Venture Capital Trust Association (VCTA) submission to the Treasury Select Committee’s SME Finance Enquiry, March 2018       


 1.       The VCTA represents ten of the largest Venture Capital Trust (VCT) funds, equivalent to £3 billion. Venture Capital Trusts are Government backed investment schemes that channel money into young, innovative and high-tech SMEs that struggle to get finance from traditional risk-averse investors. VCTs are estimated to have created 27,000 jobs since they were first launched, and many VCT backed businesses have gone on to become household names, like Secret Escapes and Fat Face.

2.       VCTs offer young, innovative and high-tech businesses up to £12m (£20m for Knowledge intensive SMEs) of risk capital for the long-term growth and development with experienced investors who offer their own human capital to help SMEs overcome the challenges they face when scaling up. 

3.       Changes to the scheme rules in November 2015 have resulted in extremely lengthy delays in HMRCs processing of VCT investment applications.  These delays are preventing the effective delivery of risk finance to SMEs, causing serious problems for the businesses themselves.  Addressing these delays would mean that VCTs would be more effective in being able to invest in SMEs across the UK who are trying to scale up and employee more people.

4.       Within the last few weeks, and while this inquiry into SME finance has been taking place, HM Treasury and HMRC have begun to address this issue. HMRC have said that they will not withdraw VCT status for an ‘inadvertent’ breach of the investment rules where the VCT has relied on the opinion of professional advisers before making an investment.

5.       This is a helpful step but the VCTA believes that for VCTs to once again rely on professional advisors and unblock the investment process:

a.       HMRC needs to provide greater clarity concerning areas where it currently exercises a judgement over certain investment conditions;

b.      guidance on what actions a VCT would need to take to remedy an ‘inadvertent breach’ of VCT rules; and

c.       allow VCTs to hold a small number of investments that HMRC subsequently deems to be non-qualifying despite having relied on professional advisers.

 VCT Background

 6.              The effective supply of capital is crucial in closing the SME finance gap and realising the Government’s future ambitions for the UK economy.  The VCT scheme was established in 1995 to encourage private investors to invest in fully listed investment companies that would use their shareholders’ capital to invest in certain types of SMEs which would otherwise find it difficult to obtain long-term risk finance. 

7.              In common with the Government’s other Venture Capital Schemes (the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)), to ameliorate the risk of making such investments, investors benefit from various tax reliefs.  Under the VCT scheme investors can claim income tax relief of up to 30% of the amount invested (subject to the annual investment limit of £200,000), tax free dividends and tax-free capital growth. A range of investors choose to invest in VCTs and many may only invest £5-10k, using the scheme to supplement ISA investments and aid retirement planning.

8.              VCTs are listed on the London Stock Exchange allowing their shareholders to access their capital by selling their shares, without the need for the VCT itself to sell its underlying investments. The unique ‘evergreen’ structure of VCTs encourages long term investment from the outset, giving investee companies longer to grow – the longer money is invested, the more chance there is for the investee to be successful. It also means that when an investment is realised, proceeds can be recycled into new growth companies, and some of the longer running VCTs have seen their funds recycled more than two times.

9.              By their nature, VCTs are investors of ‘patient capital’: the average duration of a VCT investment is seven years and VCTs fund businesses in multiple rounds of investment, allowing investors to respond to the changing needs of the business they invest in as it develops.

10.          Data from the VCTA on the types of companies that VCTs have invested in since 2015 demonstrates that investments are being made into growing, entrepreneurial-led, tech-related businesses. The average headcount of each investment was 40 employees, which was significantly below the 250 employees limit. In total, 74% of investments had fewer than 50 employees and 96% had fewer than 100 employees. The average VCTA investment is £1.9 million, into a company with approximately 40 employees and revenue of £3 million.

11.          VCTs invest throughout the UK, helping to balance the nation’s economy, and as VCTs support businesses to grow rapidly through the development of their management teams and operational functions, VCTs help create employment at all levels within a business. Research by the Association of Investment Companies (AIC) shows that where an investment has been present for over five years, the average increase in jobs is 103 per company. Companies currently backed by the VCT scheme have created 27,000 jobs since the date of the first investment by a VCT.

HMRC Advance Assurance Delays

12.          The Government understandably has to ensure that VCT funds go to businesses that fall within the VCT mandate, that the scheme operates effectively and represents good value for money for the taxpayer.  As a result, periodically the VCT schemes are subject to review and amended to ensure funds are properly targeted. 

13.          Following a review of EU State aid rules in 2014, the Government made significant amendments to the VCT scheme in November 2015 as well as further amendments in November 2017 following the Patient Capital Review.

