Part 4: Income tax, corporation tax and capital gains tax Section 26 and Schedule 6: Venture Capital Trusts Details of the section and Schedule 6
Section 26 introduces Schedule 6.
	Paragraph 1 of the Schedule introduces the amendments to the VCT rules in Part 6 of the Income Tax Act (ITA) 2007. All references are to ITA 2007.
	Paragraph 2 inserts new paragraph (za) in subsection (3) of, and new subsection (5) in, section 261. Paragraph (za) sets the date after which VCT relief will cease to apply to new investments, unless the legislation is renewed. The date may be changed by regulations made by the Treasury.
	Paragraph 3 amends section 274.
	Paragraph 3(2) amends subsection (2) to introduce two extra conditions a company must meet in order to be approved as, and retain its status as, a VCT: "the permitted maximum age condition" and "the no business acquisition condition". The conditions apply to all investments made by a VCT, whether the holdings are qualifying holdings within Chapter 4, or non-qualifying holdings, subject to certain exceptions listed at new subsection (3A).
	Paragraph 3(3) makes consequential amendments to subsection (3).
	Paragraph 3(4) inserts new subsection (3A). Subsection (3A) lists certain types of investments a VCT may make for liquidity management purposes without breaching the investment limits, permitted maximum age condition and no business acquisition condition. In general a VCT may only make investments in companies that will be qualifying holdings. The permitted investments will be non-qualifying holdings and allow VCTs to make short term investments of funds on hand where activities to make investments in new qualifying holdings are underway.
	Paragraph 3(5) substitutes subsection (5) and provides a power, alongside the powers already existing in subsection 5, for the Treasury to amend the list in subsection (3A) by regulations.
	Paragraph 4 amends section 280B which supplements the investment limits condition specified in section 274.
	Paragraph 4(2) inserts new paragraphs (a) to (c) in subsection (2). The effect of the changes is to specify two extra limits an investee company (a relevant company) must meet if a VCT is to make an investment in that company. As well as meeting the total annual investment limit of £5 million, the relevant company must also meet a total (lifetime) investment limit as at the date the VCT invests in it and, in certain circumstances, that limit must not be breached for the following five years.
	Subsection (2)(b) and (c) provide that the amounts of the new limits are specified in new section 292AA(1) and new section 292AB(4) and are £20 million for knowledge-intensive companies and £12 million for other companies. The limits apply to any company a VCT invests in, whether or not the investment counts as a qualifying holding. The effect is to stop a VCT from using its tax-advantaged funds to invest in any company or group that has already received more than the specified amount of State aid.
	Paragraph 4(3) inserts new subsection (2A) which supplements amended subsection (2). It defines the periods for which the two new limits apply.
	Paragraph 4(4) substitutes subsection (3) and inserts new subsections (3A) to (3F).
	Subsection (3) specifies the relevant investments that are to be taken into account for determining if the annual investment limit is breached. As well as taking into account the relevant investments made in the relevant company in the year, the rules bring into account any other relevant investments the company or group has received and used in the year. These relevant investments are:
	Relevant investments in a company before it became a 51% subsidiary of the relevant company or
	Relevant imported investments (defined in new subsection (3D)).
	However if the subsidiary left the group before the end of the year, any relevant investments made in it after it left the group are not taken into account.
	Subsection (3A) specifies the relevant investments that are to be taken into account for determining if the total investment limit is breached. These are effectively the same relevant investments as are taken into account for determining if the annual limit in subsection (3) has been breached but looking back from the investment date at all the relevant investments received, rather than looking back for just one year.
	Subsections (3B) and (3C) specify a further limit on the total amount of relevant investments that is applied for the five years following the date when a VCT makes a relevant investment in a company. The purpose of these provisions is to stop an investee company exceeding the total investment limit by using VCT money for a company or trade that it acquires after it received the relevant investment. This would happen where the new company or trade has benefited from earlier relevant investments that, together with the relevant company's relevant investments at the relevant time, would breach the relevant company's investment limit.
	For example: a relevant company, A, which is not a knowledge-intensive company, has received a loan from a VCT of £2 million, bringing its total relevant investments to the limit of £12 million. At a later date, using other funds, company A wants to acquire company B and employ the £2 million received from the VCT in company B. Company B is not a knowledge-intensive company and has already received relevant investments of £12 million. The combined effect of subsections (3B) and (3C) on this scenario would be that company A breaches the limit of £12 million and the VCT has breached the investment limits condition in section 274.
