Chapter 1: Introduction

Overview

797.     This Chapter gives an overview of the Part, labels certain concepts and gives signposts to material contained elsewhere.

Clause 258: Overview of Part

798.     This clause says that the relief dealt with by this Part ("VCT relief") is a tax reduction and it provides a navigational aid regarding the content of later Chapters. It is based on section 332A of ICTA.

Clause 259: Venture capital trusts and VCT approvals

799.     This clause defines "venture capital trust", "VCT" and "VCT approval". It is based on section 842AA(1) of ICTA and paragraphs 7(4) and 17 of Schedule 33 to FA 2002.

Clause 260: Other tax reliefs relating to VCTs

800.     This clause provides signposts to other tax reliefs relating to VCTs. It is new.

Chapter 2: VCT relief

Overview

801.     This Chapter:

• identifies who is eligible for VCT relief and on what amounts;

• identifies the claims to VCT relief that may be made;

• quantifies the entitlement to the tax reduction;

• deals with cases in which VCT relief is not available or will be reduced or withdrawn; and

• deals with other matters (information and powers to make regulations).

Clause 261: Eligibility for relief

802.     This clause identifies cases in which, and amounts in respect of which, an individual is eligible for VCT relief for a tax year. It is based on paragraph 1(1), (2), (4), (9) and (10) of Schedule 15B to ICTA.

Clause 262: Entitlement to claim relief

803.     This clause provides for an individual to claim VCT relief for a tax year. It is based on paragraph 1(1) and (3) of Schedule 15B to ICTA.

804.     Subsection (2) explicitly provides that a claim by the individual does not have to extend to all the shares by reference to which such eligibility exists for the tax year. This is implied by paragraph 1(3) of Schedule 15B which simply sets a limit on a claim for relief.

Clause 263: Form and amount of relief

805.     This clause specifies that a claim for VCT relief gives entitlement to a tax reduction and quantifies the amount of that entitlement. It is based on paragraph 1(5) of Schedule 15B to ICTA.

806.     Subsection (1) is expressed in terms of the individual's entitlement to a tax reduction. Clauses 27 and 29 contain provisions about how effect is given to the entitlement to a reduction and how the actual reduction is quantified.

Clause 264: No entitlement to relief if there is a linked loan

807.     This clause removes an individual's entitlement to VCT relief by reference to shares if certain loans are made, as described in this clause, to the individual or an associate of the individual. It is based on paragraph 2 of Schedule 15B to ICTA.

808.     For shares issued in the tax years 2000-01 to 2005-06 the relevant period ended immediately before the third anniversary of the share issue in question. The relevant period applicable for these earlier tax years is dealt with in Part 8 of Schedule 2 to this Bill.

Clause 265: No entitlement to relief which would have been lost if it had already been obtained

809.     This clause removes entitlement to VCT relief by reference to shares if, before the relief is obtained, circumstances have arisen that would cause the relief to be withdrawn or reduced. It is based on paragraph 1(8) of Schedule 15B to ICTA.

810.     This and other clauses follow the terminology used by other venture capital schemes and refer to relief being "obtained" where paragraph 1(8) refers, and other paragraphs in Schedule 15B to ICTA refer, to relief being "given".

Clause 266: Loss of relief if shares disposed of within 5 years

811.     This clause reduces or withdraws any VCT relief obtained by reference to shares that are disposed of within five years of their issue. It is based on paragraph 3(1) to (4) and (8) of Schedule 15B to ICTA.

812.     The period from issue in subsection (1)(b) was three years for shares issued in the tax years 2000-01 to 2005-06. The period applicable for these earlier tax years is dealt with in Part 8 of Schedule 2 to this Bill.

813.     For the tax years 2004-05 and 2005-06, the rate in subsection (4) was the higher rate of tax; and for earlier tax years, that rate was the lower rate of tax (called the savings rate in this Bill). The rates applicable for these earlier tax years are dealt with in Part 8 of Schedule 2 to this Bill.