14.          The VCTA believes that the 2015 and 2017 reforms to VCTs have had a major positive effect in ensuring investments are properly targeted on higher risk, higher growth businesses dramatically reducing money raised in lower risk, ‘capital preservation’ funds.  

15.          However, these changes have considerably increased the complexity of the VCT investment rules providing HMRC with the broader, discretionary powers that are applied on a case-by-case basis.  They also introduced the penalty for a breach of this rule to be a complete loss of VCT status for the fund. This would have catastrophic consequences for the fund’s shareholders as it would mean they would no longer benefit from any of the VCT tax benefits and require those shareholders who had not held their shares for a minimum of five years to repay any income tax relief they had received.

16.          To ameliorate the risk of breaching the VCT investment rules, since November 2015 VCTs have sought an advance assurance from HMRC that the investments they propose to make meet the VCT investment rules. The same considerations also apply to the EIS and SEIS schemes.

17.          The wholly disproportionate penalty of the disqualification of an entire fund for a non-qualifying investment means to proceed without having received formal advance assurance approval from HMRC represents real risk to company boards. The members of the VCTA appreciate that the current regulations are intended to prevent abuse. However, the consequence has been that VCT funds are only proceeding with investments which have prior HMRC advance assurance approval. This places enormous pressure on HMRC’s inspectors and uses up very valuable resources that otherwise would be available to deal with other tax matters.

18.          The problem that VCTA members are facing is that there are extremely lengthy delays at HMRC in processing the applications, causing serious financial problems for the businesses themselves. The current target for processing applications, announced in the 2017 Budget, is 15 days, yet the average length of time for clearance is at 64 days, with some applications from October last year still yet to be processed nearly six months on. As of 8 March, a total of 28 investments from VCTA members amounting to £81.4 million were awaiting clearance from HMRC, and the system is now at breaking point.

19.          Such severe delays in funding can have serious and catastrophic effects on businesses, who may have no other recourse for financial support and are relying on clearance from HMRC. The VCTA know of one business awaiting advance assurance using a senior executive’s personal credit cards to cover costs, whilst also being notified by a debt collector within HMRC that they were coming into the business to ‘lock the assets of the company’, because of unpaid PAYE which were a direct result of the delays in the advance assurance process from HMRC.

20.          The industry and VCTA members contributed to the “Tax-advantaged venture capital schemes - streamlining the advance assurance service” consultation into this issue that was published in December 2016 and closed in January 2017.  The current situation is particularly frustrating as we predicted this difficulty and recommended changes at that time. We have since contributed to a constructive dialogue with HMT and HMRC and discussions remain ongoing in pursuit of a workable solution.


21.          HMRC’s response to the backlog in advance assurance applications has been to encourage funds to “self-approve investments” on the basis of professional expert advice.  However, the wholly disproportionate penalty of the disqualification of an entire fund for a non-qualifying investment means to proceed without having received formal advance assurance approval from HMRC represents real risk to VCTs and their shareholders.

22.          To address this issue, on 9 March 2018, HMRC published revised guidance (Appendix 1) for advance assurances for VCTs. The Guidance states that provided the VCT takes ‘all reasonable steps’ to ensure an investment would be qualifying HMRC will not withdraw status from a fund having inadvertently made a non-qualifying investment.

25.          This is a helpful first step in helping unblock the current ‘log-jam’ in the advance assurance process. While helpful, this guidance raises further issues, especially around the areas where HMRC currently exercises a judgement with respect to the VCT investment rules and the process of remedying the breach.  

26.   VCTs engage professional advisers well in advance of making investment decisions as part of their efforts to ‘take all reasonable steps’ to ensure an investment is qualifying. To make the self-approval system workable and reduce the chances of subjectivity and inconsistencies in the application of the rules, these professional advisers need HMRC to provide clarity over:

a.       The growth and development conditions;

b.      The ‘capital at risk’ conditions especially ‘commercial’ interest rate on loans;

c.       The exemptions to the age limits where investments are ‘transformational’ or where the investment enables the SME to expand into a new geographical or product market; and

d.      What steps a VCT would need to take to remedy an ‘inadvertent breach’ either allowing the VCT to hold the investment or sufficient time to arrange a disposal of the investment in a commercial manner.

e.      Establish a statute of limitation regarding the length of time HMRC has to provide an opinion on self-approved investments.

27.          By their nature VCT investments are highly illiquid and cannot be disposed of quickly. The imposition of a six or twelve month timeframe would put the VCT in an invidious position that would only mean a significant loss of value were the VCT to try to sell the investment quickly.  Ultimately, the VCT might be forced to essentially give the investment away to protect their VCT status but in so doing VCTs would need assurance from HMRC that the VCT was not acting ‘uncommercially’ – a condition which itself could lead to a loss of VCT status.