	The limits specified in subsection (2)(c) apply only if the provisions of subsection (3B) apply and the relevant company uses the VCT's investment in the new company or trade.
	If the relevant company acquires one or more companies or trades that have received relevant investments that would take the combined group over the total limit, but the VCT's investment is not employed in any of those companies or trades, then subsection (2)(c) does not apply. However, the relevant company would not be eligible to receive any future relevant investments as the limit in subsection (3A) would be breached.
	If the relevant investment is used for one of the companies or trades acquired after the relevant investment was made then all of the relevant investments received by the subsidiaries acquired since the relevant investment are taken into account in determining if the limit is breached.
	Subsections (3D), (3E) and (3F) define the "relevant imported investments" that are to be taken into account for the three limits in subsections (3)(c), (3A)(c) and (3C)(c). The purpose of counting relevant imported investments towards a relevant company's relevant investments is to ensure the investment limits are not sidestepped by acquiring a trade without a company shell that has already benefited from relevant investments. The following paragraphs (22) to (24) explain how these subsections work.
	The relevant imported investments of a relevant company at a qualifying time are:
	Relevant investments in a company where the money was used by a subsidiary of that company, and that subsidiary company became a subsidiary of the relevant company before the qualifying time
	Relevant investments that have been employed in a trade by a company or other person, where that trade has been transferred at a qualifying time to the relevant company, its 51% subsidiary or a partnership of which the relevant company or its subsidiary is a member. Such a trade is defined as a "relevant transferred trade".
	The qualifying time varies, depending on which of the investment limits is being considered. For the annual limit, only relevant imported investments made during the year are taken into account. For the other two limits the qualifying period is unlimited and any relevant investments employed in the trade at any time up to the time that the amount of relevant investments is being determined, by any owner of the trade, will be relevant imported investments.
	However:
	Relevant investments made in a subsidiary company within subsection (3D)(a) after it has left the relevant company's group are not included
	If the trade has been transferred from one subsidiary to another subsidiary of the relevant company, that will not count as a relevant transferred trade. This is because the relevant investment will already have counted towards the relevant company's relevant investment by virtue of subsections (3)(b)(ii), (3A) (b)(ii) and (3C)(b)(ii).
	Paragraph 4(5)(a) inserts new paragraph (ba) in subsection (4) to extend the definition of a "relevant investment" to an investment made under the Social Investment Tax Relief (SITR) rules. SITR investments will therefore count towards a company’s investment limits.
	Paragraph 4(5)(b) updates the reference in subsection (4)(c) to the latest guidelines, published in 2014, by the European Commission ("Guidelines on State aid to promote risk finance investments").
	Paragraph 4(6) makes a consequential amendment to subsection (5).
	Paragraph 4(7) inserts new subsections (6) to (9).
	Subsection (6) specifies when an SITR investment, that is a relevant investment, is made.
	Subsections (7) to (9) supplement the rules on relevant imported investments and relevant transferred trades defined in subsections (3D) and (3F).
	Subsection (7) and (8) provide that transfers of part of a trade count as the transfer of a trade but only the money used in that trade or part of trade count towards the amount of the relevant imported investment.
	For example, company A receives a relevant investment of £2 million and uses it for its trade, and later sells off part of that trade to company B. When calculating company B's relevant investments for the purposes of section 280B(3C), only the part of the £2 million used in the part of the trade that company A transferred (the relevant transferred trade) counts towards the amount of the relevant imported investment. The amount will depend on the particular circumstances of the case.
	Subsection (9) defines a trade widely, to include any pre-trading activities that have benefited from a relevant investment.
	Paragraph 5 inserts new sections 280C and 280D.
	Section 280C specifies the details of the permitted maximum age limit in section 274. It applies to all investments made by a VCT whether or not the holding is a qualifying holding (subject to the exceptions listed in section 274(3A). This provision targets VCT investments to earlier-stage companies, companies that need several rounds of tax-advantaged funding before the market will invest in them and companies whose activities are changing so substantially as to constitute a new business activity.
