VCTs: All change

This year has been one of change for the VCT market, with the Government making a number of amends that either directly or indirectly affected the market.

The draft Finance Bill 2012, published on 6 December, has introduced new rules for both the companies that the schemes can invest in and for investors in both VCTs and EISs. The Government wants VCTs to be refocused on the higher risk investments, rather than being used simply as vehicles to gain tax relief.

Over the years a number of VCTs have been set up that test the boundaries of the limits and many in the industry feel that while they follow the letter of the law on the schemes, they are not set up in the spirit of the schemes. The Government hinted earlier this year that it would be cracking down on the rules, aiming to weed these schemes out.

The draft Finance Bill amends, which will affect any shares issued on or after 6 April 2012, will see a disqualifying purpose test applied to shares issued. Shares will be disqualified “whose main purpose is to generate access to the relief in circumstances where either the benefit of the investment is passed to another party to the arrangements, or the business activities would otherwise be carried on by another party”. The bill adds that it will deem any business not to be qualifying if it has existing shares in another company.

Another change announced in the draft bill is that shares can carry preferential rights to dividends, with certain caveats, being that it is not dependent on a decision of the company, the holder or anyone else and that the dividends cannot be cumulative. The rules on loan capital have also been changed, with a relaxation on the proportion of loan capital that an investor can hold without being treated as “connected” to the company.

Most recently it was revealed in the Autumn Statement that the limit that a VCT can invest in a single company of £1m was being lifted. Further details revealed in the draft Finance Bill confirm that this will be the case for any company not in partnership. It leads the way for VCTs to invest more heavily in a single company. And it will particularly benefit those VCTs that want to reinvest in a business, after an initial investment, which would then tip them over a £1m total investment.

Another big bonus for the market is that it is likely to result in more consolidation of VCTs. Currently one investment house may set up multiple VCTs in order to invest in a company. For example, a house wanting to put £3m in one company would need to do so via three VCTs, each investing the £1m limit. This means that the administration, legal and other costs are multiplied by three, costs that are ultimately passed on to the investor. Now, with the rules changed, these VCTs can merge, creating a larger VCT with overall lower costs.