A VCT is a tax efficient UK closed-end collective investment scheme designed to provide private equity capital for small expanding companies and capital gains for investors. VCTs are a form of publicly traded private equity. VCTs are companies listed on the London Stock Exchange, which invest in other companies which are not themselves listed.
A VCT is operated by an investment fund manager. Such schemes enable investors to make an investment in higher-risk EIS-type investments but rather than investing in only one company the fund will contain a pool of investments in different companies. Because the risk is spread, this makes them less risky than an EIS investment.
A VCT investment is often made by entrepreneurs, wealthy individuals or investors who provide capital in return for a proportion of the company’s shares. For many investors, the tax reliefs attached to the EIS scheme make investing under the scheme particularly attractive.
The maximum amount that an investor may invest into a VCT scheme is £200,000 per tax year.
There are three main direct costs that need to be considered:
- compliance costs
- professional advice
- reporting obligations.
Much of the initial cost will be incurred by the preparatory work. This will include grooming the company, obtaining key staff and having the right management structure in place. A business plan will form the cornerstone of any negotiations.
Legal fees will vary depending on whether other services are provided, the complexity of the business, its size and risk to the lender.
Fees to prepare management accounts will vary depending on whether other services are provided; bookkeeping, for example, and also on the complexity of the business, its size and the frequency of issue.
It is also advisable to have an exit plan in place for the investor; it shows that there is a longer-term plan in place.
The rules of VCT schemes can be extremely complicated and you should factor in the cost of taking professional advice from a qualified adviser.
For the business:
- access to equity capital to consolidate or develop business
- raising finance in the form of equity strengthens your balance sheet
- it can lead to additional finance being made available from other sources such as banks.
For the investor:
- enables the investor to invest in higher risk/higher return companies but spreads the risk across a portfolio of investments
- generous tax reliefs available. The EIS scheme offers four tax reliefs in one and covers both income tax and capital gains tax. The reliefs available are as follows:
- Income tax relief: the investor may invest up to £200,000 in a tax year and obtain a tax reducer of 30% of the amount of investment
- Capital gains tax exemption: if the investor has received income tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of, any capital gain on the disposal of the EIS shares will be exempt from capital gains tax. There is no minimum period of retention for which the shares must be held.
The scheme rules are complex and there are strict criteria to be met by the scheme
- the VCT in which the individual invests must be approved by HMRC
- a company can carry on some excluded activities, but these must not be a 'substantial' part of the company’s trade. HMRC take 'substantial' to mean more than 20% of the company’s activities
- there is no requirement that the qualifying company is resident in the UK, but for shares issued on or after 6 April 2011, the company must have a ‘permanent establishment’ in the UK
- VCT investment can be difficult to obtain, with fund managers seeking to invest in those businesses offering the highest potential returns for the VCT investors.
The right type of finance for your business gives examples of financial structures that are suitable for different trading types and sizes of business.
Loans are a common form of finance, like trade credit and overdraft facilities. A loan can be used alongside a hedge or an interest swap, for example, to ensure that the cost of the loan is suitable for the business needs. For short-term problems, such as managing your cashflow, an overdraft or business credit card may be more suitable options.
Where loans are used to finance assets, hire purchase or leasing should also be considered.