Finance Bill (HC Bill 49)

(e) no tax avoidance (see section 257CE), and

(f) no disqualifying arrangements (see section 257CF).

The requirements

257CA The shares requirement

(1) 5The relevant shares must meet—

(a) the requirements of subsection (2), and

(b) unless they are bonus shares, the requirements of subsection
(4).

(2) Shares meet the requirements of this subsection if they are ordinary
10shares which do not, at any time during period B, carry—

(a) any present or future preferential right to dividends that is
within subsection (3),

(b) any present or future preferential right to a company’s assets
on its winding up, or

(c) 15any present or future right to be redeemed.

(3) A preferential right to dividends carried by a share in a company is
within this subsection if—

(a) the amount of any dividends payable pursuant to the right,
or the date or dates on which they are payable, depend to any
20extent on a decision of the company, the holder of the share
or any other person, or

(b) the amount of any dividends that become payable at any time
pursuant to the right includes any amount that became
payable at any earlier time pursuant to the right but has not
25been paid.

(4) Shares meet the requirements of this subsection if they—

(a) are subscribed for wholly in cash, and

(b) are fully paid up at the time they are issued.

(5) Shares are not fully paid up for the purposes of subsection (4)(b) if
30there is any undertaking to pay cash to any person at a future date in
respect of the acquisition of the shares.

257CB The purpose of the issue requirement

(1) The relevant shares (other than any of them which are bonus shares)
must be issued in order to raise money for the purposes of a
35qualifying business activity carried on, or to be carried on, by the
issuing company or a qualifying 90% subsidiary of that company.

(2) For the meaning of “qualifying business activity” see section 257HG.

257CC The spending of the money raised requirement

(1) The requirement of this section is that before the end of period B all
40of the money raised by the issue of the relevant shares (other than
any of them which are bonus shares) is spent for the purposes of the
qualifying business activity for which it was raised.

(2) Spending money on the acquisition of shares or stock in a company
does not of itself amount to spending the money for the purposes of
a qualifying business activity.

(3) This requirement does not fail to be met merely because an amount
5of money which is not significant is spent for another purpose or
remains unspent at the end of period B.

257CD The no pre-arranged exits requirement

(1) The issuing arrangements for the relevant shares must not include—

(a) arrangements with a view to the subsequent repurchase,
10exchange or other disposal of those shares or of other shares
in or securities of the issuing company,

(b) arrangements for or with a view to the cessation of any trade
which is being or is to be or may be carried on by the issuing
company or a person connected with that company,

(c) 15arrangements for the disposal of, or of a substantial amount
(in terms of value) of, the assets of the issuing company or of
a person connected with that company, or

(d) arrangements the main purpose of which, or one of the main
purposes of which, is (by means of any insurance, indemnity
20or guarantee or otherwise) to provide partial or complete
protection for persons investing in shares in the issuing
company against what would otherwise be the risks attached
to making the investment.

(2) The arrangements referred to in subsection (1)(a) do not include any
25arrangements with a view to such an exchange of shares, or shares
and securities, as is mentioned in section 257HB(1).

(3) The arrangements referred to in subsection (1)(b) and (c) do not
include any arrangements applicable only on the winding up of a
company except in a case where—

(a) 30the issuing arrangements include arrangements for the
company to be wound up, or

(b) the arrangements are applicable to the winding up of the
company otherwise than for genuine commercial reasons.

(4) The arrangements referred to in subsection (1)(d) do not include any
35arrangements which are confined to the provision—

(a) for the issuing company itself, or

(b) if the issuing company is a parent company that meets the
trading requirement in section 257DA(2)(b), for the issuing
company itself, for the issuing company itself and one or
40more of its subsidiaries or for one or more of its subsidiaries,

of any such protection against risks arising in the course of carrying
on its business as might reasonably be expected to be provided in
normal commercial circumstances.

