot control another company other than a qualifying subsidiary.
• Raise less than £5 million a year, with a maximum investment of £12 million over the company’s life.
• The funds must be deployed within two years of the investment.
• Be able to meet the Risk to Capital condition.

Claiming Tax Relief

The process for claiming VCT tax relief is straightforward.

Income Tax Relief: Once VCT shares are issued, the VCT registrar will send investors their tax and share certificates. Income tax relief can be claimed either via an investors self-assessment or by reducing their PAYE tax bill (assuming they're employed).

Tax-Free Dividends: VCT investors who receive exempt dividends are not required to declare them on their tax returns.

Tax-Free Growth (Disposal Relief): Once an investor decides to dispose of VCT shares, an investor doesn't have to pay CGT on any gain made on the disposal of VCT shares. Any disposal of VCTs at a loss are not eligible for relief.

VCT and EIS Tax Reliefs

The most notable difference between VCTs and EIS funds are the tax reliefs available to the investors.

Advance Assurance

Companies can apply to HMRC in advance of issuing shares to a VCT to ensure that the proposed subscription meets the qualifying conditions for VCT.

Companies can apply to the Venture Capital Relief Team of HMRC to see whether they meet VCT qualifying conditions. VCT advance assurance allows companies to provide HMRC with the business's structure, their activities and the amount of the proposed investment as well as how the company intends to spend the monies. HMRC will give companies an opinion based on their application on whether the company would meet VCT qualifying conditions. So long as all the information in the advance assurance is accurate and complete, HMRC will genrtally be bound by any assurance given.

Typically most VCTs do not seek advance assurance anymore; this is due to HMRC's preference as stated in the Venture Capital Manual VCM60410:

"In general, companies seeking an investment from a VCT should not need an advance assurance from HMRC. VCTs should be able to rely upon their professional advisers to determine if a prospective investment is qualifying or not" and "Provided that the VCT has taken reasonable steps (like consulting a professional adviser) HMRC will not withdraw approval from the VCT if the investment subsequently turns out to be non-qualifying. HMRC will accept that the breach was outside the control of the VCT".