Finance Bill

House of Commons

Session 2003 - 04
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Finance Bill

Finance Bill
Schedule 18 — Enterprise investment scheme
Part 1 — Income tax relief
358

      (2)
In section 336 of the Income and Corporation Taxes Act 1988 (c. 1)
(temporary residents in the United Kingdom) for “Cases I, II and III of
Schedule E” substitute “determining taxable earnings from an employment
under Chapters 4 and 5 of Part 2 of the Income Tax (Earnings and Pensions)
Act 2003 (employment income: charge to tax)”.
5
      (3)
In section 38(9) of the Finance Act 1988 (c. 39) (maintenance payments under
existing obligations: 1989-90 onwards)—
(a)
for “68(1)(b) or 192(3)” substitute “or 68(1)(b)”, and
(b)
after “Taxes Act 1988” insert “or section 355 of the Income Tax
(Earnings and Pensions) Act 2003”.
10
      (4)
In section 76 of the Finance Act 1989 (c. 26) (non-approved retirement
benefits schemes)—
(a)
in subsection (3)(b) and (6)(b), for the words from “is treated” to the
end substitute “counts as employment income of a person by virtue
of section 386(1) of the Income Tax (Earnings and Pensions) Act 2003
15
(charge on payments to non-approved retirement benefit schemes)”,
and
(b)
in subsection (6D)(a) for “employer” substitute “employee”.
Schedule 18
Section 88

Enterprise investment scheme
20
Part 1
Income tax relief
1     (1)
Section 289 of the Taxes Act 1988 (eligibility for income tax relief) is
amended as follows.
      (2)
In subsection (1)—
25
(a)
in paragraph (a), omit “wholly in cash”,
(b)
after that paragraph insert—
“(aza)
he subscribed for the shares (other than any of
them which are bonus shares) wholly in cash,”,
(c)
in paragraph (aa), for the words from “are fully” to “future date)”
30
substitute “(other than any of them which are bonus shares) are fully
paid up”,
(d)
in paragraph (b), for “and all other shares comprised in the same
issue” substitute “(other than any of them which are bonus shares)”,
(e)
for paragraph (c) substitute—
35
“(c)
at least 80 per cent. of the money raised by the issue
of—
(i)
the shares, and
(ii)
all other eligible shares (if any) in the
company of the same class which are issued
40
on the same day,

is employed wholly for the purpose of the activity
mentioned in paragraph (b) above not later than the
time mentioned in subsection (3) below, and”.

Finance Bill
Schedule 18 — Enterprise investment scheme
Part 1 — Income tax relief
359

      (3)
For subsections (1A) to (1D) substitute—
“(1A)
The requirements of this subsection are satisfied in relation to the
qualifying company if at no time in the relevant period is any of the
following, namely—
(a)
the relevant qualifying trade,
5
(b)
relevant preparation work (if any), and
(c)
relevant research and development (if any),

being carried on by a person other than the qualifying company or a
qualifying 90% subsidiary of that company.
(1B)
In a case where relevant preparation work is carried on by the
10
qualifying company or a qualifying 90% subsidiary of that company,
there is to be disregarded, for the purpose of determining whether
the requirements of subsection (1A) above are satisfied in relation to
the qualifying company, the carrying on of the relevant qualifying
trade by a company other than—
15
(a)
the qualifying company, or
(b)
a subsidiary of that company,

at any time in the relevant period before the qualifying company or
any qualifying 90% subsidiary of that company carries on that trade.
(1C)
The requirements of subsection (1A) above are not to be regarded as
20
failing to be satisfied in relation to the qualifying company if—
(a)
by reason only of anything done as a consequence of the
qualifying company or any other company being in
administration or receivership, or
(b)
by reason only of the qualifying company or any other
25
company being wound up or dissolved without winding up,

the relevant qualifying trade ceases to be carried on in the relevant
period by the qualifying company or any qualifying 90% subsidiary
of that company and is subsequently carried on in that period by a
person who is not at any time in the period of restriction connected
30
with the qualifying company.
(1D)
Subsection (1C) above applies only if (as the case may be)—
(a)
the entry into administration or receivership and everything
done as a consequence of the company concerned being in
administration or receivership, or
35
(b)
the winding up or dissolution,

is for bona fide commercial reasons and is not part of a scheme or
arrangement the main purpose of which or one of the main purposes
of which is the avoidance of tax.
(1E)
In this section—
40

