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HMRC internal manual

Venture Capital Schemes Manual

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VCT: VCT approval: 70% qualifying holdings condition: disregard of disposals: further share issues, multiple disposals and mergers

ITA07/S280A

Where there is an issue of ordinary shares after an earlier issue of ordinary shares, both of which took place whilst a company was approved as a VCT, the 70% qualifying holding condition does not apply to the funds raised by the further issue in accounting periods up to and including any accounting period ending before three years after the further issue is made (the ‘disregard period’) (VCM54220).

If the qualifying holding which is the subject of a disposal was acquired with money from a further share issue then to the extent that it was so acquired there is no disregard of the disposal under S280A for as long as the disregard period for the further share period lasts.

Disposal of qualifying holding acquired with funds subject to disregard under further share issue rule

Example

A VCT with full approval acquires a holding for £200,000. It funds the acquisition with £80,000 out of funds from its original share issue and £120,000 from funds derived from a further share issue that took place on 10 March 2005. Its accounting period runs to 31 January and the disregard period in respect of the further share issue will therefore run to 31 January 2008.

On 1 January 2008 it disposes of the holding for £400k in cash. The disregard in respect of this disposal under S280A will apply until 1 July 2008.

Treatment until 31 January 2008 (period during which further share issue disregard applies)

The holding was funded 40% by the original share issue and 60% from the further share issue. The further share issue is still within its disregard period. The effect of this on the S280A treatment is as follows:

S280A(2)(a) -40% of the holding, £80,000 is treated as retained

S280(2)(b) - the value of the VCT’s investments are treated as reduced by 40% of the monetary consideration received for the disposal, £160,000

Treatment from 31 January 2008

On 31 January 2008 the funds from the share issue on 10 March 2005 cease to be disregarded under the further share issue rules.

For the period 31 January 2008 (expiry of the further share issue disregard) to 1 July 2008 (expiry of the S280A treatment):

S280A(2)(a) - the full value of the disposed holding, £200,000, is now treated as retained, and

S280A(2)(b) - the value of the VCT’s total investments are now treated as reduced by the full amount of the monetary consideration received for the disposal, £400,000.

From 1 July 2008 onwards there will be no disregard in respect of the disposal of this investment under S280A.

Multiple disposals

A VCT may dispose of a qualifying investment within the disregard period under S280A of a previous disposal. This may lead to a further adjustment under S280A.

Multiple disposals

Example

A VCT with full approval has qualifying holdings of £1.5m and total investments of £2m. Its qualifying holdings are therefore 75% by value of its total investments.

1 July 2008

it makes a disposal of a qualifying holding valued at £200,000 for £700,000. The effect of S280A is as follows:

  • deemed qualifying holding of £200,000 retained, Qualifying Holding Adjustment 1 (QHA1),
  • deemed reduction in total investments by £500,000 (£700,000- £200,000), Total Holding Adjustment 1(THA1).

Its adjusted qualifying holdings are £1.5m (actual qualifying holding £1.3m + QHA1 £200,000),

and its adjusted total holdings are £2.0m (actual total holding £2.5m - THA1 £500,000).

1 September 2008

On 1 September 2008 it makes a further disposal of a qualifying holding valued at £150,000 for £350,000 in cash. The effect of S280A in respect of this second disposal is as follows:

  • deemed qualifying holding of £150,000 retained, Qualifying Holding Adjustment 2 (QHA2),
  • deemed reduction in total investments by £200,000 (£350,000-£150,000), Total Holding Adjustment 2 (THA2),

The VCT has made assorted investments and payments since 1 July 2008. Its actual qualifying holdings (after the second disposal) are now £1.6m, actual total investments are £2.4m.

Its adjusted qualifying holdings are £1.95m (actual qualifying holding £1.6m + QHA1 £200,000 + QHA2 £150,000),

and its adjusted total holdings are £1.7m (actual holding £2.4m - THA1 £500,000- THA2 £200,000) .

The adjusted total holding of £1.7m is less than the adjusted qualifying holding of £1.95m so S280A(6) applies to increase the total holdings to £1.95m.

The percentage of qualifying holdings is therefore 100% (1.95m/1.95m x 100%).

1 January 2009

On 1 January 2009 the adjustments in respect of the disposal on 1 July 2008 (QHA1 and THA1) cease to apply. There have been no changes in actual holdings since 1 September 2008.

The adjusted qualifying holdings are therefore £1.75m (actual qualifying holding £1.6m + QHA2 £150,000) and the adjusted total holdings are £2.2m (actual qualifying holding £2.4m- QHA2 £200,000). The percentage of qualifying holdings is now 79%.

1 September 2009

On 1 September the adjustments in respect of the second disposal cease to be made (QHA2 and THA2). If no further disposals have been made within the last 6 months, for the purpose of the 70% qualifying investment condition there will be no adjustments under S280(2).

Mergers

No disregard is available for any disposal that takes place between companies that are merging. For the definition of merging companies see VCM57010.