	Subsections (2) to (5) provide that a VCT's investment in a company must be made before the end of that company's initial investing period unless condition A, B or C applies.
	Subsection (3) defines the initial investing period as ending a certain number of years after the company's relevant first commercial sale. The number of years is:
	10 years for knowledge-intensive companies; and
	7 years for all other companies.
	Subsection (4) specifies condition A. Condition A applies if the company has already received a relevant investment which has been used for the same activities as the new investment is to be used for. This condition provides for companies that need several rounds of funding, where the initial round of funding is received before the end of the company's initial investing period.
	Subsection (5) specifies condition B. Condition B applies if the amount of the investment (and any other relevant investments received in a 30 day period that includes the date of the VCT's investment in the relevant company) is at least 50% of the annual turnover of the company, averaged over the previous five years and the money raised is used for the purpose of entering a new product or geographical market. The 30 day period provides some flexibility for a company that is assembling a number of tax-advantaged investments from different investors. Condition B ensures initial risk finance investments in an older company are used only for activities that effectively constitute a new business activity, where it may be difficult to raise investment from the market. Each new business activity must satisfy the 50% turnover test in paragraph (a). A number of smaller unconnected initiatives cannot be combined in order to meet the 50% threshold.
	Subsection (6) specifies condition C. Condition C applies if the company had previously met condition B, by way of receiving risk finance investments from a Venture Capital Trust or under the EIS. The money must be used for the same activity or activities for which the money raised under condition B was used, that is to continue to support activities for entering a new product or geographical market. It cannot use the money for a new project or for its other business activities. However if the money raised under condition B was used for, say, two separate activities, the new money raised under condition C does not have to be used for both those activities. For example if one of the activities had already failed, any subsequent money raised could be used for the activity that has continued.
	Subsection (7) defines the date of a company's relevant first commercial sale. The definition is designed to identify the earliest commercial activity carried on by the relevant company or its subsidiaries at the time the investment is made or, if later, when the money is employed. Its purpose is to ensure the age limit cannot be sidestepped by setting up or using a reasonably new company to receive relevant investments to employ in a mature trade that would not itself be under the age limits. The definition uses the earliest date of any commercial sale made by the company or any other person who has carried on any trade which is carried on by the company or its subsidiary or a partnership of which the relevant company or its subsidiary is a member, including trades transferred from other owners. The trade may or may not be, or have been, a qualifying business activity and it may or may not have benefited from a relevant investment. However the first commercial sale of a subsidiary or transferred trade acquired after the investment was made is taken into account only if money raised from the investment is employed for the purposes of that company or trade.
	Subsection (8) defines "the average turnover amount" for the purposes of condition B in subsection (5) as one fifth of the "total relevant turnover". Paragraphs (a) and (b) of subsection (8) specify the five years over which the total relevant turnover is to be taken. Generally speaking, these rules allow for a company with consistent 12 month periods of account to determine its average turnover by reference to the last five complete audited accounts prior to the investment date.
	Subsection (8)(a) specifies that, where the end of the most recent accounts filing period falls within the 12 months before the investment was made, the 5 year period ends immediately before that accounts filing period starts.
	Subsection (8)(b) specifies that if there is no accounts filing period that ends within 12 months before the date of the investment, perhaps because the company's accounting period is more than 12 months long, the 5 year period ends on the day 12 months before the date the investment was made.
	Subsection (9) defines a number of terms used in section 280C. In particular:
	"Entering a new product or geographical market" for the purposes of condition B in subsection (4) has the same meaning as the European Commission General block exemption Regulation No 651/2014. What constitutes a new product or geographical market depends on the company's particular circumstances. The new market must be so different that outside investors would need to carry out disproportionately expensive due diligence because the company's track record in relation to its existing activities cannot be used to judge the prospects of success of what is effectively a new enterprise. This will be considered on a case by case basis. For example, a company that has operated exclusively in the south west of England may be entering a new geographical market if it started to operate in Scotland. A company that has always produced paper products but wants to move into producing food snacks would be entering a new product market.
