Will high-risk investors take tax bait?
28 June 1999
Huw Witty, partner, Nabarro Nathanson
Louise Higginbottom, partner, Norton Rose
Robert Fenner, managing partner, Fenners
The Government's shake-up of the 1998 Finance Bill is expected to provide better tax breaks for venture capitalist trusts (VCT).
Until recently VCTs, which are listed companies investing in high-risk businesses, faced losing out on attractive tax relief on a number of counts.
Potential cuts in tax relief could be incurred on, for example, floating a company supported by VCT investment and when the VCT-owned shares were converted under the subsidiary of a new holding company.
However, the two clauses introduced to the Finance Bill seek to rectify these deterrents to VCTs and encourage investment in high-risk ventures.
But will the changes to the bill clarify the law dealing with VCTs? And will the incentive for companies and financial institutions to invest in high-risk companies mean more work for corporate and tax lawyers?
Huw Witty, corporate and private client partner at Nabarro Nathanson, says of the shake-up: "It is a welcome surprise. It is taking away what were unfair anomalies to make the rules easier and give the law more certainty."
The changes may well increase the use of VCTs, says Witty. "This change has been aimed at those investing in these vehicles to add another string to their selling bow. It has given another reason for the existence of VCTs."
He adds: "The changes will certainly affect the advice we give to investors looking at VCTs going to the stock exchange. Formerly I would have said that there would be problems.
"People would have done flotations in the past, but the new way means you don't have to jump through as many hoops.
"The key change that has been made shows that the Inland Revenue does listen and is prepared to make the changes in order to avoid pitfalls on technicalities."
Louise Higginbottom, tax partner at Norton Rose, agrees that the clauses will simplify things for investors. "It is even better news for companies in which VCTs invest," she adds.
But she remains doubtful whether better tax incentives will mean an increase in investment, therefore providing more work for lawyers.
Higginbottom agrees with Witty that the changes will affect the type of advice given to clients.
She says lawyers can now give more positive advice rather than steering them away from the previously money-draining moves like flotation.
"It will attract potential companies seeking equity investment to go to VCTs. It introduces further flexibility, but if people don't want to use it they don't have to."
One problem area, says Higginbottom, relates to the technicality of the clearance mechanism which could cause delays.
"The government draftsmen have put a clearance mechanism in the Finance Bill but haven't given a time limit on it. It appears to have been a conscious decision and may give rise to difficulties where companies need to move fast in today's markets," she explains.
But Robert Fenner, managing partner at City firm Fenners, says: "I certainly think it should ease some technical concerns."
He adds: "Any change which gives VCTs greater flexibility is a positive change."
However, Fenner disputes that the changes will have any dramatic effect: "It is not a major change in government policy but a tidying up of an existing anomaly in line with government policy.
"Fundamentally, it shows governmental support for VCTs and their further development."
And he sees a future for VCTs. "Venture capitalists have fair levels of funds and use these vehicles as one of their means of attracting funds and investments," says Fenner. "As long as venture capitalists are active, there is the related legal work."