VCM54098 - VCT: VCT approval: securities: commercial rates of return

Section 17 and Schedule 5 of the Finance Act 2018introduced an objective test (a ‘safe harbour’) for a commercial rate of return (ITA07/S285(2B)). Loans will not be excluded for providing more than a commercial return where the return is below specified threshold limits.

Returns will not be considered as excessive if two conditions are met:

  • The return for the initial five years of the loan period must be no more than 50% of the amount loaned.
  • The total amount to be returned must also represent no more than an interest rate of 10% per annum. That rate is referenced to the average amount of the loan outstanding over term of the agreement. This therefore takes account of any actual repayments of the loan principal that might be made after the initial five year period.

Both of these conditions must be met for the loan to be in this ‘safe harbour’.

Loans made on terms outside this safe harbour may still be qualifying securities. This will be the case when greater rates of return are justified by the circumstances in which a particular loan investment is made. The higher return may, for instance, be in recognition of the investment being made in conditions where there is an exceptional risk-to-capital (see VCM8520). The terms of the loan agreement may mean that it is not possible to calculate the amount of the return in advance of the payment becoming due; the rate of interest payable on the loan may be tied to a bank base rate and other payments might also be contingent or variable.

In the circumstance where there is no fixed return amount a best estimate of the return finally payable is needed. Whether or not the return is excessive is provisionally determined on the basis of that estimate. A final decision is made once the amount of the return is known with certainty. If this results in a change that affects to the amount of VCT relief properly due then the appropriate amendments will be made. These adjustments can be given effect regardless of normal time limits for amending assessments.