Venture Capital Trusts (VCTs) have been hoarding investor cash after an error from HM Revenue and Customs left the vehicles afraid of issuing new shares.
New legislation introduced by the Treasury was intended to prevent VCTs from abusing their tax-efficient status by paying out dividends to investors buying in to a VCT for a very short period of time purely to collect the tax-free dividend.
However, wording in this year's Finance Bill mistakenly implies trusts paying dividends to any shareholders purchasing new shares after 6 April would lose their tax-efficient status.
Some VCTs are understood to have held off issuing new shares after 6 April as a result, with fears compounded by HMRC's decision last month to revoke the tax-efficient status of the Oxford VCTs for a separate rule breach.
In a statement sent to members, the Association of Investment Companies said: "As currently drafted, the legislation could be read to say that a VCT paying dividends out of reserves created from the reduction of share premium or capital, to any shareholder allotted shares on or after 6 April 2014, will lose status.
"The loss of status would arise irrespective of when the reserve was created."
The AIC said the above interpretation contrasts with earlier indications of how the provisions on return of capital were intended to operate.
"Previous policy statements had indicated that the new restrictions, and potential for a loss of status, would only apply to payments made out of funds raised on or after 6 April 2014," it added.
In response, the Treasury told the AIC, it would seek to make "a minor amendment to the legislation".
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