Clause 267: Transfers of shares between spouses or civil partners

814.     This clause prevents loss of VCT relief occurring where the shares in question are disposed of between spouses or civil partners who are living together at the time of disposal. It also provides for "step-in-shoes" treatment, for VCT relief purposes, in respect of shares transferred between those spouses or civil partners. It is based on paragraph 3(5) to (7) of Schedule 15B to ICTA.

Clause 268: Loss of relief if VCT approval withdrawn

815.     This clause treats certain shares in a company as disposed of, for VCT relief purposes, at the time VCT approval is withdrawn from a company. It is based on paragraph 3(9) of Schedule 15B to ICTA.

816.     Subsection (1) does not apply where clause 281(3) treats VCT approval as never having been given to a company. In those cases there never was any entitlement to VCT relief in respect of the company's shares and any relief that was obtained is withdrawn under clause 269.

817.     Subsection (2) has provisions about the timing (immediately before loss of VCT approval) and nature (not arm's length) of any disposal of shares that is treated as taking place. These provisions ensure that any VCT relief recapture (where the shares were issued less than five years before loss of approval) covers all the VCT relief obtained in respect of the shares concerned.

Clause 269: Loss of relief which is subsequently found not to have been due

818.     This clause withdraws any VCT relief that has been obtained but which should not have been obtained. It is based on paragraph 4(1) of Schedule 15B to ICTA.

Clause 270: Assessment on withdrawal or reduction of relief

819.     This clause provides that withdrawal or reduction of VCT relief, under the preceding clauses, is by way of assessment for the tax year for which the relief was obtained. It is based on paragraph 4 of Schedule 15B to ICTA.

Clause 271: Provision of information

820.     This clause, in connection with VCT relief, provides for cases where information must be given to an officer of Revenue and Customs and cases where the officer may require information. It is based on paragraphs 1(11) and 5 of Schedule 15B to ICTA.

821.     Subsection (4) requires a VCT to give notice to an individual if clause 261(4) (issue of own shares) prevents the individual from being eligible for relief. Clause 261(4) contains a signpost to this requirement.

Clause 272: Regulations as to procedure etc

822.     This clause allows the Treasury to make regulations about certain aspects of VCT relief and other reliefs related to VCTs. It is based on section 73(1) and (2) of FA 1995.

823.     This power has been used in relation to the Venture Capital Trust Regulations 1995 (SI 1995/1979).

Clause 273: Interpretation of Chapter

824.     This clause provides definitions of certain terms used in the Chapter. It is based on paragraph 6(1) and (3) of Schedule 15B to ICTA.

825.     The clause removes a possible doubt as to the effectiveness of the amendment made by section 73(1)(b) of FA 1998 to the definition of "eligible shares" in paragraph 6(1) of Schedule 15B to ICTA. See Change 58 in Annex 1. Part 8 of Schedule 2 to this Bill contains a provision to preserve this possible doubt as to the meaning of eligible shares for shares issued before 6 April 2007.

826.     Schedule 2 to this Bill contains a provision dealing with the fact that the period from issue in subsection (1) was three years for shares issued in the tax years 2000-01 to 2005-06.

Chapter 3: VCT approvals

Overview

827.     This Chapter:

• lists the conditions relevant to VCT approval;

• sets out alternative bases on which VCT approval may be given and the time from which VCT approval has effect;

• deals with the withdrawal of VCT approval and the time from which withdrawal has effect; and

• deals with related matters (including powers to make regulations for certain matters).

Clause 274: Requirements for the giving of approval

828.     This clause sets out the conditions which must be met before the Commissioners for Her Majesty's Revenue and Customs are able to approve a company as a VCT. It is based on section 842AA(2) and (3) of ICTA.

829.     Subsection (1) specifies the accounting periods in relation to which the conditions have to be met.

830.     Subsection (2) gives labels to each of the conditions in section 842AA(2), changes the order in which they appear and uses a tabular layout as an aid to navigation.

831.     References in the conditions to qualifying holdings and eligible shares are explained in clause 285(1) and (2).

832.     Subsection (3) provides a signpost to the provisions that contain material supplementing some of the conditions listed in the table.

