VCM60170 - VCT scheme: general: approval: income retention condition

ITA/S274(2)In considering whether a VCT has retained more than 15% of its income derived from shares and securities it is necessary to look at the amount of income retained by the VCT at the end of each accounting period.

As a company, a VCT comes within the post FA02 rules requiring it to account for credits and debits from creditor relationships and from derivatives in its CT computation. However specific rules apply to a VCT to take account of the fact that its capital profits and losses are exempt from tax.

For periods of account (as defined in ITA/S989) commencing on or after 1 January 2005, FA96/SCH10/PARA1B states that for a VCT capital profits, gains and losses from a creditor relationship (as defined in FA96/S103) must not be brought into account as credits or debits for the purposes of Chapter II of Part IV of FA96.

Similar provisions in FA02/SCH26/PARA38 apply in respect of credits and debits from derivative contracts for periods of account commencing on or after 1 January 2005. Details can be found at CFM14020.

For companies required to prepare accounts under the Companies Act 1985 or the Companies Act (Northern Ireland) Order 1986 the new rules commence from any period of account beginning on or after 1 January 2005 for which the company is required or permitted to produce accounts in accordance with international accounting standards.

Similar (but not identical) rules for creditor relationships and for derivatives applied for accounting periods beginning after 30 September 2002. These rules are described in detail at CFM14015 onwards.

Any credits or debits which are excluded from the CT computations under FA96/SCH10/PARA1B or under the similar rules for derivatives will also be excluded in computing the income retained for the purpose of the 15% retention test.

The income retained must not exceed 15% of the gross income from shares and securities. This does not apply if the amount the company would be required to distribute is less than £10,000. Where the accounting period (defined in ICTA88/S834) is less than 12 months, the figure of £10,000 is proportionately reduced. Nor does it apply where the company is required to retain more than 15% of its income by law. However in these circumstances the company must not retain any more than the law requires unless the amount of excess it retains together with any income distributed is less than £10,000 (or a proportionately reduced amount where the accounting period is less than 12 months).

Dividends declared in respect of an AP will not be treated as constituting income retained in that AP, provided that the dividend has been declared by the time that the accounts are finalised