Oxford Technology VCT (OXT) and Oxford Technology 3 VCT (OTT) have had their venture capital trust (VCT) status removed by HM Revenue & Customs, which could result in the loss of substantial tax benefits to their shareholders. This is the first time that VCTs have had their status stripped since the inception of this type of fund in 1995.
When investing in pharmaceutical company Scancell Holdings (SCLP), the Oxford VCTs' manager breached the VCT rules on investment limits . He 'forgot' that VCTs cannot invest more than 15 per cent of their portfolio in a single company as calculated by the last price at which that company's shares were purchased.
Oxford Technology VCT invested £125,000 in Scancell Holdings in 1999 and has made subsequent investments since. In December 2003 Oxford Technology 3 VCT invested £150,000 in Scancell and has also made subsequent investments.
Scancell is now quoted on the Alternative Investment Market (Aim) and in August 2013, both VCTs purchased additional shares as part of a discounted rights issue. This brought the total invested by Oxford Technology VCT to £491,000, less than 10 per cent of the total capital raised by this VCT, and the total invested by Oxford Technology 3 to £400,000, less than 10 per cent of the total capital raised by that VCT.
However, because Scancell's share price had increased significantly these investments resulted in a breach of the 15 per cent rule. Scancell shares have done well and are up over three times over the last three years.
Oxford Technology VCT is the top performing VCT in terms of net asset value (NAV) over the past five years, up 754 per cent, according to Bestinvest data, and it is up 383 per cent since launch. Oxford Technology 3 VCT is up 63 per cent over five years and 677 per cent since launch.
However, the VCTs' share prices have fallen sharply since it was announced on Thursday 13 that they are losing their status, and Oxford Technology trades at a discount to NAV of nearly 14 per cent in contrast to its 12 month average premium of more than 20 per cent. Oxford Technology 3 VCT trades at a discount to NAV of 43.55 per cent in contrast to its 12 month average discount of 34.85 per cent.
Lucius Cary, manager of the VCTs, says that he was keen to support Scancell's rights issue because they like to stay with the start-ups they invest in until they deliver what they are seeking to do. But he admits: "I forgot about the 15 per cent rule, this was a technical error on my part, but as soon as I discovered this (in October last year) I called HMRC and notified them of the inadvertent breach."
Mr Cary adds that he offered to sell shares to reduce the holding or do whatever HMRC felt necessary, but this was not accepted and after considering the case HMRC decided to withdraw VCT approval, effective since 7 March. As a result the VCTs have not yet sold any shares and Oxford Technology is appealing against HMRC's decision. If the appeal is not successful the VCTs may delist.
HMRC guidelines say that circumstances in which VCT approval will not be withdrawn when there is a breach of the rules include:
• the breach was as a result of circumstances outside the control of the company;
• those circumstances prevented the company from meeting the conditions;
• the company took all reasonable steps to continue to meet the conditions;
• the breach is notified to HMRC as soon as it is identified, and
• the position is corrected without delay.
"The calculations involved in meeting the 15 per cent rule are very complex and on re-examination for the appeal could provide room for a different outcome," says Martin Churchill, editor of the Tax Efficient Review. "We believe that the main VCT providers have enough experience in applying the VCT rules, and use external advisers which should allow them to minimise this kind of risk."
Oxford Technology did not use external advisers. "We did that ourselves because we are a small fund and it minimises costs for investors," explained Mr Cary.
Although negotiations with HMRC have been going on since last October, Oxford Technology did not inform shareholders till it received the ruling last week.
WHAT DOES WITHDRAWAL OF VCT STATUS MEAN FOR INVESTORS? For investors in the Oxford Technology VCT and Oxford Technology 3 VCT, HMRC's ruling means that: • front end income tax relief in shares issued within a period of five years prior to this notice will be withdrawn; • any deferred gains come to charge; • subsequent dividends from the VCTs will not be exempt from income tax; and • any subsequent gains on disposal of the VCTs' shares will not be exempt from capital gains tax (CGT). Oxford Technology has not raised new money for many years so its shareholders should be unaffected by the first point. However, Oxford Technology 3 VCT raised £995,000 between 2007 and 2010 and investors who put money into this could have to return any upfront tax credit received. "The trickier issue here may relate to anyone in Oxford Technology who invested in order to defer a CGT liability, as this VCT was launched prior to 6 April 2004 when VCTs had CGT deferral features," says Jason Hollands, managing director at Bestinvest. "For these investors, the liability to CGT re-crystallises on the date the status is withdrawn." Oxford Technology advises its shareholders to get financial advice and The Association of Investment Companies (AIC) has produced a guide on the implications of the loss of VCT status which you can see on its website or by clicking here. |
