Finance (No. 2) Bill (HC Bill 134)

Finance (No. 2) BillPage 70

(3) The second operating costs condition is that in each of the
relevant three succeeding years at least 10% of the relevant
operating costs constitute such expenditure.

(4) In subsections (2) and (3)—

  • 5“relevant operating costs” means—

    (a)

    if the issuing company is a single company at the
    time the relevant shares are issued, the operating
    costs of that company, and

    (b)

    if the issuing company is a parent company at
    10the time the relevant shares are issued, the sum
    of—

    (i)

    the operating costs of the issuing
    company, and

    (ii)

    the operating costs of each company
    15which is a qualifying subsidiary of the
    issuing company at that time, excluding
    a company’s operating costs for any of
    the relevant three succeeding years
    during any part of which the company is
    20not a qualifying subsidiary of the issuing
    company;

  • “the relevant three succeeding years” means the three
    consecutive years the first of which begins with the date
    the relevant shares are issued.””

3 (1) 25Section 292A of ITA 2007 (the maximum amount raised annually through
risk finance investments requirement for VCT relief) is amended as follows.

(2) In subsection (1), for “must not exceed £5 million” substitute “must not
exceed—

(a) if the company is a knowledge-intensive company at that
30date (see section 331A and subsection (6A)), £10 million, and

(b) in any other case, £5 million.”

(3) After subsection (6) insert—

(6A) If the relevant company began to carry on a trade less than three
years before the date the relevant holding is issued, section 331A as
35it applies for the purposes of this section has effect with the
substitution of the following subsections for subsections (3) to (5A)—

(3) The first operating costs condition is that in at least one of the
relevant three succeeding years at least 15% of the relevant
operating costs constitute expenditure on research and
40development or innovation.

(4) The second operating costs condition is that in each of the
relevant three succeeding years at least 10% of the relevant
operating costs constitute such expenditure.

(5) In subsections (3) and 4)—

  • 45“relevant operating costs” means—

    (a)

    if the relevant company is a single company at
    the applicable time, the operating costs of that
    company, and

    Finance (No. 2) BillPage 71

    (b)

    if the relevant company is a parent company at
    the applicable time, the sum of—

    (i)

    the operating costs of the relevant
    company, and

    (ii)

    5the operating costs of each company
    which is a qualifying subsidiary of the
    relevant company at that time, excluding
    a company’s operating costs for any of
    the relevant three succeeding years
    10during any part of which the company is
    not a qualifying subsidiary of the
    relevant company;

  • “the relevant three succeeding years” means the three
    consecutive years the first of which begins with the date
    15the relevant holding is issued.””

4 In section 297B of ITA 2007 (the proportion of skilled employees
requirement for VCT relief), in subsection (2)(a), after “sections” insert
“292A,”.

Initial investing period: permitted age of knowledge-intensive company

5 20In section 175A of ITA 2007 (the permitted maximum age condition for EIS
relief), in paragraph (a) of subsection (2), for “beginning with the relevant
first commercial sale,” substitute beginning with—

(i) the relevant first commercial sale, or

(ii) if the issuing company so elects, the date by reference
25to which that company is treated as reaching an
annual turnover of £200,000 (see section 252B),”.

6 After section 252A of ITA 2007 insert—

252B Knowledge-intensive company reaching turnover of £200,000

(1) This section has effect for the purposes of section 175A(2)(a)(ii)
30(alternative initial investing period in case of knowledge-intensive
company).

(2) Where—

(a) the annual turnover of the issuing company in relation to an
accounting period (see subsection (3)) is £200,000 or more,
35and

(b) the annual turnover for the company in relation to each
previous accounting period is less than £200,000,

the company is treated as reaching an annual turnover of £200,000 or
more by reference to the specified date (see subsection (4)).

(3) 40The annual turnover in relation to an accounting period is—

(a) the turnover for that accounting period (if the accounting
period is for 12 months), or

(b) the turnover for the period of 12 months ending when that
accounting period ends (if not).