(5) In this section “the issuing arrangements” means—

(a) 45the arrangements under which the shares are issued to the
individual,

(b) any arrangements made, before the shares were issued, in
relation to or in connection with the issue, and

(c) if before the shares were issued information on pre-arranged
exits was made available to any prospective subscribers for
shares in the issuing company, any arrangements made
during period B.

(6) 5For the purposes of subsection (5)(c) “information on pre-arranged
exits” means any information indicating the possibility of making,
during period B, arrangements of the kind described in paragraph
(a), (b), (c) or (d) of subsection (1).

257CE The no tax avoidance requirement

10The relevant shares must be issued for genuine commercial reasons,
and not as part of a scheme or arrangement the main purpose or one
of the main purposes of which is the avoidance of tax.

257CF The no disqualifying arrangements requirement

(1) The relevant shares must not be issued, nor any money raised by the
15issue spent, in consequence or anticipation of, or otherwise in
connection with, disqualifying arrangements.

(2) Arrangements are “disqualifying arrangements” if—

(a) the main purpose, or one of the main purposes, of the
arrangements is to secure—

(i) 20that a qualifying business activity is or will be carried
on by the issuing company or a qualifying 90%
subsidiary of that company, and

(ii) that one or more persons (whether or not including
any party to the arrangements) may obtain relevant
25tax relief in respect of shares issued by the issuing
company which raise money for the purposes of that
activity or that such shares may comprise part of the
qualifying holdings of a VCT,

(b) that activity is the relevant qualifying business activity, and

(c) 30one or both of conditions A and B are met.

(3) Condition A is that, as a (direct or indirect) result of the money raised
by the issue of the relevant shares being spent as required by section
257CC, an amount representing the whole or the majority of the
amount raised is, in the course of the arrangements, paid to or for the
35benefit of a relevant person or relevant persons.

(4) Condition B is that, in the absence of the arrangements, it would have
been reasonable to expect that the whole or greater part of the
component activities of the relevant qualifying business activity
would have been carried on as part of another business by a relevant
40person or relevant persons.

(5) For the purposes of this section it is immaterial whether the issuing
company is a party to the arrangements.

(6) In this section—

• “component activities” means—

  (a)

  45if the relevant qualifying business activity is activity
  A (see section 257HG(2)), the carrying on of a

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  qualifying trade, or preparing to carry on such a
  trade, which constitutes that activity, and

  (b)

  if the relevant qualifying business activity is activity B
  (see section 257HG(4)), the carrying on of research
  and development which constitutes that activity;

• 5“qualifying holdings”, in relation to the issuing company, is to
  be construed in accordance with section 286 (VCTs:
  qualifying holdings);

• “relevant person” means a person who is a party to the
  arrangements or a person connected with such a party;

• 10“relevant qualifying business activity” means the activity for
  the purposes of which the issue of the relevant shares raised
  money;

• “relevant tax relief”, in respect of shares, means one or more of
  the following—

  (a)

  15SEIS relief in respect of the shares;

  (b)

  EIS relief in respect of the shares;

  (c)

  relief under Chapter 6 of Part 4 (losses on disposal of
  shares) in respect of the shares;

  (d)

  relief under section 150A or 150E of TCGA 1992
  20(enterprise investment scheme) in respect of the
  shares;

  (e)

  relief under Schedule 5B to that Act (enterprise
  investment scheme: re-investment) in consequence of
  which deferral relief is attributable to the shares (see
  25paragraph 19(2) of that Schedule);

  (f)

  relief under Schedule 5BB to that Act (seed enterprise
  investment scheme: re-investment) in consequence of
  which SEIS re-investment relief is attributable to the
  shares (see paragraph 4 of that Schedule).

