Firms and trade bodies have offered a cautious welcome to government plans to crack down on so-called ‘enhanced buy-back’ schemes run by venture capital trust managers, but have warned the rules must not affect mechanisms that provide much-needed liquidity for the sector.
Enhanced buy-backs allow investors who have their VCT shares for more than the five-year qualifying period to sell their shares back to the manager and immediately repurchase shares for another five years, thereby becoming entitled to another round of 30 percent income tax relief.
The Treasury announced it would launch a review into such schemes in March of this year. Last week it published a consultation paper proposing limiting such schemes to prevent “misuse” of the facility. The paper estimates that “recycling” shares cost the taxpayer £40m in 2012/13.
The plans could see restrictions to prevent investors being able to re-purchase shares in the same trust for a prescribed period of time, or on VCTs buying back shares where an investor is likely to re-invest in the same trust or with the same manager.
Hargreaves Lansdown said the government was right to review the rules as VCTs are not designed simply to support investments “made purely for the purpose of maximising tax relief”.
However, it warned that managers must be allowed to continue to buy back their own shares so as to provide an effective exit route for investors and maintain liquidity in the sector.
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said: “The government has been reviewing VCT and other tax relief incentive schemes in recent years to ensure they are fit for purpose, delivering the desired objectives and are not being abused.
“The government’s rationale for consulting on the issues of EBB is therefore appropriate, however any changes need to be clearly laid out to avoid creating any confusion or misleading investors.”
The Association of Investment Companies, the trade body covering closed-ended companies such as investment trusts and VCTs, also welcomed the government’s intervention - and similarly sounded caution over the importance of “traditional” buy-back mechanisms.
Ian Sayers, Director General, AIC said: “VCTs play a vital role in supporting the growth of UK SMEs, particularly those struggling to secure bank lending. However, it is right that the Government continues to review the operation of the scheme to ensure it is functioning correctly and delivering its public policy objectives.
“That said we also wish to ensure that there is as little disruption to the ongoing work of VCTs as possible, in particular the use of “traditional” share buy-backs which help maintain liquidity in the sector.”
The consultation is open until 26 September. It is expected that draft legislation will be published this autumn, with any new rules coming into effect in April 2014.
