HM Revenue & Customs (HMRC) has amended Venture Capital Trust (VCTs) legislation that has been preventing VCT managers from issuing new shares to investors, for fear of losing their tax-efficient status.
New wording of the rules has now been passed through Parliament and fully approved at committee level, which gives VCTs the green light to continue business as usual.
Earlier this month, Investors Chronicle reported that thousands of VCT investors were being left in limbo because VCTs had taken their cash, but were holding off issuing new shares because uncertainty over the legislation meant they were too nervous.
The original wording in the rules falsely indicated that established VCTs could lose their tax-efficient status if they pay dividends to investors who bought shares in the new tax year starting 6 April.
Legal experts were warning VCT managers that the taxman might have been 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 admitted it had fudged the wording of the rules, which were actually designed to prevent money placed in VCTs after 5 April from being used to pay dividends without ever having been invested in small companies.
Guy Rainbird, public affairs director at the Association of Investment Companies (AIC), the trade body that lobbied the taxman to reword the rules, said the legislation was pushed through Parliament for approval "at the earliest possible opportunity".
"Officials at HMRC clearly realised how important it was to get this changed, and we are very happy with the way they engaged with us. We are supportive of these changes as they will benefit VCTs and their investors," he said.
VCTs are expected to start issuing new shares again in around 2-3 weeks, which will be welcome news to investors that have applied to buy VCT top-ups. However, the new wording has thrown up another issue which may force a number of VCTs to change their fee structures.
It is common for VCTs to charge a large fee such as 5 per cent, and then rebate 3 per cent to investors in shares because there is a tax benefit on the sum. However, because the new legislation says rebates cannot be paid out of new capital, VCTs may have to stop offering rebates all together.
Paul Jourdan, CEO of Amati Global Investors, said: "If VCTs stop offering rebates on fees it will make things simpler for investors. Instead of charging 5 per cent upfront and rebating 3 per cent, we will simply charge 2 per cent upfront with no rebate.
"This is a very minor issue though. The legislation amendment is very good news and VCTs will definitely start issuing shares as soon as they can now."