CHAPTER 4 30The issuing company

Introduction

257D Overview of Chapter

The issuing company is a qualifying company in relation to the
35relevant shares if the requirements of this Chapter are met as to—

(a) trading (see section 257DA),

(b) the issuing company’s carrying on of the qualifying business
activity (see section 257DC),

(c) UK permanent establishment (see section 257DD),

(d) 40financial health (see section 257DE),

(e) unquoted status (see section 257DF),

(f) control and independence (see 257DG),

(g) no partnerships (see section 257DH),

(h) gross assets (see section 257DI),

(i) number of employees (see section 257DJ),

(j) no previous other risk capital scheme investments (see
section 257DK),

(k) the amount raised through the SEIS (see section 257DL),

(l) 5qualifying subsidiaries (see section 257DM), and

(m) property managing subsidiaries (see section 257DN).

The requirements

257DA The trading requirement

(1) The issuing company must meet the trading requirement
10throughout period B.

(2) The trading requirement is that—

(a) the company, ignoring any incidental purposes, exists
wholly for the purpose of carrying on one or more new
qualifying trades (see section 257HF), or

(b) 15the company is a parent company and the business of the
group does not consist wholly or as to a substantial part in the
carrying on of non-qualifying activities.

(3) If the company intends that one or more other companies should
become its qualifying subsidiaries with a view to their carrying on
20one or more new qualifying trades—

(a) the company is treated as a parent company for the purposes
of subsection (2)(b), and

(b) the reference in subsection (2)(b) to the group includes the
company and any existing or future company that will be its
25qualifying subsidiary after the intention in question is carried
into effect.

This subsection does not apply at any time after the abandonment of
that intention.

(4) For the purpose of subsection (2)(b) the business of the group means
30what would be the business of the group if the activities of the group
companies taken together were regarded as one business.

(5) For the purpose of determining the business of a group, activities are
ignored so far as they are activities carried on by a mainly trading
subsidiary otherwise than for its main purpose.

(6) 35For the purposes of determining the business of a group, activities of
a group company are ignored so far as they consist in—

(a) the holding of shares in or securities of a qualifying
subsidiary of the parent company,

(b) the making of loans to another group company,

(c) 40the holding and managing of property used by a group
company for the purpose of one or more qualifying trades
carried on by a group company, or

(d) the holding and managing of property used by a group
company for the purpose of research and development from
45which it is intended—

(i) that a qualifying trade to be carried on by a group
company will be derived, or

(ii) that a qualifying trade carried on or to be carried on
by a group company will benefit.

(7) Any reference in subsection (6)(d)(i) or (ii) to a group company
includes a reference to any existing or future company which will be
5a group company at any future time.

(8) Where period B begins after the incorporation of the company, the
requirement of subsection (2) must have been complied with since its
incorporation; but for the purposes of that subsection any interval
between the incorporation of the company and the time when it
10commenced business is to be ignored.

(9) In this section—

• “incidental purposes” means purposes having no significant
  effect (other than in relation to incidental matters) on the
  extent of the activities of the company in question;

• 15“mainly trading subsidiary” means a qualifying subsidiary
  which, apart from incidental purposes, exists wholly for the
  purpose of carrying on one or more qualifying trades, and
  any reference to the main purpose of such a subsidiary is to
  be read accordingly;

• 20“non-qualifying activities” means—

  (a)

  excluded activities (within the meaning of sections
  192 to 199), and

  (b)

  activities (other than research and development)
  carried on otherwise than in the course of a trade;

• 25“qualifying trade” has the same meaning as in Part 5 (see
  sections 189 and 192 to 200).

257DB Ceasing to meet trading requirement: administration etc

(1) A company is not regarded as ceasing to meet the trading
requirement merely because of anything done in consequence of the
30company or any of its subsidiaries being in administration or
receivership.

This is subject to subsections (2) and (3).

(2) Subsection (1) applies only if—

(a) the entry into administration or receivership, and

(b) 35everything done as a result of the company concerned being
in administration or receivership,

is for genuine commercial reasons, and is not part of a scheme or
arrangement the main purpose or one of the main purposes of which
is the avoidance of tax.

(3) 40A company ceases to meet the trading requirement if before the end
of period B—

(a) a resolution is passed, or an order is made, for the winding up
of the company or any of its subsidiaries (or, in the case of a
winding up otherwise than under the Insolvency Act 1986 or
45the Insolvency (Northern Ireland) Order 1989, any other act
is done for the like purpose), or

(b) the company or any of its subsidiaries is dissolved without
winding up.

