HMRC blunder leaves VCT investors in limbo

The wording in the rules falsely indicates that established VCTs could lose their tax-efficient status if they pay dividends to investors who bought shares in the new tax year starting April 6th.

VCT managers have been spooked by the blunder and are now too nervous to issue any new top-up shares to investors until the rules are made clearer.

Insiders say the VCT industry has been aware of a problem for weeks, but the majority of trusts are still accepting new money from investors without informing them that it is sitting in cash instead of being funnelled into the tax efficient investments they signed up for.

Legal experts have been warning VCT managers that the taxman could be using the new rules to put an end to existing VCTs selling top-up share issues - by making paying dividends to new investors from existing reserves against the rules.

But HMRC has confirmed that the rules, announced in the Budget in March, were actually designed to prevent money placed in VCTs after April 6th from being used to pay dividends without ever being invested in small companies.

And it has assured the Association of Investment Companies (AIC), the trade body that represents VCTs, that it will amend the legislation within a month to allow VCTs to continue to issue shares to investors without having to fear of falling foul of the new rules.

A HMRC spokesperson told Investors Chronicle: “The legislation is intended to prevent VCTs from repaying investors' capital in the form of tax-free dividends after the investor has received tax relief on it but before the VCT has been required to fully invest the capital in qualifying small and medium companies. The intention is that this will apply in respect of capital raised from shares issued on or after 6 April 2014, but not in respect of capital raised before that date.

“HMRC considers that the legislation which was introduced to Parliament in March does have the intended effect. However some members of the VCT industry are concerned that the legislation, as drafted, is not sufficiently clear that it applies only in respect of capital raised on or after 6 April 2014. In order to give the industry the certainty it desires, the Government will make an amendment to the legislation, at either Committee or Report stage. HMRC is working closely with the Association of Investment Companies to ensure that the industry is comfortable with the drafting.”

Around £480 million was invested in VCTs in the 2013/14 tax year.

VCTs affected by the fudge in the new legislation