What happens to VCT income tax relief when a company's Venture Capital Trust approval is withdrawn?

Under section 268 of the Income Tax Act 2007, shareholders who hold shares at the time VCT approval is withdrawn are treated as having disposed of those shares immediately before the withdrawal takes effect. The deemed disposal is treated as not at arm's length, triggering clawback of the full VCT relief originally claimed under section 266.

Why is the deemed disposal under section 268 treated as not being at arm's length?

The non-arm's length treatment ensures the full amount of VCT relief originally claimed can be recaptured. If the disposal were treated at market value, only partial relief might be clawed back. This mechanism guarantees complete recovery of tax relief where shares were issued less than five years before VCT approval was lost.

Does section 268 apply where VCT approval is treated as never having been given under section 281(3)?

No. Section 268 does not apply where VCT approval is treated as never having been given under section 281(3). In those cases, there was never any valid entitlement to VCT relief, so the relief is withdrawn separately under section 269 rather than through the deemed disposal mechanism in section 268.

How does section 268 interact with the five-year disposal rules in section 266?

The deemed disposal under section 268 feeds into the rules in section 266, which govern clawback of VCT relief when shares are disposed of within five years of issue. Because the disposal is deemed non-arm's length and occurs immediately before withdrawal, full VCT relief is recovered on shares issued within the preceding five years.

Income Tax Act 2007 section 268

Loss of relief if VCT approval withdrawn

Section 268 deals with what happens to VCT income tax relief when a company loses its Venture Capital Trust approval, treating shareholders as having disposed of their shares so that relief can be clawed back.

When a company's VCT approval is withdrawn (other than where approval is treated as never having been given), shareholders are treated as having disposed of their VCT shares
The deemed disposal is treated as occurring immediately before the withdrawal takes effect, ensuring relief is recaptured on all shares held at that point
The deemed disposal is treated as not being at arm's length, which means the full amount of VCT relief originally obtained on those shares can be clawed back under the five-year disposal rules
Where approval is treated as never having been given (under section 281(3)), this section does not apply — instead, relief is withdrawn separately under section 269 because there was never any valid entitlement to it

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