There's actually no problem here. 100% expected behavior for this VCR & capture device. The S-Video versions are correct in both cases.
The menu is generated as composite inside the VCR and not properly decoded into a separated Y/C signal for the S-Video output. If you search hard enough, you'll find multiple threads confirming that this is normal. JVC (and most VCR mfr's) engineers apparently didn't care to make the menus look nice. In contrast, the Panasonic PV-S4670 is an example of an S-VHS VCR that outputs proper, clean Y/C menus.
Your tape capture is a TV recording with a bunch of artifacts that were recorded to tape from the tuner source. You're not seeing them in the composite capture because the VC500's comb filter sucks. It's smoothing over the whole image including those artifacts; take a look at the text in the bottom right.
A pre-recorded retail Hollywood movie tape should look good. If you have issues getting clean captures from those (apart from copy protection), then there is cause for concern.
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