Shareholders in Oxford Technology VCT (OXT) and Oxford Technology 3 VCT (OTT) have set up an action group following the funds' loss of venture capital trust (VCT) status in March. The primary aim of the OXTAG group is to try to reverse HM Revenue and Custom's (HMRC) decision to revoke the status and keep shareholders informed, but if an appeal against the decision is lost, it will also develop policies on what should happen to the VCTs.
Oxford Technology and Oxford Technology 3 had their VCT status stripped because when investing in pharmaceutical company Scancell (SCLP), their manager breached the rules on investment limits. He said 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. As a result, shareholders in these two funds are set to lose many of the attractive tax benefits a VCT offers, including:
• front-end income tax relief on shares issued within a period of five years prior to losing the status;
• income tax relief on subsequent dividends;
• capital gains tax relief on subsequent gains on disposal of the VCTs' shares; and
• any deferred gains will come to charge.
The VCTs have now launched an appeal against HMRC.
OXTAG held its first meeting earlier this month at which the VCTs' fund manager, Lucius Cary, said the legal work has been given to a lawyer who believes HMRC has the discretion to reverse its decision. A key date is 7 June, as within three months of the initial decision the VCTs can seek a judicial review of HMRC's action. If a positive response to the appeal is not received by that date, the lawyer may recommend a judicial review. However, this would be costly and time-consuming as it could take nine to 15 months.
Mr Cary admitted the fault for the breach in the 15 per cent rule was his own and at this point no fees are being charged to the VCTs for work on the appeal. He has not yet sold the excess holding in Scancell shares because without VCT status, tax is now payable on profits and he is hoping to avoid this.
Mr Cary also has no plans to change the way he operates the VCTs and rejected a shareholder's suggestion that someone else should be employed to make checks. It is standard practice among many VCTs to outsource accounting and due diligence. But Mr Cary cited costs as the reason not to outsource some functions or to expand the board.
OXTAG reports that he seemed shocked at the suggestion that he or the VCTs' other directors stand down and he plans to seek re-election as a director of both VCTs at their annual general meeting (AGM) on 9 July. Some shareholders feel it inappropriate to have the same person as both fund manager and director, especially after the recent mistake, so they may try to remove him as a director at the AGM. Shareholders also felt that at least one new independent director is required on each VCT's board to establish adequate corporate governance and to assist with the HMRC appeal, and that within a reasonable period the chairmen of both VCTs should also be replaced.
Each VCT only has a board of two, one of which is fund manager Lucius Cary.
For further details on the OXTAG campaign, see http://www.sharesoc.org/campaigns5.html.
Oxford Technology and Oxford Technology 3 VCTs' AGM is at 12.00 on 9 July at the Magdalen Centre, Oxford Science Park, OX4 4GA.
The Association of Investment Companies has also produced a guide for consumers on the implications of the announcements by Oxford Technology VCT and Oxford Technology 3 VCT which you can view at www.theaic.co.uk. Points in the guide include loss of initial income tax relief on withdrawal of VCT approval.
Whether or not investors lose their initial income tax relief depends on when the shares were issued. If the shares on which income tax relief was claimed were issued earlier than five years prior to the withdrawal of VCT approval, this income tax relief will not have to be paid back to HMRC.
The date of withdrawal of VCT approval was, according to the announcements made by the two Oxford VCTs, 7 March 2014. If the shares were issued less than five years before VCT approval was withdrawn, then the tax relief claimed in respect of these shares may have to be paid back to HMRC. In this situation the investor has specific obligations to notify HMRC.
Investors who have claimed initial income tax relief on shares issued less than five years before the date of withdrawal of VCT approval have 60 days to inform HMRC that the income tax relief should be withdrawn. Failure to do so could give rise to penalties. The 60 day period starts when the investor learns
that something has happened which would cause the relief to be clawed back. Learning that a VCT has lost its status would be an event which triggers the start of this timetable.
Whether or not the VCT intends to appeal the withdrawal of its status does not affect the timetable: the 60 day period starts when the investor becomes aware that something has happened which would cause the relief to be clawed back, not when the result of an appeal is known.
Once HMRC has been informed, it will consider the position and, as appropriate, issue the investor with a revised income tax assessment for the year in which the shares were subscribed for. The investor will then have to make a payment in relation to that tax assessment.
Dealing with the other implications of the withdrawal of VCT approval, for example as regards deferred capital gains, taxable gains arising from a disposal of the shares or income tax on dividends should be dealt with in the investor's next tax return.
