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HMRC internal manual

Venture Capital Schemes Manual

VCT: investor income tax reliefs: dividend exemption from income tax

ITTOIA05/S709 - S712

Individuals aged 18 or over who acquire ordinary VCT shares (whether by subscription for new shares or otherwise) are exempt from income tax on dividends in respect of shares acquired within the ‘permitted maximum’.

The permitted maximum of shares in VCTs is £200,000 for 2004-05 onwards (a year beginning on 6 April and ending on 5 April in the following year).

Investors who receive exempt dividends do not have to show them on their tax returns and HMRC officers should not assess investors on exempt dividends.

Withdrawal of VCT approval

The relief applies only to those dividends paid by the VCT whilst it is approved. If provisional approval is withdrawn (see VCM54400), all dividends paid during the period of approval will be treated as if they were never exempt from income tax.

Genuine commercial purpose

Relief is not due unless the shares are acquired for genuine commercial purposes and not as part of a scheme or arrangement, the main purpose of which is tax avoidance.

Tax credits

Before 6 April 1999, the VCT could also claim tax credits. Individuals gave written declarations of eligibility for the relief to the VCT which claimed the tax credits, in respect of the dividends paid, on their behalf from SPSS. The VCT then paid these to individuals. Individuals could not claim tax credits from their districts. Tax credits are still shown on the dividend tax vouchers. They do not represent tax paid by the investor, but the tax credit reflects the fact that the VCT has been taxed on the profits that are being passed to the investors. Consequently, tax credits are not payable to VCTs or investors after 6 April 1999.