A number of venture capital trusts (VCTs) have been holding fire on issuing new shares amid fears that it could result in them losing their VCT status.
In the Budget, the Treasury said that new funds raised could not be used to pay dividends and instead had to be invested into qualifying companies.
But confusion has arisen around the wording of the draft legislation. The Association of Investment Companies (AIC) said it can be read as saying that VCTs would lose their VCT status if they paid dividends from historical cash reserves. However, the legislation does in fact only threaten this loss of status on payments made out of funds raised on or after 6 April 2014.
This is a significant difference given that many VCTs are mature and have built up cash reserves to fund dividends over several years.
The AIC told its members in a newsletter that it has sought and received clarification from both the Treasury and HMRC and the policy is as originally expected. The government is expected to amend the legislation for clarification purposes in the near future.
The Treasury told the AIC: ‘The intention is that the new rule applies only in respect of returns of capital from shares issued on or after 6 April 2014. Where VCT returns of capital are made out of capital raised from shares issued on or after 6 April, this would be a breach of the rules. Existing reserves should not be affected.’
The AIC added: ‘The AIC welcomes this clarification. It will continue its dialogue with officials to ensure a satisfactory outcome is achieved.’
‘While today’s development is positive, it may be prudent for VCTs to take advice on the full implications of the new rules and consider if they need to delay making any share allotments, and any related payments, in the new tax year until the precise implications of the rules fully understood.’