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Clause 50 - Venture capital trusts

Finance (No. 2) Bill – in a Public Bill Committee at 9:10 am on 13th May 2014.

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Question proposed, That the clause stand part of the Bill.

Photo of Gary Streeter Gary Streeter Conservative, South West Devon

With this it will be convenient to discuss the following:

Government amendments 16 to 19.

That schedule 8 be the Eighth schedule to the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 50 introduces schedule 8, which makes amendments to the venture capital trust regime to ensure that the tax reliefs are used as the original policy intended and to facilitate different types of investment. The changes should ensure that the VCT  regime continues to be well targeted and effective in facilitating access to finance for smaller business with growth potential.

I also want to speak to Government amendments 16 to 19, which clarify the impact of the restriction of VCT returns to capital. The Budget announced a further change to VCTs and the other tax-advantaged venture capital schemes—the enterprise investment scheme and the seed enterprise investment scheme—to prevent low-risk companies already benefiting from particular renewable subsidies from also qualifying for tax relief. I will table an amendment on Report to introduce that legislation. I know that a number of interested parties have raised questions about the types of company that may be affected, so an information note will be published shortly to clarify the scope of the change.

The Government provide generous tax reliefs to individuals taking on the risks of investing in smaller, relatively unproven businesses with growth potential. The VCT regime was introduced in 1995 specifically to encourage investment by retail investors who were interested in investing in smaller, higher-risk trading companies, but who prefer to have their investments made, managed and diversified by a professional fund manager. In 2012 the Government substantially expanded the scope of the VCT regime by allowing companies with up to 250 employees and £15 million gross assets to qualify for investment. Annual investments of up to £5 million were also allowed under the scheme. However, as well as expanding the scheme, the Government have made other changes to ensure that the tax relief continues to be well targeted, supporting high-risk investments into companies that might otherwise struggle to access finance.

In order to preserve the integrity of the regime, it is important that we continue to be vigilant in limiting opportunities for misuse of the generous tax incentives that we offer. It is also important that the regime continues to be relevant to wider changes in the market and does not unnecessarily restrict the regime to one type of investor. The clause makes a number of changes to ensure that the VCT regime continues to be well targeted and effective. The changes are fairly technical; I will provide a brief overview of each in turn. Further information is provided in the response documents and updates on the consultation on VCTs available at gov.uk.

The bulk of the clause deals with two changes that ensure tax reliefs cannot be misused by recycling moneys that benefited from tax relief or returning capital that has not been invested. The first of the changes is described in schedule 8 as linked sales. At Budget 2013, the Chancellor announced his concern that some VCTs were taking advantage of the tax reliefs in the regime in a way that was not intended through a practice commonly known as enhanced share buy-backs. This involved the VCT buying back shares from investors at the same time as providing an opportunity for investors to subscribe for new shares in the same VCT. In effect, the investor’s money was simply being recycled within the fund and their tax relief was being refreshed. In some cases no new investments were being made at all.

If the Government leave that practice unchecked, it is likely to increase the Exchequer cost of the VCT regime without increasing the pool of money available to VCTs for investment in small and medium-sized enterprises. Perhaps more importantly, we were concerned that, without a change in the rules, investor perception of  VCTs would become skewed. Therefore, the clause makes changes to restrict VCT tax relief where there is a sale of VCT shares linked to reinvestment. That should prevent taxpayers from receiving multiple rounds of tax relief on the same underlying investment.

The second change is described in the schedule as “return of capital”, and is related to the linked sales of VCT shares and deals with the issue of VCTs using share premium accounts and other reserves to offer investors a tax-free return. Although the return is often described to investors as a dividend, it bears no relation to investments made. In some cases, these returns have been made to investors before the VCT has made any investments into SMEs. The Government recognise that the practice has not been prevalent across the industry, although there have been some examples of misuse. However, we felt that if the rules were left unchanged, the robust action that I have described to limit linked sales from VCTs could quickly be undermined.

Again, without action in this area, arrangements were likely to increase the cost of the VCT tax reliefs, but without an equivalent increase in money invested in SMEs. The schedule therefore introduces a new rule to limit inappropriate returns of capital by restricting the use of these accounts when funds are initially raised and where VCTs may not have made qualifying investments. The new rule limits a VCT’s ability to return share capital that does not represent profits made on investments within three years of the end of the accounting period in which funds were raised. We intended the rule to apply only to new issues of shares.

This approach was agreed with the industry shortly before the Budget this year. However, we have received representations expressing concern that the original drafting might affect pre-6 April share issues, which was not the intention of the policy change. We have therefore tabled Government amendments 16 to 19, which make minor changes to the legislation to ensure that the rule clearly applies only to new capital raised.

Schedule 8 also makes a minor amendment to the VCT legislation to deal with time limits for making taxpayer assessments. The change will ensure that HMRC can make assessments to recover VCT tax relief to ensure that the VCT rules will continue to work as intended, rather than relying on the general rules applicable to making assessments. Investors using VCTs must hold their shares for 15 years to continue to qualify for the tax relief that they have received. However, the VCT legislation does not contain its own provisions as to the time period in which HMRC may make assessments to recover tax relief. HMRC is therefore at present reliant on the general rules applicable to the making of assessments contained within the Taxes Management Act 1970 and the Finance Act 2008.

