Amati VCT
Amati VCT was launched in 2005 as the First State AIM VCT by Dr Paul Jourdan, whilst at First State Investment Management (UK) Limited. This VCT moved with Dr Jourdan to Noble Fund Managers in 2007, where Douglas Lawson became co-manager in 2008 and the name changed to Noble AIM VCT plc. Following the management team taking over Noble Fund Managers in 2010 the VCT changed its name to Amati VCT at its AGM on 2 July 2010. Over its first five years Amati VCT has been one of the top performing AIM VCTs to have raised funds in the 2004/5 tax year (source: Tax Efficient Review).
A Brief Explanation of VCTs
Investors who subscribe for new shares in a VCT are currently entitled to income tax relief of 30% of the value of their investment, up to a maximum subscription of £200,000 in any one tax year. The relief can only be claimed against income tax actually paid, or due to be paid in the same tax year as the subscription, regardless of the rate at which the tax was paid. In addition, any dividends paid by the VCT are tax free, and disposals of the shares are also free of capital gains tax (and equally losses cannot be offset against other gains). VCTs, unlike investment trusts, are also allowed to pay dividends out of capital gains.
In exchange for these tax concessions the VCT is required to fund young companies in the UK, which in turn, should help to create jobs and commercialise some of the skills and intellectual property which the UK has been so good at creating. Specifically the rules VCTs must meet in this respect determine that they must invest 70% of new funds raised in 'Qualifying Holdings' before the third financial year end after the money was raised. The rules surrounding what constitutes a 'Qualifying Holding' have changed each year since 2006 and there is the potential here for much confusion amongst investors. We have set out below a summary of how the rules work, and how they have changed over the last few years. Because the Amati VCT raised most of its funds prior to April 2006 it is able to operate predominantly under the original set of rules, which gives it considerably greater scope for making investment into companies mature enough to justify an AIM listing than it would have if it were starting from scratch today. The manager is keen to preserve this benefit for the investors, and restricts the size of any new share issues so as to maintain it.
What Amati VCT strives to be
VCTs vary a great deal over how they aim to make their qualifying investments. Amati VCT invests almost exclusively in AIM-traded companies, and seeks to find those which can become substantial businesses in a reasonable time frame. VCTs vary even more in what they do with the 30% of funds raised that are not required to be invested in qualifying holdings. Amati VCT uses this 'non-qualifying' portion of the portfolio to make up the gaps left in the qualifying one. For example, it is very rare to be able to invest in natural resources companies in the qualifying portfolio because most such companies are excluded by the rules. It is also hard to find qualifying investments with significant exposure to the growth of Far Eastern economies which is such a feature of the current economic landscape. We use the non-qualifying section of the portfolio to fill in these gaps, making investments into London listed companies, either AIM or full list, to do so. The intention is to make the portfolio as a whole an attractive smaller companies fund, which makes investments in companies capitalised up to around £2bn, albeit with a strong bias towards companies capitalised at less than £50m.
Key features of the evolution of Qualifying Investment regulations from 2005-10*
In all cases qualifying investments have to take the form of buying new shares in a company (funding them directly, rather than buying shares from an existing owner). Companies must be conducting one of a number of qualifying trades, and must be genuine trading businesses, or must have an intention to acquire such a trading business. Most of the changes since 2006 have been driven by the need to secure EU State Aid approval for VCT schemes. Rules changes introduced have not been retrospective, so pools of money raised earlier continue to operate under the earlier sets of rules. We track each pool of money raised, and allocate each individual investment to a particular pool.
Funds raised pre-April 2006 (91% of Amati VCT's current funds operate under these rules)
Qualifying investments are subject to a gross asset test at the time of the investment. Prior to the investment the gross assets must not be greater than £15m, and not greater than £16m after the investment. At least 50% of a company's qualifying activities much be in the UK. At least 21% of total funds raised (being 30% of the minimum level of qualifying investments) have to be in ordinary shares.
Funds raised April 2006 - April 2007
Qualifying investments are subject to a gross asset test at the time of the investment. Prior to the investment the gross assets must not be greater than £7m, and not greater than £8m after the investment.
Funds raised April 2007 - April 2008
In addition to the qualifying trade and gross assets test, to be qualifying investments the companies must not have more than 50 employees and must not raise more than £2m from VCT, EIS or Corporate Venturing scheme funds in any twelve month period.
Funds raised April 2008 - April 2009
Coal production, steel production and ship building are excluded from the list of qualifying trades.
Further Rule Changes Due in the Finance Act of 2011
EU State Aid approval for VCTs was finally received by HM Treasury in April 2009, subject to four further changes.
1) Territorial rules were relaxed, such that companies are only required to have a 'permanent establishment' in the UK. This is a positive for AIM VCTs, as our investee companies often have an international dimension.
2) 'Enterprises in difficulty' are excluded from qualifying. Generally speaking if a company is quoted on AIM we expect it will not be treated as being 'in difficulty'.
3) 49% of total funds raised have to be in ordinary shares (up from 21%). We currently have around 12% of the total portfolio in convertible bonds (non-equity instruments), which is unusually high for an AIM VCT. This rule change is potentially more of an issue for other types of VCT.
4) VCTs are allowed to list on any 'European Union Regulated Market', but few are expected to move their listing outside of London.
It is highly likely that these changes will be put into effect this year. In addition there continues to be debate over how the VCT legislation can best ensure that qualifying investments are targeted on genuine small enterprises which will serve to stimulate the UK economy.
* This is only intended as a brief summary of only the most pertinent features of complex legislation. Amati accepts no liability in respect of this summary. Those wishing to know more should refer to the HMRC website at http://www.hmrc.gov.uk, which has an excellent search function.