	An undertaking's "first commercial sale" is defined by reference to the European Commission’s Guidelines on State aid to promote risk finance investments. Paragraph 52(xi) of the Guidelines defines a first commercial sale as "the first sale by an undertaking on a product or service market, excluding limited sales to test the market"
	The "total relevant turnover amount" used for the purposes of determining the average turnover amount in subsection (8) includes the turnovers over the previous five years of the relevant company and:
	where the relevant company is not a parent company at the investment date: any 51% subsidiaries it acquires after the investment date for which the money raised from the investment is used; and the turnover of a transferred trade for which the money raised is used, to the extent that its turnover over the previous five years has not already been taken into account.
	where the relevant company is a parent company at the investment date: any 51% subsidiaries it holds at the investment date and any 51% subsidiaries it acquires after the investment date for which the money raised by the investment is used; and the turnover of a transferred trade for which the money raised is used, to the extent that its turnover over the previous five years has not already been taken into account.
	The definition of the total relevant turnover amount is intended to ensure that, where a company depends on meeting condition B in subsection (5), all the relevant turnovers of subsidiaries and trades that have been acquired both before and after the investment was made are taken into account. However the turnovers of subsidiaries and trades acquired after the investment was made are included only if the subsidiary or trade uses any of the money raised by the investment.
	Section 280D specifies the details of the no business acquisition condition in section 274. It applies to all investments made by a VCT whether or not the holding is a qualifying holding. It prevents a VCT from investing in a company that goes on to use the money to acquire an existing trade, or part of a trade, either by buying the company carrying on the trade, buying the trade itself, intangible assets that have been employed previously in a trade or goodwill of a trade.
	Section 280D does not stop a company using money from a VCT investment to buy plant and machinery to use in its own trade. However the company would breach the condition if the plant and machinery were acquired as part of wider arrangements to acquire a trade, for example where other funds were used to acquire the goodwill or other intangible assets of a trade. Similarly, a company can use money to commission the creation of intangible assets that will be used in the company's trade, for example to build a website, because that intangible asset has not been previously employed in a trade.
	Section 280D(3) provides for the Treasury to make regulations to allow money to be used for the acquisition of certain intangible assets. This power could be used if it emerged that section 280D(2)(d) prevented a company from acquiring an intangible asset that was not an integral part of a trade.
	Paragraph 6 amends section 286.
	Paragraph 6(2) introduces an explicit requirement that a company must use funds invested by the VCT to promote the growth and development of the company or, where the company is a parent company, the group.
	Paragraph 6(3) makes a number of minor consequential changes.
	Paragraph 7 makes a number of changes to section 292A which limits the amount of risk finance investments (referred to as "relevant investments") a company may receive each year.
	Paragraph 7(2) substitutes subsection (2) and inserts new subsections (2A) and (2B) in section 292A.
	Subsections (2) to (2B) provide that a VCT's holding in a relevant company ceases to be a qualifying holding if the relevant company receives a further relevant investment that breaches the annual investment limit. The provisions for determining which relevant investments count towards the limit are the same as those that apply to section 280B(2)(a) in relation to the annual investment limit.
	Paragraph 7(3)(a) inserts new paragraph (ba) in section 292A(3) to extend the definition of a "relevant investment" to an investment made under the SITR rules. SITR investments will therefore count towards a company’s annual investment limit.
	Paragraph 7(3)(b) updates the reference in section 292A(3)(c) to the latest guidelines, published in 2014, by the European Commission ("Guidelines on State aid to promote risk finance investments").
	Paragraph 7(4) makes a minor consequential change to subsection (4).
	Paragraph 7(5) inserts new subsection (4A) in section 292A to specify when an SITR investment, that is a relevant investment, is made.
	Paragraph 7(6) makes a consequential change to subsection (5).
	Paragraph 7(7) inserts new subsection (7) in section 292A. Subsection (7) supplements subsections (2) to (2B) by applying the same definition of "trade" as in section 280B.
	Paragraph 7(8) updates the heading of section 292A to refer to the latest European Commission’s Guidelines on State aid to promote risk finance investments.
	Paragraph 8 inserts new sections 292AA and 292AB. These sections provide that a VCT's holding in a relevant company ceases to be a qualifying holding if the relevant company breaches the total investment limit at:
	The investment date, or
	Any time during the 5 year post-investment period.
