The purpose of the Venture Capital Schemes is to provide funding for companies that are in the relatively early stage of the business cycle. At the time of writing, there are four separate schemes, each one offering generous tax breaks to investors as a reward for taking on the risks associated with this type of investment.
The following table (which can be downloaded in pdf format) is a summary of the tax breaks and some of the key conditions that need to be satisfied. The table is best viewed by printing it out on A3 (large) paper and pasting it on the wall. The table has one empty column which is being kept free for the Social VCT that is to be introduced in the near future.
The following is some additional commentary, intended to clarify and expand on certain points arising from the table.
There are four Venture Capital Schemes at present. The different levels of risk are reflected in the type of investment:
In all three schemes - which we shall call the Enterprise Schemes - investors subscribe for securities in a company in return for the tax breaks. One can invest in more than one company, subject to the annual limits. However, the following scheme provides a more efficient way of spreading risk:
And finally (let's hope!):
Although there are similarities between the various Venture Capital Schemes, there are also important differences.
This is the latest Venture Capital Scheme, introduced in 2014. At present, the scheme is temporary, applying to investments made between 6 April 2014 and 5 April 2019 (inclusive)1. However, there is the possibility of the scheme being made permanent2. This is similar to the position of the SEIS Scheme - this scheme was also temporary when it was first introduced in 2012, but has since been made permanent3.
The other major difference between the SITR Scheme and the others is the fact that investors are permitted to invest in debt in addition to equities. Why is this the case?
The reason stems from the fact that a lot of social enterprises don't have ordinary share capital. For example, the organisation in question could be a company limited by guarantee or a charitable trust. In these circumstances, it makes sense to permit investors to subscribe for debt4 - but note that the debt must be unsecured, and must rank lower than other types of debt in the event of a winding up5. This is consistent with the idea that the tax breaks associated with the Venture Capital Schemes are only offered in return for investors taking a risk with their hard earned money.
In order to access upfront income tax relief, the investment must be made directly, with the funds going straight into the company's coffers. So investors must subscribe for the shares or debt as the case may be - it isn't possible to buy the securities secondhand.
One point to make about the SITR Scheme and the special rules for debt investments. It is not necessary for the debt to be of the sort that requires a debt instrument to be issued in the way that equity is issued to investors. A straightforward loan will do, as long as the funds are advanced directly to the social enterprise - one cannot access the relief by taking an assignment of the debt from a third party6.
Each of the Enterprise Schemes has the facility to subscribe for securities in one tax year and carry back the relief against the previous year's income7. For example, with the EIS Scheme, one can subscribe for £2m worth of shares with:
This example assumes that the investor hasn't used his previous year's allowance and that the limit for that year was also £1m. One also needs to take into account that the amount that one can carry back can also change - for example, before 2009/10 only half the amount could be carried back, as well as being subject to the relevant limit for the previous year8.
With the exception of VCTs, upfront relief is the key to accessing most of the other tax reliefs. One needs to make a distinction between:
In most cases, both conditions will need to be satisfied.
For example, in order to benefit from the CGT exemption, it is crucial that Enterprise Scheme investors claim the upfront income tax relief when originally subscribing for their securities9. Failure to do so will mean that they are liable to pay tax on any capital gains incurred when they eventually cash in on their investment.
However, for CGT reinvestment relief, both the EIS and SITR Schemes don't require a claim for relief. All that is needed is that the investor would have been eligible for upfront relief at the time the investment was made10.
VCTs on the other hand, are in a class of their own. One doesn't need to claim the income tax relief in order to qualify for the dividend and CGT exemptions. In fact, these exemptions are available even if the shares have been bought second hand on the stock market.
In theory, one could claim upfront VCT relief, lose it, but still keep the other exemptions11. By contrast with the Enterprise Schemes, losing the upfront relief means losing (nearly) all the others.
There is no dividend exemption for the Enterprise Schemes, only for VCTs. However, this doesn't matter, given that the former types of investment are companies at an earlier stage of the business cycle - any earnings they do make are likely to be ploughed back into the business instead of being distributed to shareholders.
VCTs on the other hand are legally required to distribute at least 85% of their income to their shareholders12. So the dividend exemption makes sense. Note that this is not unrestricted. Investors buying up to £200,000 worth of shares in any tax year obtain the full benefit, but income generated from any extra shares are taxed in the normal way13.
All the Venture Capital Schemes have a CGT exemption. This would normally mean that capital losses are unallowable under general principles14.
However, for the Enterprise Schemes, a capital loss can also be set against other capital gains. This is not the case for VCTs15.
This relief relates to capital gains incurred on other assets. It is possible to defer, or even extinguish part of the tax charge by applying the disposal proceeds to a venture capital investment. Only the Enterprise Schemes have this facility - VCTs used to have it, but it was abolished for the tax years 2004/05 onwards.
There are important differences between the schemes which have this relief:
Also known as share loss relief, this relief applies to investors who have subscribed for shares in an unquoted trading company. Provided the various conditions are satisfied, a capital loss on the shares can be set off against income19.
There is a quirk in the legislation. The rules make a distinction between:
There is no explicit statement that SEIS or SITR shares qualify. In principle they should qualify under the "other shares" heading, since the further conditions to satisfy appear similar to those applying for SEIS/SITR companies. However, one should be wary. It is possible in theory, for an investment to satisfy the SEIS/SITR criteria but fall foul of one of the conditions mentioned in the share loss relief rules - one needs to look closely at the legislation to confirm whether the relief will be available.
Note that for the SITR Scheme, the relief doesn't apply to losses on debt investments.
Shares held in VCTs don't qualify for the relief for a number of reasons:
These reliefs are not specific to the Venture Capital Schemes. They are a consequence of the rules on business property relief in the inheritance tax legislation.
The Enterprise Schemes qualify because they involve holding shares in unquoted trading companies. VCTs don't qualify as they involve quoted securities - the only way anyone can get relief in this case is to control the whole company, which is highly unlikely24.
The Summary table and above commentary should provide a guide as to what the tax breaks are, and the differences between the various Venture Capital Schemes.
However, one should note that the legislation does change quite frequently, and that therefore this can be no more than an overview - for example, the limits of how much you can invest in the schemes seem to keep changing over the years. One should always check for the latest updates in the tax news.
Furthermore, the conditions attached to the various tax breaks are a lot more numerous and complicated than is set out in the table - one should always bear this in mind if you are in the business of advising on these schemes. Hopefully, the statutory references in this article should provide some clue as to where to go to in the legislation.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Maastricht University - 5th Global Tax Policy Conference: Tax Policy after BEPS, what can be expected? On 6 September 2019 at the Royal Museums of Arts and History in Brussels, Prof. Dr Hans van den Hurk, chairman of the Annual Global Tax Policy Conference of the Maastricht Centre for Taxation (Maastricht University) with his esteem speakers are addressing the above question.Read more