(4) 45The specified date is—

(a) in the case of an accounting period of 12 months or less, the
last day of that accounting period;

Finance (No. 2) BillPage 72

(b) in the case of an accounting period of more than 12 months,
the last day of the period of 12 months beginning when that
accounting period begins.

(5) The turnover of the issuing company for a period (“the period”) is
5treated for the purposes of this section as including the relevant
turnover of any company that is a member of the same group as the
issuing company during the whole or any part of the period (a
“group company”).

(6) The relevant turnover of a group company is—

(a) 10its turnover for the period, if the group company is a member
of the same group as the issuing company for the whole of the
period;

(b) if the group company is a member of the same group as the
issuing company for part of the period, its turnover for that
15part of the period.

(7) Any necessary apportionments of turnover are to be made, on a time
basis according to the respective lengths of the periods in question,
for the purposes of subsections (3)(b) and (6).

(8) In this section “turnover” has the meaning given by section 474(1) of
20the Companies Act 2006 and is to be determined by reference to—

(a) the accounts of the company, and

(b) amounts recognised for accounting purposes.”

7 In section 280C of ITA 2007 (the permitted maximum age condition for VCT
relief), in paragraph (a) of subsection (3), for “beginning with the relevant
25first commercial sale,” substitute beginning with—

(i) the relevant first commercial sale, or

(ii) if the relevant company so elects, the date by
reference to which that company is treated as
reaching an annual turnover of £200,000 (see section
30331B),”.

8 In section 294A of ITA 2007 (the permitted company age requirement for
VCT relief), in paragraph (a) of subsection (2), for “beginning with the
relevant first commercial sale,” substitute beginning with—

(i) the relevant first commercial sale, or

(ii) 35if the relevant company so elects, the date by
reference to which that company is treated as
reaching an annual turnover of £200,000 (see section
331B),”.

9 After section 331A of ITA 2007 insert—

331B 40 Knowledge-intensive company reaching turnover of £200,000

(1) This section has effect for the purposes of sections 280C(3)(a)(ii) and
294A(2)(a)(ii) (alternative initial investing period in case of
knowledge-intensive company).

(2) Where—

(a) 45the annual turnover of the relevant company in relation to an
accounting period (see subsection (3)) is £200,000 or more,
and

Finance (No. 2) BillPage 73

(b) the annual turnover for the company in relation to each
previous accounting period is less than £200,000,

the company is treated as reaching an annual turnover of £200,000 or
more by reference to the specified date (see subsection (4)).

(3) 5The annual turnover in relation to an accounting period is—

(a) the turnover for that accounting period (if the accounting
period is for 12 months), or

(b) the turnover for the period of 12 months ending when that
accounting period ends (if not).

(4) 10The specified date is—

(a) in the case of an accounting period of 12 months or less, the
last day of that accounting period;

(b) in the case of an accounting period of more than 12 months,
the last day of the period of 12 months beginning when that
15accounting period begins.

(5) The turnover of the relevant company for a period (“the period”) is
treated for the purposes of this section as including the relevant
turnover of any company that is a member of the same group as the
relevant company during the whole or any part of the period (a
20“group company”).

(6) The relevant turnover of a group company is—

(a) its turnover for the period, if the group company is a member
of the same group as the relevant company for the whole of
the period;

(b) 25if the group company is a member of the same group as the
relevant company for part of the period, its turnover for that
part of the period.

(7) Any necessary apportionments of turnover are to be made, on a time
basis according to the respective lengths of the periods in question,
30for the purposes of subsections (3)(b) and (6).

(8) In this section “turnover” has the meaning given by section 474(1) of
the Companies Act 2006 and is to be determined by reference to—

(a) the accounts of the company, and

(b) amounts recognised for accounting purposes.”

35Commencement

10 (1) The amendments made by this Schedule come into force in accordance with
provision made by the Treasury by regulations.