Clause 275: Alternative requirements for the giving of approval

833.     This clause allows the Commissioners to approve a company as a VCT if they are satisfied that conditions, which are not met in relation to the company's most recent accounting period, will be met in certain other accounting periods. It is based on section 842AA(4) of ICTA.

834.     Most approvals are in practice given under this provision.

Clause 276: Conditions relating to income

835.     This clause supplements the nature of income condition and the income retention condition. It is based on section 842(1AB) and (2A) to (2C), section 842AA(11) of ICTA and paragraph 40 of Schedule 26 to FA 2002.

836.     Section 842AA(11)(za) and (b) relies on the user adapting material that applies to similar conditions in section 842 (investment trusts). This clause eliminates the need to refer to section 842. Paragraph 40 of Schedule 26 to FA 2002 deals with derivative contracts in relation to VCTs.

Clause 277: The 15% holding limit condition

837.     This clause effectively restricts the times at which the 15% holding limit condition is applied in relation to investments in a company and provides supplementary material relating to that condition. It is based on section 842(1A), (2), (3) and (4) and section 842AA(11) of ICTA.

838.     Section 842AA(11)(a) and (c) applies certain provisions in section 842 (investment trusts) to section 842AA(2)(d). This clause eliminates the need to refer to section 842.

839.     Subsection (1) is based on section 842(3)(b), which provides that if an addition is made to a holding, the holding is treated as acquired at that time, and is also based on section 842(2)(b). The effect is that the 15% holding condition only applies on the occasion or occasions when the holding is acquired or when it is added to.

840.     The underlying approach is that the 15% holding limit condition is applied in relation to a company only at times when shares or securities are acquired in that company. This prevents the condition being breached solely as a result of fluctuations in the value of investments.

Clause 278: Conditions relating to value of investments: general

841.     This clause provides rules about the values of holdings of investments of particular descriptions. Those rules are used in applying the 15% holding limit condition, the 70% qualifying holdings condition and the 30% eligible shares condition. It is based on section 842(3) and (4) and section 842AA(5) and (11) of ICTA.

842.     The underlying approach is that there is a valuation (or revaluation) of investments of any particular description only when investments of that description are acquired. In that way the three conditions will not cease to be satisfied solely because of later fluctuations in the value of investments.

843.     The clause makes it clear that the rules about the valuation of a holding in this clause apply equally to the 15% holding limit condition, the 70% qualifying holdings condition and the 30% eligible shares condition. See Change 59 in Annex 1.

Clause 279: Conditions relating to value of investments: qualifying holdings

844.     This clause provides what is to be taken as the value of shares or securities acquired on certain exchanges or conversions if those shares or securities are treated as meeting some of the conditions in Chapter 4 (qualifying holdings). It also provides power to make regulations about the value of shares or securities in certain cases. It is based on section 842AA(5AA) to (5AE) of ICTA.

845.     An exchange has to meet the requirements of clause 326 (restructuring arrangements) and a conversion has to meet the requirements of clause 329 (conversion of convertible shares and securities).

846.     The powers to treat conditions in Chapter 4 as met under clause 330 (power to facilitate company reorganisations etc involving exchange of shares) are extended to encompass the valuation of shares and securities involved in reorganisations.

Clause 280: Conditions relating to qualifying holdings and eligible shares

847.     This clause provides a period of grace during which the proceeds from most further issues of ordinary shares by a VCT are disregarded in determining whether the VCT meets the 70% qualifying holdings condition and the 30% eligible shares condition. It is based on section 842AA(5A) and (5B) of ICTA and paragraph 11(1), (2) and (4) of Schedule 33 to FA 2002.

848.     The underlying rationale is to give the VCT a reasonable amount of time to invest the proceeds of the further share issue in qualifying holdings before taking those proceeds into account for the 70% qualifying holdings condition and the 30% eligible shares condition. Without any period of grace those conditions might deter VCTs from issuing further share capital to raise funds for investment in qualifying holdings.

849.     The clause also contains powers to make regulations varying the treatment that would otherwise apply under this clause. These powers have been used in making the Venture Capital Trust (Winding up and Mergers) (Tax) Regulations 2004 (SI 2004/2199).