	Section 292AA(1) specifies the cap on the total amount of relevant investments a company and its subsidiaries may receive, of £20 million for a knowledge-intensive company and £12 million for other companies. This cap also applies for the purposes of section 280B(2)(b).
	Section 292AA(2) to (4) determine the relevant investments that count towards the limit; these are the same as specified in section 280B(3A).
	Section 292AA(5) defines certain terms used in the section.
	Section 292AA(6) and (7) make provision for a holding ceasing to be a qualifying holding where the relevant company receives an investment under EIS, SEIS or SITR that breaches the total investment limit. In such a case, the holding will remain a qualifying holding until the relevant company submits a compliance statement to HMRC in respect of that new investment.
	Section 292AB applies in a similar way to breaches of the 5-year post-investment limit by a company in which a VCT has a qualifying holding as section 292AA applies to breaches of the total investment limit. The relevant investments that count towards the limit are the same as those specified in section 280B(3C), if either condition A or condition B applies.
	Paragraph 9 repeals section 292B. The effect of this provision is to allow a company to raise funds under VCT without having to have spent 70% of any SEIS funds it has already raised. Companies may receive VCT investments the day after raising SEIS funds.
	Paragraph 10 substitutes new subsections (5ZA) to (5A) for section 293(5A).
	Section 293 (5ZA) and (5ZB) prohibits a relevant company from using money raised from a VCT to acquire an existing trade, or part of a trade, either by buying the company carrying on the trade or buying the trade itself or the intangible assets or goodwill of a trade.
	As with section 280D (no business acquisition condition) subsection (5ZA) does not stop a company using money from a VCT investment to buy plant and machinery to use in its own trade so long as there are no wider acquisitions of the assets of a trade or commission the creation of intangible assets.
	Section 293(5ZB) provides for the Treasury to make regulations to allow money to be used for the acquisition of certain intangible assets. This power could be used if it emerged that section 280D(2)(d) prevented a company from acquiring an intangible asset that was not an integral part of a trade.
	Section 293(5A) generally repeats the original text of the substituted subsection (5A).
	Paragraph 11 inserts new section 294A. It applies the same maximum age limits to investments that are qualifying holdings as are applied to all VCT investments under section 280C. If, for some reason, a VCT were to breach the permitted maximum age condition but did not lose its VCT status, section 294A would ensure the investment could not count as a qualifying holding.
	Paragraph 12 amends section 297A, to specify a higher limit of 500 full time equivalent employees for knowledge-intensive companies.
	Paragraph 13 inserts new section 297B, which introduces a new requirement for companies that rely upon meeting the skilled employee condition in section 331A in order to qualify as a knowledge-intensive company. If the relevant company did not meet the innovation condition in new section 331A(6) at the time the VCT made its investment in the relevant company then the relevant company must continue to meet the skilled employee condition for at least three years after the relevant holding was issued. The exception to this is where the company is in administration or receivership.
	Paragraph 14 repeals section 311, which is replaced by a power to amend Chapter 3 or 4 under new section 330B.
	Paragraph 15 amends section 313(5) to make clear that the usual meaning of a connected person for Part 6 under section 993 does not apply to an independent expert for the purposes of new section 331A(10). Instead, the EIS definition of "connection", at section 167, 170 and 171 applies to an independent expert.
	Paragraphs 16 to 18 make provision for the new rules introduced by Schedule 6 to be incorporated in the exchange provisions in Chapter 6 of Part 6 of ITA. The share exchange provisions apply when shares in a new parent company have been exchanged for shares in a company that has raised VCT investments. Provided certain conditions are met, the new shares in the parent company are treated as though they were the old shares and the new shares are treated as qualifying holdings.
	Paragraph 16 makes consequential changes to section 326 (restructuring to which section 327 applies).
	Paragraph 17 inserts new section 326A which applies the share exchange provisions to the investment limits, permitted maximum age and no business acquisition conditions in Chapter 3 of Part 6 (VCT approvals). Provided the rules are met, and continue to be met, the new parent company will retain its status as a VCT.
	Section 326A(3) to (6) ensure that the new parent company is treated as the relevant company for the purposes of the investment limits, permitted maximum age and no business acquisition conditions in section 280B, 280C and 280D.
