The Venture Capital Trust (Winding up and Mergers) (Tax) Regulations 2004

Explanatory Note

(This note is not part of the Regulations)

These Regulations make provision in relation to tax for the winding up of a venture capital trust, for mergers between venture capital trusts and for the tax treatment of a “further issue” of shares by any venture capital trust. Venture capital trusts (“VCTs”) are companies which are approved by the Inland Revenue under section 842AA of the Income and Corporation Taxes Act 1988. The Regulations are made under powers in Schedule 33 to the Finance Act 2002. The retrospective provision made by regulation 1(2) is authorised by Paragraph 16(1)(e) of that Schedule.

Regulation 1 provides for citation, commencement and effect, and regulation 2 for interpretation.

Regulation 3 sets out details of the VCTs to which regulations 4 to 8 apply. They are companies being wound up, where the company was either (a) approved as a VCT continuously for at least 3 years ending with the winding up, or (b) approved as a VCT and being wound up compulsorily.

Regulations 4 to 8 provide that a VCT which is being wound up has a grace period (called the “prescribed winding-up period”, defined by regulation 2(1) so that in most cases it will be the three years beginning at the commencement of the winding up) during which certain tax exemptions continue to apply, and provide for the VCT’s tax treatment when that period expires.

Regulations 9 to 13 make provision for mergers of VCTs (as defined in Schedule 33 to the Finance Act 2002). Regulations 9 and 10 introduce a procedure for advance Inland Revenue approval of a merger (following which regulations 11 to 13 will apply to the relevant VCTs).

Regulations 11 to 13 make provision for the tax treatment of the companies involved in the merger particularly the company which represents the merged entity, known as the “successor company.”

Regulation 14 makes the application of section 842AA(5B) of the Income and Corporation Taxes Act 1988 (which applies to “further issues” of shares by a VCT) conditional on the money being raised by that issue for investment purposes.

A full regulatory impact assessment has not been produced for this instrument as it has no impact (exceeding the minimum threshold) on the costs of business.