Clause 281: Withdrawal of VCT approval of a company

850.     This clause sets out cases in which a company's approval as a VCT may be withdrawn and the time from which the withdrawal has effect, and contains supplementary material concerning the time limits for assessing tax consequent on the withdrawal. It is based on section 842AA(6) to (10) of ICTA.

Clause 282: Withdrawal of VCT approval in cases for which provision made under section 280(3)

851.     This clause gives the Treasury power to make regulations that provide, in certain cases, for withdrawal of VCT approval to have effect before notice of withdrawal is given. It is based on paragraph 12 of Schedule 33 to FA 2002.

852.     The cases are limited to those where clause 280(2) (disregard of money raised by further share issue) would have prevented withdrawal of approval but clause 280(3) applies.

Clause 283: Time as from which VCT approval has effect

853.     This clause explains when a VCT approval takes effect. It is based on section 842AA(1) of ICTA.

854.     Paragraph (a) of section 842AA(1), which refers to an approval given in 1995-96, has not been rewritten.

855.     Section 842AA(1) and (4)(b), and regulation 4(2)(b) of SI 1995/1979, make it clear that the date from which approval has effect is not necessarily the date on which approval is given. Subsection (3) notes that an approval can be forward-dated as well as back-dated.

Clause 284: Power to make regulations as to procedure

856.     This clause gives the Treasury powers to make regulations regarding VCT approvals, the obligations of VCTs in relation to certain matters and the persons liable to account for tax consequent on withdrawal of VCT approval. It is based on section 73(2) of FA 1995.

857.     This power has been used in relation to the Venture Capital Trust Regulations 1995 (SI 1995/1979).

Clause 285: Interpretation of Chapter

858.     This clause provides various definitions for this Chapter. It is based on section 842AA(11A) to (14) of ICTA.

859.     Subsections (4) to (6), based on section 842AA(11A) to (11C), provide an interpretation of references to a company's investments. Paragraph 8 of Schedule 15 to FA 2006 does not extend this interpretation explicitly to the definitions in section 842(3) of ICTA. Subsection (4) of this clause applies the interpretation to Chapter 3 as a whole. See Change 59 in Annex 1.

Chapter 4: Qualifying holdings

Overview

860.     One of the conditions relating to VCT approval is that the investing company holds at least 70% of its investments in qualifying holdings, (the 70% qualifying holdings condition in clause 274). This Chapter sets out the requirements that need to be met for an investment to be a qualifying holding.

Clause 286: Qualifying holdings: introduction

861.     This clause describes the ground-rules for what is a qualifying holding. It is based on paragraph 1 of Schedule 28B to ICTA.

862.     Subsection (1) introduces certain labels. The company invested in is described as "the relevant company", the shares or securities are "the relevant holding" and in this Chapter the company that makes the investments is described as "the investing company" rather than "the trust company".

863.     Where there are shared provisions, the order matches that in Part 5 Chapter 4, (EIS: the issuing company) as far as possible.

864.     Subsections (4) and (5) provide that in this Chapter, if only part of the money raised by a relevant holding meets the requirements of clause 287, clause 293 and clause 294, the holding is treated as two separate holdings.

Clause 287: The maximum qualifying investment requirement

865.     This clause requires that the relevant holding does not represent an investment that exceeds "the maximum qualifying investment". It is based on paragraph 7 of Schedule 28B to ICTA.

866.     The maximum qualifying investment is £1m, see subsection (2).

867.     Subsection (3)(a) makes it explicit that if the maximum qualifying investment is exceeded, the £1m can be included as a qualifying holding and the shares or securities which represent the excess over the maximum qualifying investment are not regarded as part of the relevant holding.

868.     Subsection (3)(b) ensures that there can be no double counting of an amount that represented such an excess. See Change 60 in Annex 1.

869.     Subsections (4) and (5) provide a rule for attributing shares or securities subsequently disposed of to the part of an investment that is in excess of the maximum qualifying investment.