(2) Regulations under sub-paragraph (1)

(a) may make different provision for different purposes;

(b) 40may provide for any of those amendments to have effect in relation
to shares issued, or investments made, on or after a day that is—

(i) earlier than the day on which the regulations are made, but

(ii) not earlier than 6 April 2018.

Finance (No. 2) BillPage 74

Section 17

SCHEDULE 5 Venture capital trusts: further amendments

Relaxation of restriction where there is a linked sale

1 (1) Section 264A of ITA 2007 (restricting VCT relief where there is a linked sale)
5is amended as follows.

(2) In subsection (5), at the beginning of paragraph (b) insert “if subsection (7A)
applies,”.

(3) After subsection (7) insert—

(7A) This subsection applies if—

(a) 10the date of the merger or restructuring referred to in
subsection (7) (“D2”) is before, or the same as, the date when
the individual subscribes for the relevant shares (“D1”), or

(b) D2 is after D1 but no more than two years after, and either—

(i) the individual could reasonably be expected to know
15at the time of subscribing for the relevant shares that
the merger or restructuring referred to in subsection
(7) was likely to take place, or

(ii) the main purpose of the merger or restructuring, or
one of its main purposes, is to enable individuals to
20obtain a tax advantage in connection with VCT relief.

(7B) For the purposes of subsection (7A)

(a) the date of the merger or restructuring is the date of the issue
of shares referred to in section 323(1)(a) or (2)(a) or section
326(2)(a) (or, if there is more than one such issue, the date of
25the first of them);

(b) a “tax advantage” includes—

(i) relief or increased relief from tax,

(ii) repayment or increased repayment of tax,

(iii) avoidance or reduction of a charge to tax or an
30assessment to tax, and

(iv) avoidance of a possible assessment to tax.”

The 70% qualifying holdings condition

2 In section 274 of ITA 2007 (requirements for the giving of approval), in the
fifth entry of the table in subsection (2) (the 70% qualifying holdings
35condition), for “70%” in the first and second columns substitute “80%”.

3 In consequence of the amendment made by paragraph 2, in each of the
following provisions of ITA 2007, for “70%”, where it appears before
“qualifying”, substitute “80%”—

(a) in section 274, subsection (3)(c), (d) and (e);

(b) 40in section 275 (alternative requirements for the giving of approval),
subsection (3)(b);

(c) in section 278 (conditions relating to value of investments: general),
subsection (1);

Finance (No. 2) BillPage 75

(d) in section 280 (conditions relating to qualifying holdings and eligible
shares), subsection (2);

(e) in section 280A (the 70% qualifying holdings condition: disposal of
holding), in the heading and in subsection (2);

(f) 5in Schedule 4 (index of defined expressions), the entry for the
qualifying holdings condition.

4 In section 280A of ITA 2007, in subsection (2)(a), for “6” substitute “12”.

The minimum investment on further issue condition

5 (1) Section 274 of ITA 2007 is amended as follows.

(2) 10In the table in subsection (2), after the entry for “the investment limits
condition” insert—

“The minimum investment
on further issue condition
The company has not breached and will
not breach, in the relevant period, the
minimum investment on further issue
15condition”

(3) In subsection (3), after paragraph (f) insert—

(fa) the minimum investment on further issue condition by
section 280BA,”

6 After section 280B of ITA 2007 insert—

280BA 20 The minimum investment on further issue condition

(1) A company breaches the minimum investment on further issue
condition where—

(a) there has been an issue of ordinary share capital of the
company (“the first issue”),

(b) 25a VCT approval of the company has taken effect on or before
the day of the making of the first issue,

(c) a further issue (“the further issue”) of ordinary share capital
of the company has been made since the making of the first
issue, and

(d) 30the company does not, on or before the relevant deadline,
invest at least 30% of the money raised by the further issue in
shares or securities which when held by the company are
comprised in the company’s qualifying holdings.

(2) The relevant deadline is the last day of the period of 12 months
35immediately following the end of the accounting period in which the
further issue is made.”