This is subject to subsection (4).

(4) Subsection (3) does not apply if the winding up or dissolution is for
genuine commercial reasons, and is not part of a scheme or
arrangement the main purpose or one of the main purposes of which
5is the avoidance of tax.

257DC The issuing company to carry on the qualifying business activity

(1) The requirement of this section is met in relation to the issuing
company if, at no time in period B, is any of the following—

(a) the relevant new qualifying trade,

(b) 10relevant preparation work (if any), and

(c) relevant research and development (if any),

carried on by a person other than the issuing company or a
qualifying 90% subsidiary of that company.

(2) Subsection (3) has effect for the purpose of determining whether the
15requirement of this section is met in relation to the issuing company
in a case where relevant preparation work is carried out by that
company or a qualifying 90% subsidiary of that company.

(3) The carrying on of the relevant new qualifying trade by a company
other than the issuing company or a subsidiary of that company is to
20be ignored if it takes place at any time in period B before the issuing
company or any qualifying 90% subsidiary of that company begins
to carry on that trade.

(4) The requirement of this section is not regarded as failing to be met in
relation to the issuing company if, merely because of any act or event
25within subsection (5), the relevant new qualifying trade—

(a) ceases to be carried on in period B by the issuing company or
any qualifying 90% subsidiary of that company, and

(b) is subsequently carried on in that period by a person who is
not at any time in period A connected with the issuing
30company.

(5) The following are acts and events within this subsection—

(a) anything done as a consequence of the issuing company or
any other company being in administration or receivership,
and

(b) 35the issuing company or any other company being wound up,
or dissolved without being wound up.

(6) Subsection (4) applies only if—

(a) the entry into administration or receivership, and everything
done as a consequence of the company concerned being in
40administration or receivership, or

(b) the winding up or dissolution,

is for genuine commercial reasons, and is not part of a scheme or
arrangement the main purpose or one of the main purposes of which
is the avoidance of tax.

(7) 45In this section—

• “the relevant new qualifying trade” means the new qualifying
  trade which is the subject of that qualifying business activity;

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• “relevant preparation work” means preparations within section
  257HG(2)(b) which are the subject of the qualifying business
  activity mentioned in section 257CB;

• “relevant research and development” means—

  (a)

  5research and development within section 257HG(3)
  which is the subject of that qualifying business
  activity, and

  (b)

  any other preparations for the carrying on of the new
  qualifying trade which is the subject of that activity.

257DD 10 The UK permanent establishment requirement

(1) The issuing company must meet the UK permanent establishment
requirement throughout period B.

(2) The UK permanent establishment requirement is that the issuing
company has a permanent establishment in the United Kingdom.

257DE 15 The financial health requirement

(1) The issuing company must meet the financial health requirement at
the beginning of period B.

(2) The financial health requirement is that the issuing company is not
in difficulty.

(3) 20The issuing company is “in difficulty” if it is reasonable to assume
that it would be regarded as a firm in difficulty for the purposes of
the Community Guidelines on State Aid for Rescuing and
Restructuring Firms in Difficulty (2004/C 244/02).

257DF The unquoted status requirement

(1) 25At the beginning of period B—

(a) the issuing company must be an unquoted company,

(b) there must be no arrangements in existence for the issuing
company to cease to be an unquoted company, and

(c) there must be no arrangements in existence for the issuing
30company to become a subsidiary of another company (“the
new company”) by virtue of an exchange of shares, or shares
and securities, if—

(i) section 257HB applies in relation to the exchange, and

(ii) arrangements have been made with a view to the new
35company ceasing to be an unquoted company.

(2) In this section “unquoted company” means a company none of
whose shares, stocks, debentures or other securities are marketed to
the general public.