870.     Subsections (6) and (7) set out the consequences if the trade which meets the requirements of clause 291(1) is carried on by the relevant company in a partnership or joint venture. The £1m is divided by the number of the members of the partnership or the parties to the joint venture. In subsection (6)(b) the words "as such" after "the joint venture" in paragraph 7(4)(b) of Schedule 28B to ICTA have not been reproduced, as they do not add anything.

871.     In subsection (8), which sets out what the relevant period is, it is made clear that the period ends with the issue of the relevant holding.

Clause 288: The no guaranteed loan requirement

872.     This clause requires that the relevant holding does not include any securities that are backed up by a "guaranteed loan" and explains what is meant by this term. It is based on paragraph 10A of Schedule 28B to ICTA.

Clause 289: The proportion of eligible shares requirement

873.     This clause requires a certain proportion of an investment in a relevant company to be in eligible shares. It is based on paragraph 10B of Schedule 28B to ICTA.

874.     Subsections (2) and (3) set out rules about the value of shares in or securities of a company. The underlying approach is to value shares and securities at their value when acquired so that the requirement will not cease to be satisfied purely because of later fluctuations in the value of those investments.

875.     Subsection (4) ensures that the value of the investment cannot be less than its initial cost price.

Clause 290: The trading requirement

876.     This clause requires that the relevant company exists essentially for the purpose of carrying on qualifying trades or is a parent company of a group that carries on qualifying activities. It is based on paragraph 3(2) and (6) to (11) of Schedule 28B to ICTA.

877.     A parent company, a group and a group company are defined in clause 332.

878.     Paragraph 3(6)(c) of Schedule 28B to ICTA is rewritten in subsection (1)(b) and subsection (3). The requirements in paragraph 3(6)(b) and (c) are covered respectively by the definition of "parent company" in clause 332 and by clause 298.

879.     Subsections (2) and (6) provide that certain requirements can be met in relation to a company that is not part of the group at the time the shares are issued. See Change 61 in Annex 1. The provision for property used for R&D in subsection (5)(d) has been extended. See Change 41 in Annex 1.

880.     The words "capable of" have been omitted in subsection (7), rewriting the definitions of "incidental purposes" and of "mainly trading subsidiary" in paragraph 3(2)(a) and (11) of Schedule 28B to ICTA. The intention is to make the definitions simpler to interpret: in practice the test will not change.

881.     The label "non-qualifying activities" in subsection (1)(b) is defined in subsection (7). Paragraph (z) in subsection (7) refers to excluded activities. These are listed in clause 303. Clause 305 provides a let-out for certain leasing of ships from being treated as a non-qualifying activity.

882.     The way that subsection (7) interprets non-qualifying activities means that no distinction is made between the let-out in clause 305(4), derived from paragraph 4(7)(a) to (d) of Schedule 28B to ICTA, and the let-out in clause 305(7), derived from the final words of paragraph 4(7). This contrasts with paragraph 3(8)(b) of Schedule 28B to ICTA. See Change 43 in Annex 1.

883.      There is no reference to R&D in the definition of non-qualifying activities in subsection (7)(aa), in contrast to the definition in clause 181(8)(o) in Part 5 (Enterprise investment scheme). This is because in VCT the carrying on of R&D is treated as the carrying on of a trade in clause 300(2).

Clause 291: The carrying on of a qualifying activity requirement

884.     This clause requires that the relevant company carries on, or certain of its subsidiaries carry on, a qualifying activity at all times from the issue of the relevant holding to the time in question. It is based on paragraph 3(3) to (5B) of Schedule 28B to ICTA.

885.     Subsection (1) introduces the term "qualifying activity" to cover the activities in paragraph 3(3)(a) and (b) of Schedule 28B to ICTA and these activities are set out in subsections (2) and (3). This should make it easier for persons, who are not relying on subsection (3) to meet any of the requirements in this Chapter, to disregard the material in subsections (3) to (6).

886.     Subsection (8) is new. The change enables the requirement in subsection (3) to be met in relation to a company that is not a qualifying 90% subsidiary at the time the shares are issued. See Change 61 in Annex 1.