28.          The wholly disproportionate penalty of the disqualification of an entire fund for a non-qualifying investment is at the heart of this issue.  The legislation should be amended to allow VCTs to hold a small number of investments (say, a maximum of two at any one time) that have been deemed non-qualifying by HMRC after having made the investment on the basis of professional advice.

29.          The qualifying investment threshold has recently increased from 70% to 80% (effective from periods ending after 6 April 2019 although many VCTs are already at that target). VCTs have to run with a safety margin of c5% to this test and it is normal to have at c10% of assets in cash, generally more. As a result, an additional restriction would be to limit non-qualifying investments to a maximum of 5% of the VCT value of the fund.

30.          HMRC provides greater clarity over the areas where they currently exercise judgement and agree a set of criteria for investments that most obviously meet the VCT rules for these transactions, VCTA members would have a high-quality standard of self-audit documents to support self-approval, such documents being available for subsequent audit by HMRC should the need arise to safeguard against misuse. We believe such a scheme would significantly alleviate the workload on HMRC inspectors with confidence that self-approval was being undertaken where there is a lower risk that the investment does not meet the VCT rules by meeting key criteria and within agreed self-audit standards.


For queries or further information relating to this submission, please contact Chris White on 020 7234 3343 or


 VCM 55360

 VCT qualifying holdings: requests for advance assurances: overview

The advance assurance service is a non-statutory service offered by HMRC on a discretionary basis, where we may offer an opinion as to whether a prospective investment would be a qualifying investment.

In general, companies seeking an investment from a VCT should not need an advance assurance from HMRC. VCTs should be able to rely upon their professional advisers to determine if a prospective investment is qualifying or not.

VCM54360 specifies the circumstances when HMRC will not withdraw approval from a VCT should it make a non-qualifying investment.  

HMRC will expect a VCT to take all reasonable steps to ensure an investment would be qualifying; for example, acting on professional advice specifying the technical basis upon which the proposed investment would meet each requirement in Chapter 4 of Part 6 ITA 2007. Provided that the VCT has taken such steps HMRC will not withdraw approval from the VCT if the investment subsequently turns out to be non-qualifying. HMRC will accept that the breach was outside the control of the VCT.

If there are genuine doubts about whether a proposed investment is qualifying, the company may seek an advance assurance from HMRC. The company must explain how it meets each condition and draw attention in its application to each point of doubt with a full technical explanation as to why it believes the requirement is met.

The rules of confidentiality apply. Requests will be dealt with only if they come from the company’s secretary or directors or a person authorised by them to negotiate with HMRC on their behalf. Any other parties making enquiries about a company must address those enquiries to the company itself.

An advance assurance is given in respect of a particular issue of shares or securities. An assurance given in respect of one issue should not necessarily be regarded as providing assurance in respect of a different issue.

An advance assurance will not cover the status of the VCT itself, that is, whether the investment would enable the VCT to meet the conditions for approval under section 274 ITA 2007. Those conditions depend upon the VCT’s other investments. 

HMRC may decline to provide an advance assurance in certain circumstances, see VCM55400 for more details.

Requests for an advance assurance should be made to the Small Company Enterprise Centre whose address and contact details are at VCM2070.

 VCM 54360

 VCT approval: breach of approval conditions: circumstances in which approval will not be withdrawn

SI1995/1979 Regulations 8A - 8J

HMRC will not withdraw approval where the breach fulfils the following conditions:

1.     the breach was as a result of circumstances outside the control of the company,

2.     those circumstances prevented the company from meeting the conditions

3.     the company took all reasonable steps to continue to meet the conditions

4.     the breach is notified to HMRC as soon as it is identified, and

5.     the position is corrected without delay.

These conditions are explained in more detail in VCM54370 onwards.

 VCM 54370

 VCT approval: breach of approval conditions: meaning of ‘outside the control’

The breach must be due to an event outside the control of the VCT; if the VCT was capable of taking action to avoid the breach it will not be considered to be ‘outside the control’ of the VCT.

An example of an event outside the control of a VCT might be a take-over bid leading to either the disposal of shares in a qualifying investee company or the investee company ceasing to qualify under the Scheme. However, a commercial decision by the VCT to dispose of an investment would not be an inadvertent breach.

A further example might be if a breach occurs as a direct result of an action by a ‘third party’ in circumstances where the VCT or its advisors are not in a position to prevent such action. In such a case HMRC will consider the individual circumstances of the action in evaluating whether the breach is ‘outside the control’.

A failure by the VCT to make sufficient investments to meet the 70% test at the end of the provisional approval period would not, outwith exceptional circumstances, be considered outside its control.