What does section 396 of the Corporation Tax Act 2009 do?

Section 396 excludes capital profits and losses arising from loan relationships held by venture capital trusts from the corporation tax loan relationships rules. This means capital gains or losses on such relationships cannot be brought into account as taxable credits or allowable debits, preserving the historic VCT exemption from tax on investment disposal profits.

How are capital profits or losses identified for VCTs under section 396?

A profit or loss is of a capital nature if it would be recorded in the capital column of the income statement under the Statement of Recommended Practice (SORP) for investment companies. This test applies even if the VCT is not itself an investment trust — the question is whether the item would appear in the capital column had the SORP been correctly applied.

Can the Treasury change the definition of capital profits or losses for VCTs?

Yes, the Treasury has power to amend the definition of capital profits or losses by statutory order where a VCT prepares accounts under international accounting standards rather than UK GAAP. This recognises that international standards may classify items differently. Any such order may include transitional, consequential and supplemental provisions for different circumstances.

Does section 396 exclude interest income on VCT loan relationships from corporation tax?

No. Section 396 only excludes profits or losses of a capital nature. Revenue items such as annual interest income, which would appear in the revenue column of the income statement under the SORP, remain within the loan relationships rules and are taxable credits in the normal way. Only capital gains or losses on disposal are excluded.

Corporation Tax Act 2009 section 396

Venture capital trusts: profits or losses of a capital nature

Section 396 excludes capital profits and losses arising from loan relationships held by venture capital trusts from the corporation tax loan relationships rules.

Capital profits or losses on loan relationships held by a venture capital trust (VCT) cannot be brought into account as taxable credits or allowable debits under the loan relationships rules.
Capital profits or losses are those recorded through the capital column of the income statement under the relevant Statement of Recommended Practice (SORP), or that would have been so recorded if the VCT had been an investment trust applying the SORP correctly.
The Treasury has power to amend the definition of capital profits or losses by order, specifically for VCTs that prepare their accounts under international accounting standards.
Any such Treasury order may make different provision for different circumstances, and may include incidental, supplemental, consequential and transitional provisions.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member