The general time limits in the legislation were reduced to a period of four years from the end of the relevant year of assessment. That change has the unintended effect that if an investor disposes of his VCT shares in the 12 months before the fifth anniversary of their acquisition, HMRC is time barred from raising an assessment to recover the VCT relief. The change that the clause introduces for time limits for making assessments simply preserves the intention of the legislation and the five-year minimum period for VCT investments.

Finally, the clause provides for investors to invest in VCTs via a nominee. Around 11,000 individuals currently invest in venture capital trusts in the UK. By allowing individuals to acquire their investments via nominees, the Government are facilitating a wider range of investment opportunities. The change will allow individuals to invest via platforms, as is already possible for many other investment trusts—and, indeed, for investments in the enterprise investment scheme. This change should mean that VCT investments will be offered on platforms, alongside other investment products, allowing individuals to compare different investment opportunities. We hope the change will open up opportunities for a broader range of investors to engage with the VCT scheme and support SMEs’ access to finance. We intend to consider this as part of the consultation and evidence-gathering exercise that will take place over the summer. The amendment also provides a power to amend the regulations relating to a VCT’s obligation to provide HMRC with details of their investors.

When speaking to the clause, I said that VCT shares must be held for a minimum of 15 years; the minimum investment period is in fact five years. I apologise if a slip of the tongue may have misled the Committee. With that prompt correction—the Opposition will no doubt have spotted the slip; I am keen to correct it before it is pointed out—let me say that I believe the changes in the clause will result in a better targeted and more effective VCT regime. I hope the clause will stand part of the Bill.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 9:30 am, 13th May 2014

It is a pleasure to be back in the Committee this morning, Mr Streeter.

It is always good to see a Minister who recognises the error of his ways, even with an inadvertent slip of the tongue. I am glad he was able to correct that point. I thank him for sending us a letter in advance with information about the clause and the Government amendments to it. That is always helpful to us in understanding the Government’s thinking.

I note the Minister’s point about bringing back further issues on Report. I am sure he will be pleased to hear that we generally support the changes to ensure that investors do not benefit from multiple rounds of tax relief on the same underlying investment, which is one issue the clause tackles. I do no intend to go through every detail he has outlined, but it is worth stressing what, as I understand it, the Government are trying to do. As it stands, the legislation could be exploited in a way that Parliament did not intend. It is important we clear up any issues to do with that.

I would like the Minister to respond briefly to a couple of points. I am interested in how investments and venture capital trusts are actively supporting SMEs. How are the Government monitoring that? Can he provide figures for the level of VCT investments in SMEs? Will he also say how many of the companies invested in by VCTs have gone on to be successful contributors to the UK economy? I also want to draw attention to a point made by the Association of Investment Companies, which supplied information in advance of this debate and recognised that

“The need for guidance is not a shortcoming of the amendments proposed.”

Will the Minister say when and how further guidance will be produced?

The Minister wrote in his letter that

“there may be circumstances in which Government would want to disapply or amend the effect of the new legislation, where one or more VCTs merge.”

As he has also said, a power to make such changes by secondary legislation is being introduced. Will he say more about the circumstances in which he would wish to take advantage of that power?

Photo of David Gauke David Gauke The Exchequer Secretary

I thank the hon. Lady for her support for the clause and the amendments to it. VCTs are a long-standing part of our tax system, in place since 1995. I hope that both Government and Opposition Members share the view that it is important that we incentivise investment in the UK and, in particular, that we do what we can to ensure that investors have the opportunity to invest in those smaller businesses that might involve some risk but have potential for high growth. We need an environment that encourages dynamic and entrepreneurial businesses.

In terms of the level of VCT investment and how the Government monitor that, according to figures from the Association of Investment Companies, £435 million was raised for SME investment in 2013-14. There were 27,000 investors in over 2,000 companies in that sector, so we do think it is significant. From speaking to those in the industry, I sense that this area is growing more strongly and that there is considerable appetite for investment, which is encouraging.

HMRC produces guidance for all legislative change. As a rule it aims to do that within about three months of Royal Assent. HMRC will produce assistance for the VCT industry in advance of formal publication, as necessary. As the hon. Member for Kilmarnock and Loudoun said, guidance is a necessary part of the changes; we hope that that will be of assistance.

HMRC monitors all VCT investments through the specialist advance assurance process, which considers applications for investment. That gives HMRC a strong view and perspective on the types of investment in the area. What is desired is a balance between establishing the necessary incentives and ensuring that there is proper focus on high-risk investment. That is why we have in recent years made the changes that we have, ensuring that the VCT regime is properly focused on those high-risk areas. The tax reliefs are generous and should not be given for low-risk investment. However, we believe that high-risk investment—the VCT regime—deserves support.

As to secondary legislation, the VCT industry has indicated that there may be circumstances where VCT mergers merit different treatment. Officials are still exploring that with the industry; hence the precautionary power to make changes in secondary legislation.

I hope that those points of clarification help the Committee.

Photo of Gary Streeter Gary Streeter Conservative, South West Devon

I commend the Minister for his personal knowledge on those technical issues.

Question put and agreed to.

Clause 50 accordingly ordered to stand part of the Bill.