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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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VCT: VCT approval: share exchanges and reconstructions: earn-outs

SI2661/2002 Regulation 10

This instruction applies where there has been an exchange of shares or securities as described in VCM55310 or a scheme of reconstruction as described in VCM55340.

As at VCM54120 Company B may acquire shares or securities in Company A and give initial consideration (either shares/securities or cash) plus an earn-out right. If the necessary conditions are met the right will become due. Such rights are often satisfied by a new issue of shares or securities in Company B. A VCT may exchange shares or securities in company A for consideration including an earn-out right. When, in pursuance of the right, shares or securities in company B are issued to the VCT, these will be ‘earn-out shares or securities’. The ‘earn-out shares or securities’ will be treated as if they were received in exchange for the company A shares or securities.

The VCT can then elect to recalculate the value of the company B share and securities.

If the VCT does make an election, in both VCM54210 and VCM54220, the formula shall be amended so that:

  • the earn-out shares and securities will be included in the calculation of Nv and Nmv at their market value immediately after they were issued, and
  • the earn-out right is omitted from the calculation of C.
  • To make an election (which will be irrevocable), notice must be given to HMRC within one year from the end of the accounting period in which the earn-out shares or securities are issued.