“relevant preparation work” means preparations falling within
subsection (2)(a)(ii) below which are the subject of the
qualifying business activity mentioned in subsection (1)
above,

“the relevant qualifying trade” means the qualifying trade
45
which is the subject of that qualifying business activity,

“relevant research and development” means—

Finance Bill
Schedule 18 — Enterprise investment scheme
Part 1 — Income tax relief
360

(a)
research and development falling within subsection
(2)(b) below which is the subject of that qualifying
business activity, and
(b)
any other preparations for the carrying on of the
qualifying trade which is the subject of that activity.”.
5
      (4)
In subsection (2)—
(a)
in paragraph (a), for “subsidiary” substitute “qualifying 90%
subsidiary of that company”,
(b)
in paragraph (a)(i), for “it” substitute “the company or any such
subsidiary”,
10
(c)
in paragraph (a)(ii)—
(i)
for “preparing to carry on” substitute “preparing to carry on,
or carrying on,”,
(ii)
for “it intends to carry” substitute “is intended to be carried”,
(iii)
for “and which it begins to carry on” substitute “by the
15
company or any such subsidiary and which is begun to be
carried on by the company or any such subsidiary”,
(d)
in the full-out words at the end of paragraph (a), for “trade is”
substitute “trade is so”,
(e)
in paragraph (b)—
20
(i)
for “subsidiary”, in the first place, substitute “qualifying 90%
subsidiary of that company”,
(ii)
in sub-paragraph (i), for “it is carrying on or which it”
substitute “the company or any such subsidiary is carrying
on or which the company or any such subsidiary”,
25
(iii)
in sub-paragraph (ii), for “subsidiary” substitute “such
subsidiary”.
      (5)
In subsection (3)(b), for “subsidiary concerned” substitute “a qualifying 90%
subsidiary of that company”.
      (6)
After subsection (3) insert—
30
“(3A)
In determining—
(a)
for the purposes of subsection (2)(a)(ii) or (3)(b) above when
a qualifying trade is begun to be carried on by a qualifying
90% subsidiary of a company, or
(b)
for the purposes of subsection (2)(b)(i) above when research
35
and development is begun to be carried on by such a
subsidiary of a company,

there shall be disregarded any carrying on of the trade or, as the case
may be, the research and development by it before it became such a
subsidiary of the company.”.
40
      (7)
After subsection (8) insert—
“(8A)
Shares are not fully paid up for the purposes of subsection (1)(aa)
above if there is any undertaking to pay cash to any person at a
future date in respect of the acquisition of the shares.”.
      (8)
For subsection (9) substitute—
45
“(9)
For the purposes of this Chapter, a company (“the relevant
subsidiary”) is a qualifying 90% subsidiary of another company (“the
holding company”) if the following conditions are met—

Finance Bill
Schedule 18 — Enterprise investment scheme
Part 1 — Income tax relief
361

(a)
the holding company possesses not less than 90% of the
issued share capital of, and not less than 90% of the voting
power in, the relevant subsidiary;
(b)
the holding company would—
(i)
in the event of a winding up of the relevant
5
subsidiary, or
(ii)
in any other circumstances,

be beneficially entitled to receive not less than 90% of the
assets of the relevant subsidiary which would then be
available for distribution to the equity holders of the
10
subsidiary;
(c)
the holding company is beneficially entitled to not less than
90% of any profits of the relevant subsidiary which are
available for distribution to the equity holders of the
subsidiary;
15
(d)
no person other than the holding company has control of the
relevant subsidiary within the meaning of section 840; and
(e)
no arrangements are in existence by virtue of which any of
the conditions in paragraphs (a) to (d) above would cease to
be met.
20
(10)
Subsections (3), (3A) and (4) of section 308 apply in relation to the
conditions in subsection (9) above as they apply in relation to the
conditions in subsection (2) of that section, but with the following
modifications.
(11)
Those modifications are—
25
(a)
that references in subsections (3), (3A) and (4) of that section
to the subsidiary are to be read as references to the relevant
subsidiary, and
(b)
that subsection (4) of that section is to be read as if the words
“the holding company” were substituted for the words “the
30
qualifying company or (as the case may be) by another
subsidiary”.
(12)
For the purposes of subsection (9) above—
(a)
the persons who are equity holders of the relevant
subsidiary, and
35
(b)
the percentage of the assets of the relevant subsidiary to
which an equity holder would be entitled,