	Paragraph 18 amends section 327 which applies the share exchange provisions to the investment limits, permitted company age requirement and the proportion of skilled employees requirement in Chapter 4 of Part 6 (qualifying holdings).
	Paragraph 18(4) inserts new subsections (4A) to (4G) which apply the requirements to be met by a relevant company to the new parent company.
	Paragraph 19 inserts new section 330B, which allows amendments to be made to Chapter 3 and Chapter 4 of Part 6 by regulations under the draft affirmative procedure. The regulations may have limited retrospective effect but only where the changes are wholly relieving such that no additional tax charges can apply retrospectively.
	Paragraph 20 inserts new section 331A which introduces the concept of a "knowledge-intensive company". A knowledge-intensive company is eligible for higher total investment limits under sections 280B and 292AA, a longer initial investing period for the purposes of the permitted maximum age condition under sections 280C and 294A and a higher number of employees under section 297A (as amended under paragraph 12 of the Schedule).
	Subsection (1) requires a knowledge–intensive company to meet one of two operating costs conditions and at least one of the innovation condition or the skilled employee condition.
	Subsection (2) specifies the times at which a company must meet the rules for a knowledge-intensive rules to benefit from the increased limits available to such companies.
	Subsection (3) and (4) specify the operating costs conditions, which compare the relevant operating costs relating to research and development or innovation to the relevant operating costs of the company (or group) over a three year period. Subsection (5) determines the period over which the conditions must be applied, using the same method as applies for the test in new sections 280C(7) and 294A(6).
	Subsections (6) to (8) specify how a relevant company must meet the innovation condition. The condition requires a company to be engaged in the creation of intellectual property which will be used for the future trade of the company (or other companies in the same group) and the activities of which will form the greater part of the company’s (or the group’s) business within 10 years of the date of the investment. The condition can be met in one of three ways:
	By having created intellectual property within the last three years, or creating intellectual property
	By taking steps in order to create intellectual property
	By demonstrating through a report by an independent expert that it is reasonable to assume the company will create intellectual property in the foreseeable future.
	The innovation condition is not confined to the creation of a single item of intellectual property. Some companies may develop a range of intellectual property that, together, will form the basis of their future business.
	Subsection (9) specifies the skilled employee condition.
	Subsection (10) defines a number of terms used throughout the section.
	In particular, "relevant operating costs" are defined by reference to the operating costs included in the company’s profit and loss account. Where the relevant company is a member of a group at the date of the investment, the operating costs are calculated by reference to the total operating costs of all companies in the group at the investment date, excluding transactions between companies in the same group.
	Subsection (11) provides for the amounts of operating costs of a company to be apportioned as is just and reasonable in determining a company’s relevant operating costs. This provision may be necessary where subsidiary companies do not share the same accounting date as the parent company.
	Subsection (12) provides that the Treasury may amend this section on the conditions a company must meet to be a knowledge-intensive company by regulations.
	Subsection (13) provides that an amendment under subsection (12) can only be made by an affirmative procedure Statutory Instrument in the House of Commons.
	Paragraph 21 repeals the provisions in Schedule 8 to Finance Act 2012 that enabled relevant companies to use money invested by a VCT, that derived directly or indirectly from funds invested in the VCT before 6 April 2012, to acquire shares in a company, in contravention to the general rule in section 293(5A). The effect of this repeal, combined with the amendments to section 274 and 293, and the introduction of section 280D, is to prohibit VCTs investing any funds, whatever their origin, in a company for the purpose of acquiring shares in another company or a trade.
	Paragraph 22 contains minor and consequential amendments to other Acts that flow from this new legislation.
	Paragraph 23 provides for commencement of the provisions in this Schedule.
	The provisions repealing the requirement for a company to have spent at least 70% of SEIS funds before receiving a VCT investment take effect from 6 April 2015.
	All other provisions take effect from the date of Royal Assent. However investments that are made before Royal Assent that would otherwise breach the new limits will not cause a holding to cease to be a qualifying holding on or after Royal Assent.
	Investments made before Royal Assent will however be taken into account for determining if:
	Investments made on or after Royal Assent breach the investment limits condition in section 280B;
	A relevant investment meets the permitted age requirement in section 280C; or
	A new investment is a qualifying holding under the provisions of sections 292A, 292AA, 292AB or 294A.