UK's Small Firms Boosted By Venture Capital Trust Tax Changes

by Robert Lee, Tax-News.com, London

22 March 2004

The UK’s small firms, especially those in the hi-tech and research sector, have been given a boost by measures in last Wednesday’s budget that will double the level of tax relief given to venture capital trusts, and expand the R&D tax credit.

Under current venture capital trust rules, individuals can obtain income tax relief of up to 20% of the aggregate investment made in new full-risk ordinary shares in VCTs up to a maximum investment of £100,000 in any tax year. Gains arising on disposals of investments in full-risk ordinary shares in VCTs (whether they were acquired new or second-hand) and dividends paid on such shares are exempt from tax.

Under the changes announced by Chancellor Gordon Brown in last week’s budget, the amount of income tax relief claimable has been increased to 40%, as has the maximum investment limit, which will stand at £200,000 on shares bought after April 6 2004.

However, capital gains tax deferral relief will no longer be available for investments in VCT shares issued on or after 6 April 2004.

The move is likely to be welcomed by the venture capital industry and investors in small, unquoted firms as it eliminates much of the risk involved in such investments, especially through periods when markets are in decline.

Meanwhile, the Chancellor has also expanded the scope of the R&D tax credit which aims to encourage new advanced processes, not just the funding of new products. It will enable large firms to claim 7.5p in the pound for certain R&D expenses, whilst small firms can claim up to 24p in the pound.

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