are to be determined in accordance with paragraphs 1 and 3 of
Schedule 18.
(13)
But in making that determination—
40
(a)
references in paragraph 3 of Schedule 18 to the first company
are to be read as references to an equity holder, and
(b)
references in that paragraph to a winding up are to be read as
including references to any other circumstances in which
assets of the relevant subsidiary are available for distribution
45
to its equity holders.”.
2     (1)
Section 289A of the Taxes Act 1988 (form of relief) is amended as follows.
      (2)
In subsection (6), for the words from “A claim” to “below is complied with”
substitute “A claim for relief in respect of eligible shares issued by a

Finance Bill
Schedule 18 — Enterprise investment scheme
Part 1 — Income tax relief
362

company shall not be allowed unless subsection (7) below is complied with
in relation to the issue of shares in question”.
      (3)
In subsection (7)—
(a)
in paragraph (a)—
(i)
for “the case of shares issued” substitute “a case where the
5
money raised by an issue of eligible shares is raised wholly”,
(ii)
for “company or subsidiary concerned has carried on the
trade for four months” substitute “trade concerned has been
carried on for four months by no person other than the
qualifying company or a qualifying 90% subsidiary of that
10
company”,
(b)
in paragraph (b)—
(i)
for “the case of shares issued” substitute “a case where the
money raised by an issue of eligible shares is raised wholly or
partly”,
15
(ii)
for the words from “or within” to the end substitute “the
research and development concerned has been carried on for
four months by no person other than the qualifying company
or a qualifying 90% subsidiary of that company”.
      (4)
In subsection (8)—
20
(a)
for paragraph (a) substitute—
“(a)
by reason only of the qualifying company or any
other company being wound up or dissolved without
winding up—
(i)
the trade concerned is carried on as
25
mentioned in subsection (7)(a) above, or
(ii)
the research and development concerned is
carried on as mentioned in subsection (7)(b)
above,

for a period shorter than four months, and”,
30
(b)
in paragraph (b)—
(i)
omit “it is shown that”,
(ii)
for “was for” substitute “is for”,
(iii)
for “not as” substitute “is not”,
(iv)
for “which was” substitute “which is”,
35
(c)
in the full-out words at the end, after “(7)(a)” insert “or, as the case
may be, (7)(b)”.
      (5)
In subsection (8A)—
(a)
for the words from “Where” to “shorter period.” substitute—

“Where, by reason only of anything done as a consequence of
40
the qualifying company or any other company being in
administration or receivership—
(a)
the trade concerned is carried on as mentioned in
subsection (7)(a) above for a period shorter than four
months, or
45
(b)
the research and development concerned is carried on
as mentioned in subsection (7)(b) above for a period
shorter than four months,

subsection (7)(a) or, as the case may be, (7)(b) above shall
have effect as if it referred to that shorter period.”,
50

Finance Bill
Schedule 18 — Enterprise investment scheme
Part 1 — Income tax relief
363