Qualifying holdings: exclusions

7 (1) Part 8 of Schedule 2 to ITA 2007 (transitional provision: venture capital
trusts) is amended as follows.

(2) 40In paragraph 69 (the no guaranteed loan requirement), after “acquired”
insert “before 6 April 2018”.

Finance (No. 2) BillPage 76

(3) In paragraph 70 (the proportion of eligible shares requirement), in sub-
paragraph (2), after “acquired” insert “before 6 April 2018”.

(4) In paragraph 81 (meaning of “excluded activities”), after “acquired” insert
“before 6 April 2018”.

8 5In Part 1 of Schedule 16 to FA 2007 (venture capital trusts: limit on number
of employees in company in which investment made), in paragraph 3(6)(b),
after “(“the investing company”)” insert “before 6 April 2018”.

9 In Schedule 11 to FA 2008 (venture capital trusts), in paragraph 12(b), after
“(“the investing company”)” insert “before 6 April 2018”.

10 (1) 10In Schedule 2 to F(No.3)A 2010 (venture capital trusts), in paragraph 6(2)(b),
after “the investing company” insert “before 6 April 2018”.

(2) The 30% eligible shares condition does not apply in relation to an accounting
period ending on or after 6 April 2018.

(3) In sub-paragraph (2) “the 30% eligible shares condition” means the
15condition referred to as such in section 274(2) of ITA 2007 as originally
enacted.

Commencement

11 The amendments made by paragraph 1 have effect in relation to claims for
relief by reference to shares issued on or after 6 April 2014.

12 20The other amendments made by this Schedule come into force in accordance
with provision made by the Treasury by regulations.

13 Regulations under paragraph 12

(a) may make different provision for different purposes;

(b) may provide for any of those amendments to come into force on or
25by reference to a day that is—

(i) earlier than the day on which the regulations are made, but

(ii) not earlier than the day on which this Act is passed.

Section 18

SCHEDULE 6 Partnerships

30Part 1 Bare trusts

1 In ITTOIA 2005, after section 848 insert—

848A Bare trusts

(1) This section applies if—

(a) 35a partner in a firm is partner as trustee for a beneficiary who
is absolutely entitled to the partner’s share of the profits of
the firm, and

(b) the beneficiary is chargeable to tax on those profits.

Finance (No. 2) BillPage 77

(2) References in this Part to a partner or member of the firm include
references to the beneficiary.”

2 In CTA 2009, after section 1258 insert—

1258A Bare trusts

(1) 5This section applies if—

(a) a partner in a firm is partner as trustee for a beneficiary who
is absolutely entitled to the partner’s share of the profits of
the firm, and

(b) the beneficiary is chargeable to tax on those profits.

(2) 10References in this Part to a partner or member of the firm include
references to the beneficiary.”

3 (1) TMA 1970 is amended as follows.

(2) In section 12AA (partnership returns), after subsection (10A) insert—

(10B) If—

(a) 15a partner in a partnership is partner as trustee for a
beneficiary who is absolutely entitled to the partner’s share
of the profits of the partnership, and

(b) the beneficiary is chargeable to tax on those profits,

references in this Act to the partner include references to the
20beneficiary.”;

(3) In section 118(1) (interpretation), at the appropriate place insert—

  • ““partner” is to be construed in accordance with section
    12AA(10B) of this Act;”.

4 (1) The amendment made by paragraph 1 has effect in relation to the tax year
252018-19 and subsequent tax years.

(2) The amendment made by paragraph 2 has effect in relation to accounting
periods beginning on or after 1 April 2018.

(3) The amendments made by paragraph 3 have effect in relation to partnership
returns relating to the tax year 2018-19 or any subsequent tax year.

30Part 2 Notional trade and business of indirect partner

5 (1) ITTOIA 2005 is amended as follows.

