VCT: VCT winding-up: introduction
FA02/S109 & FA02/SCH33; SI2004/2199; ITA/S274
Background and legislation
ITA07/S274 sets out a number of conditions that a company must meet, and continue to meet, if it is to achieve and maintain approval as a VCT (VCM54020). Events that occur during the course of its winding up could result in a failure of such a company to meet some of those conditions. For example, at various stages of the winding up, some or all of the shares making up the company’s ordinary share capital might cease to be listed in the Official List of the Stock Exchange, or the company might lose beneficial ownership of its assets. Without further provision, a loss of approval triggered by such events would result in loss of tax reliefs for investors (and the VCT).
This situation was addressed by FA02/SCH33, which enables Regulations to be made by the Treasury to provide tax rules applicable to cases where a VCT is being wound up. Regulations made under that power were introduced as part of The Venture Capital Trust (Winding up and Mergers) (Tax) Regulations 2004 (SI2004/2199).
FA02/SCH33 & SI2004/2199 introduce the concept of a ‘VCT-in-liquidation’. This is defined (ITA07/S320) as a company that:
- is being wound up (whether under UK law or the law of some other territory),
- was an approved VCT immediately before the commencement of its winding up, and
- whose winding up is for bona fide commercial reasons (and is not part of some scheme to avoid tax).
When the winding up regulations apply
The regulations in SI2004/2199 apply where:
- a VCT-in-liquidation is being wound up under proceedings that commenced on or after 17 April 2002,
the company has given notice to HMRC that a resolution has been passed, or petition granted, to wind up the company (SI1995/1979 Regulation 8(1)) (VCM54410), and
- the company must have had VCT approval for a continuous period of 3 years, in some cases 5 years, immediately preceding the start of its winding up,
- the company is being wound up by order of the court.
The 5-year period applies only where the company, having been approved as a VCT, first issued shares in the period 6 April 2004 to 5 April 2006 (the period during which ‘front end’ income tax (VCM51020) was available at a rate of 40%).
- Shares first issued before 6 April 2004 or after 5 April 2006: three-year approval requirement.
Where a company, having been approved as a VCT, first issues ordinary shares before 6 April 2004 or after the 5 April 2006 the continuous period throughout which the company must have held VCT approval status is 3 years.
- Shares first issued between 6 April 2004 and 5 April 2006: five-year approval requirement.
Where a company, having been approved as a VCT, first issues ordinary shares between 6 April 2004 and 5 April 2006 the continuous approval period is 5 years.
When the regulations do not apply
The regulations do not apply to any VCT-in-liquidation that is or has been a ‘merging company’ (other than a ‘successor company’) as defined in ITA07/S323 (VCM57020).
Effect of the regulations
For windings up to which SI2004/2199 applies the rules that normally relate to VCTs are modified. But this modification is limited to a prescribed winding up period of three years (or less if the winding-up is completed or ceases earlier without being completed) (VCM56020).
For the duration of this prescribed winding-up period SI2004/2199 operates as follows:
|VCM56030||Investors’ ‘front-end’ income tax relief: of itself, commencement of winding up of a VCT will not result in the loss of investors’ ‘front-end’ income tax relief.|
|VCM56040||Investors’ CGT exemption: investors’ capital gains tax exemption on disposals of VCT shares is preserved despite the commencement of its winding up.|
|VCM56050||Investors’ deferred gains: the winding up of a VCT does not of itself cause investors’ deferred capital gains to be brought back into charge.|
|VCM56060||Disposals by VCT: disposals by the VCT during the course of its winding up do not give rise to chargeable gains or allowable losses.|
|VCM56070||Investments transferred between VCTs: hard-to-sell investments may be transferred from a VCT that is being wound up to another VCT without loss of their status as ‘qualifying holdings’.|
Attribution of liquidator’s acts
For the purposes of the winding up regulations, and this guidance, things done by a VCT-in-liquidation include things done by a liquidator of that company (Regulation 2(4) of SI2004/2199).