(b)
in paragraph (b), after “company” insert “concerned”.
3
In section 289B of the Taxes Act 1988 (attribution of relief to shares) in
subsection (4), for “same day” substitute “same day, but this subsection does
not apply in relation to section 289A(6) and (7)”.
4     (1)
In section 290(2) of the Taxes Act 1988 (maximum subscriptions) for
5
“£150,000” substitute “£200,000”.
      (2)
The amendment made by this paragraph has effect for the year 2004-2005
and subsequent years of assessment.
5     (1)
Section 293 of the Taxes Act 1988 (qualifying companies) is amended as
follows.
10
      (2)
In subsection (4A)—
(a)
omit “which is in administration or receivership”,
(b)
after “by reason” insert “only”,
(c)
for “its” substitute “the company, or any of its subsidiaries,”.
      (3)
In subsection (4B)(b), after “company” insert “concerned”.
15
      (4)
In subsection (5)—
(a)
after “winding up of the company” insert “or any of its subsidiaries”,
(b)
after “or the company” insert “or any of its subsidiaries”.
      (5)
In subsection (6)—
(a)
for “by reason of” substitute “by reason only of the company or any
20
of its subsidiaries”,
(b)
in paragraph (a), for “and not” substitute “and is not”.
      (6)
After subsection (6) insert—
“(6ZA)
The company must not at any time in the relevant period have a
property managing subsidiary which is not a qualifying 90%
25
subsidiary of the company.
(6ZB)
“Property managing subsidiary” means a subsidiary of the company
whose business consists wholly or mainly in the holding or
managing of land or any property deriving its value from land.
(6ZC)
In subsection (6ZB) above, “land” and “property deriving its value
30
from land” have the same meaning as in section 776.”.
6     (1)
In section 300 of the Taxes Act 1988 (value received from company) for
subsection (2)(b) substitute—
“(b)
repays, in pursuance of any arrangements for or in
connection with the acquisition of the shares in
35
respect of which the relief is claimed, any debt owed
to the individual other than a debt which was
incurred by the company—
(a)
on or after the date of issue of those shares;
and
40
(b)
otherwise than in consideration of the
extinguishment of a debt incurred before that
date;”.
      (2)
Subject to sub-paragraph (3), the amendment made by this paragraph has
effect in relation to shares issued on or after 17th March 2004.
45

Finance Bill
Schedule 18 — Enterprise investment scheme
Part 1 — Income tax relief
364

      (3)
The amendment made by this paragraph does not have effect in relation to
the repayment of a debt incurred before 17th March 2004 if—
(a)
the shares were subscribed for before that date, and
(b)
the debt was incurred on or after the date on which the shares were
subscribed for.
5
7     (1)
In section 303 of the Taxes Act 1988 (value received by persons other than
claimants) in subsection (9A), for “section 303AA” substitute “sections
303AA and 303A”.
      (2)
The amendment made by this paragraph has effect in relation to any
repayment (within the meaning of section 303A of the Taxes Act 1988) made
10
on or after 17th March 2004.
8     (1)
In section 303A of the Taxes Act 1988 (restriction on withdrawal of relief
under section 303) in subsection (6), omit paragraph (a).
      (2)
The amendment made by this paragraph has effect in relation to any
repayment (within the meaning of section 303A of the Taxes Act 1988) made
15
on or after 17th March 2004.
9
In section 308 of the Taxes Act 1988 (application to subsidiaries)—
(a)
in subsection (1)(a), omit the words from “and, except” to “relevant
period”,
(b)
in subsection (2)—
20
(i)
omit paragraphs (a) to (c),
(ii)
before paragraph (d) insert—
“(ca)
that more than 50 per cent. of the
ordinary share capital of the
subsidiary is owned directly or
25
indirectly by the qualifying
company;”,
(iii)
in paragraph (e), for “the conditions in paragraphs (a) to”
substitute “either of the conditions in paragraphs (ca) and”,
and for “could” substitute “would”,
30
(c)
in the opening words of subsection (3), for “the qualifying company”
substitute “any other company”,
(d)
in subsection (3)(a)—
(i)
omit “it is shown that”,
(ii)
for “and not” substitute “and is not”,
35
(e)
omit subsection (3)(b) and the word “and” immediately preceding it,
(f)
after subsection (3) insert—
“(3A)
The conditions shall not be regarded as ceasing to be satisfied
by reason only of anything done as a consequence of the
subsidiary or any other company being in administration or
40
receivership if—
(a)
the entry into administration or receivership, and
(b)
everything done as a consequence of the company
concerned being in administration or receivership,

is for bona fide commercial reasons and is not part of a
45
scheme or arrangement the main purpose of which or one of
the main purposes of which is the avoidance of tax.”,
(g)
in subsection (4)—
(i)
after “only of” insert “arrangements being in existence for”,