PAYE10075 - coding: coding allowances and reliefs: venture capital trust

The Venture Capital Trust (VCT) scheme took effect from 6 April 1995. Guidance in the Venture Capital Schemes (VCM) Manual at VCM64020 onwards describes the scheme and tells you how to deal with claims to Income Tax relief on subscriptions for VCT shares.

Rate of relief

Relief is given in terms of tax for the year of assessment in which the shares are issued by the VCT and is the smaller of

• (a) An amount equal to tax at 30 per cent from 6 April 2006 onwards on amounts subscribed within the ‘permitted maximum’

And

• (b) The amount which reduces the individual’s income tax liability to nil

The amount of relief under (a) is calculated using the amount equal to tax at 30 per cent whether the individual has a higher rate income tax liability for that year of assessment or not.

For tax years 2004/05 and 2005/06 the relief was given at the 40 per cent tax rate.

For tax years up to 5 April 2004 the relief was given at the 20 per cent tax rate.

Interaction with other reliefs

VCM64030 sets out the order in which relief should be given. You will need to take this into account when deciding in what order to calculate various coding allowances and reliefs.

Coding descriptor to use

There are no plans to introduce a coding descriptor for VCT relief nor a coding deduction to claw back excess relief. Instead, the coding allowance should be given in such a figure as will give the correct amount of relief. Use the descriptor CR (Concessional Relief).

Issue of P2

The Concessional relief note printed on the P2 will say ‘We have previously agreed that you are entitled to this tax relief. If you think our figure is wrong, or your circumstances have changed, please tell us’. You can include the special note EXPLANATION in CD format 2 to let the customer know that you will be writing to them with details of the amount of concessional relief.

How to calculate coding allowance for VCT

Calculate the relief due in terms of tax and convert this to a coding allowance. The factor you use to do this will depend on the estimated highest rate at the coded source.

Where the estimated liability at the starting, basic or higher rates clearly exceeds the amount of relief due, divide the relief due in terms of tax by the taxpayer's highest rate to arrive at the coding allowance.

Where the estimated liability straddles the rates, use the best estimate you can.

Bear in mind that the computer will automatically recalculate any HPAR using the net coding allowances after VCT relief. This could give problems in a small number of cases and before finalising the revised code, you may need to adjust your original amount for VCT relief to a balancing figure to collect the tax you want. It is expected that most claimants will be within SA so any inaccuracy in the relief given can be corrected when the return is submitted.