(3) For the purposes of subsection (2), shares, stock, debentures or other
40securities are marketed to the general public if they are—

(a) listed on a recognised stock exchange,

(b) listed on a designated exchange in a country outside the
United Kingdom, or

(c) dealt in outside the United Kingdom by such means as may
45be designated.

(4) In subsection (3)(b) and (c) “designated” means designated by an
order made by the Commissioners for Her Majesty’s Revenue and
Customs for the purposes of that provision.

(5) An order made for the purposes of subsection (3)(b) may designate
5an exchange by name, or by reference to any class or description of
exchanges, including a class or description framed by reference to
any authority or approval given in a country outside the United
Kingdom.

(6) The arrangements referred to in subsection (1)(b) and (c)(ii) do not
10include arrangements in consequence of which any shares, stocks,
debentures or other securities of the company are at any subsequent
time—

(a) listed on a stock exchange that is a recognised stock exchange
by virtue of an order made under section 1005(1)(b), or

(b) 15listed on an exchange, or dealt in by any means, designated
by an order made for the purposes of subsection (3)(b) or (c),

if the order was made after the beginning of period B.

257DG The control and independence requirement

(1) The control element of the requirement is that—

(a) 20the issuing company must not at any time in period A control
(whether on its own or together with any person connected
with it) any company which is not a qualifying subsidiary of
the issuing company, and

(b) no arrangements must be in existence at any time in that
25period by virtue of which the issuing company could fail to
meet paragraph (a) (whether during that period or
otherwise).

(2) The independence element of the requirement is that—

(a) the issuing company must not at any time in period A be
30under the control of any other company (whether on its own
or together with any person connected with it), and

(b) no arrangements must be in existence at any time in that
period by virtue of which the issuing company could fail to
meet paragraph (a) (whether during that period or
35otherwise).

(3) This section is subject to section 257HB(4) (exchange of shares).

257DH The no partnerships requirement

(1) Neither the issuing company nor any qualifying 90% subsidiary of
that company may, at any time during period A, be a member of a
40partnership.

(2) “Partnership” includes—

(a) a limited liability partnership, and

(b) an entity established under the law of a territory outside the
United Kingdom of a similar character to a partnership,

45and “member”, in relation to a partnership, is to be read accordingly.

257DI The gross assets requirement

(1) In the case of relevant shares issued by a single company, the value
of the company’s assets must not exceed £200,000 immediately
before the relevant shares are issued.

(2) 5In the case of relevant shares issued by a parent company, the value
of the group assets must not exceed £200,000 immediately before the
relevant shares are issued.

(3) For the purposes of this section the value of the group assets is the
sum of the values of the gross assets of each of the members of the
10group, ignoring any that consist in rights against, or shares in or
securities of, another member of the group.

257DJ The number of employees requirement

(1) If the issuing company is a single company, the full-time equivalent
employee number for it must be less than 25 when the relevant
15shares are issued.

(2) If the issuing company is a parent company, the sum of—

(a) the full-time equivalent employee number for it, and

(b) the full-time equivalent employee numbers for each of its
qualifying subsidiaries,

20must be less than 25 when the relevant shares are issued.

(3) The full-time equivalent employee number for a company is
calculated as follows—

• Step 1

• Find the number of full-time employees of the company.

• 25Step 2

• Add, for each employee of the company who is not a full-time
  employee, such fraction as is just and reasonable.

• The result is the full-time equivalent employee number.

(4) In this section references to an employee—

(a) 30include a director, but

(b) do not include—

(i) an employee on maternity or paternity leave, or

(ii) a student on vocational training.

257DK No previous other risk capital scheme investments

(1) 35The requirement of this section is that—

(a) no EIS investment or VCT investment is or has been made in
the issuing company on or before the day on which the
relevant shares are issued, and

(b) no EIS investment or VCT investment has been made on or
40before that day in a company which at the time the relevant
shares are issued is a qualifying subsidiary of the issuing
company.

(2) An “EIS investment” is made in the company if the company—

(a) issues shares (money having been subscribed for them), and