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HMRC internal manual

Venture Capital Schemes Manual

VCT: VCT mergers: HMRC approval: criteria

SI2004/2199 Regulation 9

HMRC will not approve a merger for the purposes of SI2004/2199 (see VCM57020) unless a joint application by the merging companies and, in any case where the successor company is not one of the merging companies, the successor company satisfies them on the following issues:

No tax avoidance The merger must be for bona fide commercial reasons and not part of a scheme or arrangement to avoid tax. In this context, having as one of the main purposes compliance with these regulations, which are drafted to maintain the tax reliefs VCTs and investors are entitled to, will not in itself prevent this test from being satisfied
Previously issued shares Where the merger is to involve the issue of shares in a company that is not one of the merging companies the only permitted issued shares in the successor company are:
  • subscriber shares,
  • such shares that may be required to obtain a trading certificate under section 117 Companies Act 1985, and
  • any other shares previously issued to effect the merger.    
      Minimum share capital to be exchanged Where the merger is effected through the exchange of shares more than 50% of the issued share capital of the merging VCTs (other than the successor VCT) have to be exchanged as part of the merger.
      Consideration other than shares - maximum value Where all or any members of a merging company are offered any consideration for their holdings other than shares in the successor company, the amount of such consideration must not exceed 10% of the aggregate amount of value or consideration offered to the members of the merging company.
      Proportionate share exchange Where shares are issued to effect a transfer of business and assets the shares must be issued in respect of and in proportion to (or nearly as maybe in proportion to) the holdings of the persons to whom they are issued in the other merging companies.
      Maximum value of residual business Where the shares issued to effect the merger are in consideration of the transfer of only part of the business of a merging company to the successor company the market value of the part not to be transferred must be merely incidental in comparison with that of the part that is to be transferred.
      Maximum amount of money used for purchase of own shares The money raised by any shares issued for new consideration (or any assets derived from that money) to be used for the purpose of the successor company purchasing its own shares must not exceed the least of:
  • 20% of the amount or value of the money raised by the shares issued for new consideration,
  • 5% of the total value of all amounts subscribed for eligible shares (as defined in ITA/S285(3)) 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.

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Meaning of ‘merely incidental’

Where only part of a business is transferred to the successor company, Regulation 9(3)(f) of SI2004/2199 says that market value of the part not transferred must be ‘merely incidental’ to the part transferred by reference to the relative values of the two components. The phrase is not further defined, any part of the business greater than 10% of the whole should not be regarded as ‘merely incidental’; cases of doubt or difficulty should be referred to CTIAA (Structure, Incentives & Reliefs team).

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Meaning of ‘shares issued for new consideration’

In these Regulations ‘shares issued for new consideration’ are shares in the successor company issued in the period during which the merger takes place, but not in exchange for shares or as consideration for a transfer of the whole or part of the business of the other merging company (or merging companies).