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HMRC internal manual

Venture Capital Schemes Manual

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HM Revenue & Customs
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VCT: VCT approval: further share issues and the 70% and 30% or 70% tests

ITA07/S280 and SI2004/2199 Regulation 14

Further share issues

There is a relaxation in relation to the 70% qualifying holdings and 30% or 70% eligible shares tests where a VCT has issued further ordinary shares. This applies where there is an issue of ordinary shares after an earlier issue of ordinary shares, which took place whilst a company was approved as a VCT. In these circumstances, the 70% and 30% or 70% tests do 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’). For accounting periods after this the tests apply to all a VCT’s investments, whether funded by earlier issues or by the further issue of ordinary shares.

The ‘disregard period’ will apply to investments funded either directly or indirectly from further issues. For example, if a VCT disposes of an investment funded directly from a further issue and acquires another from the proceeds, then the later investment is also regarded as being funded from the further issue. Similarly, investments acquired using income generated by an investment funded by a further issue will themselves be regarded as being funded from the further issue.

Where a VCT has provisional approval, it will not be prevented from having full approval during the disregard period. At the end of the disregard period the 70% and 30% or 70% tests are applied to all investments whether funded by an earlier or later issue.

If HMRC do not believe that a VCT will meet the 70% and 30% or 70% tests applied to all investments once the disregard period has ended, then approval may be withdrawn during that period. This is the case even if the VCT has full approval.

See also VCM58030 for details of the operation of the reporting rules for investments funded by further issues.

Further share issues on or after 6 April 2004

Regulation 14 of SI2004/2199 restricts the application of ITA07/S280 where the further share issue takes place on or after 6 April 2004. It restricts the relaxation of the 70% qualifying holdings condition and the 30% or 70% eligible shares condition which is provided by ITA07/S280 to cases in which the money raised by the further share issue is raised for a specified purpose. That purpose is the acquisition of additional investments that will meet the 70% and 30% or 70% tests.

In particular, the purpose described above is deemed not to be satisfied in either of the following two cases:

Any of the money raised by the further share issue is used by the VCT to purchase any of its own shares and either:

  • HMRC consider that the shares purchased are not insignificant in relation to the VCT’s issued ordinary share capital, or
  • the purchase is made as a result of a general offer to VCT members.

The further issue of shares is ashare issue for new consideration (see VCM57030) that takes place during the course of a merger of two or more VCTs and the amount or value of the money raised by that further share issue that is used for the purpose of the ‘successor company’ purchasing shares in any of the ‘merging companies’ (VCM57020) exceeds the least of:

  • 20% of the amount or value of the money raised by the shares issued for new consideration (see VCM57030),
  • 5% of the total value of all amounts subscribed for eligible shares (as defined in ITA07/S273(1)) in the successor company, the other merging company, or other merging companies, as the case may be in issue immediately before the merger; and
  • £3,000,000.

Regulation 14 is not regarded as restricting the ability of the VCT to disburse some of the money raised by the further share issue on management expenses. The 70% and 30% or 70% tests to be applied to the money raised by the further share issue should be applied to the net amount of money raised after allowing for such disbursements.

Neither is Regulation 14 regarded as precluding a VCT from placing the money raised by a further share issue on short-term investment (for example, by the purchase of gilts) pending longer-term investment of that money in qualifying holdings.

Where any of the money raised by the further share issue is used for a purpose other than for the specified purpose (see above) the provisions of ITA/S280 are treated as not having applied from the time immediately before the money was used for that other purpose. In such a case for the purposes of the 70% and 30% or 70% tests the VCT’s investments are treated as including the money raised by the further share issue. The 70% and 30% or 70% tests therefore need to be applied at the time immediately before the money was used.