(2) In section 847 (general provisions), after subsection (3) insert—

(4) For the purposes of this Part, a person is an indirect partner in a
35partnership (“the underlying partnership”) if the person is a partner
in—

(a) a partnership which is a partner in the underlying
partnership, or

(b) any partnership which is an indirect partner in the
40underlying partnership by virtue of the preceding
application of this subsection.”

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(3) After section 852 insert—

852A Notional trades: indirect partners

(1) This section applies in relation to the notional trade of a partner in a
firm if—

(a) 5the firm consists of a partnership which is a partner or
indirect partner in another partnership (“the underlying
partnership”),

(b) the members of the underlying partnership carry on a trade
(the “underlying trade”),

(c) 10the firm’s trading profits or losses referred to in section 852(1)
arise by virtue of profits or losses (“the underlying profits or
losses”) arising in the carrying on of the underlying trade,
and

(d) the underlying profits or losses do not themselves arise by
15virtue of the underlying partnership’s membership of a
partnership.

(2) Section 852 (carrying on by partner of notional trade) has effect as if
for subsections (2) to (5) there were substituted—

(2) The partner starts to carry on the notional trade at the later of—

(a) 20when the partner becomes an indirect partner in the
underlying partnership, and

(b) when the underlying partnership starts to carry on the
underlying trade.

This is subject to subsection (3).

(3) 25If the partner carries on the actual trade (whether alone or in
partnership) before the underlying partnership starts to carry on the
underlying trade, the partner starts to carry on the notional trade
when the partner starts to carry on the actual trade.

(4) The partner permanently ceases to carry on the notional trade at the
30earlier of—

(a) when the partner ceases to be an indirect partner in the
underlying partnership, and

(b) when the underlying partnership permanently ceases to
carry on the underlying trade.

35This is subject to subsection (5).

(5) If the partner carries on the actual trade (whether alone or in
partnership) after the underlying partnership permanently ceases to
carry on the underlying trade, the partner permanently ceases to
carry on the notional trade when the partner permanently ceases to
40carry on the actual trade.””

(4) After section 855 insert—

855A Notional business: indirect partners

(1) This section applies in relation to the notional business of a partner
in a firm if—

(a) 45the firm consists of a partnership which is a partner or
indirect partner in another partnership (“the underlying
partnership”),

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(b) the members of the underlying partnership carry on a trade
(“the underlying trade”),

(c) the firm’s untaxed income or relievable losses referred to in
section 854(1)(b) arise by virtue of untaxed income or
5relievable losses (“the underlying profits or losses”) arising to
members of the underlying partnership—

(i) from sources other than the carrying on of a trade,
and

(ii) otherwise than by virtue of the underlying
10partnership’s membership of a partnership.

(2) Section 854 (carrying on by partner of notional business) has effect as
if—

(a) for subsection (2) there were substituted—

(2) The partner starts to carry on the notional business at the later
15of—

(a) when the partner becomes an indirect partner in the
underlying partnership, and

(b) when the underlying partnership starts to carry on
the underlying trade.”;

(b) 20for subsection (4) there were substituted—

(4) The partner permanently ceases to carry on the notional
business at the earlier of—

(a) when the partner ceases to be an indirect partner in
the underlying partnership, and

(b) 25when the underlying partnership permanently ceases
to carry on the underlying trade.”

(3) Section 855 has effect as if for subsections (2) and (3) there were
substituted—

(2) If the partner carries on the actual trade (whether alone or in
30partnership) before the firm starts to carry it on, the partner
starts to carry on the notional business when the firm starts to
carry on the actual trade.

(3) If the partner carries on the actual trade (whether alone or in
partnership) after the firm permanently ceases to carry it on,
35the partner permanently ceases to carry on the notional
business when the firm permanently ceases to carry on the
actual trade.”

(4) In this section “untaxed income” has the same meaning as in section
854.”

(5) 40The amendments made by this paragraph have effect in relation to the tax
year 2018-19 and subsequent tax years.

Part 3 Returns: information to be included

6 (1) TMA 1970 is amended as follows.