Income Tax Bill

House of Commons

Session 2006 - 07
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Income Tax Bill

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
111

Value received by investor
213
Value received by the investor
(1)
This section applies if the investor receives any value from the issuing
company at any time in period C relating to the relevant shares.
(2)
Any EIS relief attributable to the shares must—
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(a)
if it is greater than the amount given by the formula set out below, be
reduced by that amount, and
(b)
in any other case, be withdrawn.

The formula is—

where—
10
R is the amount of the value received by the investor, and
S is the savings rate for the tax year for which the EIS relief was obtained.
(3)
This section is subject to the following sections—
(a)
section 214 (value received: receipts of insignificant value),
(b)
section 218 (value received where there is more than one issue of
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shares),
(c)
section 219 (value received where part of share issue treated as made in
previous tax year),
(d)
section 220 (cases where maximum EIS relief not obtained),
(e)
section 221 (receipts of value by and from connected persons etc), and
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(f)
section 222 (receipt of replacement value).

Sections 218 to 220 are to be applied in the order in which they appear in this
Part.
(4)
Value received is to be ignored, for the purposes of this section, to the extent to
which EIS relief attributable to the shares has already been withdrawn or
25
reduced on its account.
(5)
For the purposes of this section and sections 214 to 223, an individual who
acquires any relevant shares on such a transfer as is mentioned in section 245
(spouses or civil partners) is treated as the investor.
214
Value received: receipts of insignificant value
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(1)
Section 213(2) does not apply if the receipt of value is a receipt of insignificant
value.

This is subject to subsection (2).
(2)
If—
(a)
value is received (“the relevant receipt”) by the investor from the
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issuing company at any time in period C relating to the relevant shares,
(b)
the investor has received from the issuing company one or more
receipts of insignificant value at a time or times—
(i)
during that period, but

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
112

(ii)
not later than the time of the relevant receipt, and
(c)
the total amount of the value of the receipts within paragraph (a) and
(b) is not an amount of insignificant value,

the investor is treated for the purposes of this Chapter as if the relevant receipt
had been a receipt of an amount of value equal to that total amount.
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(3)
A receipt does not fall within subsection (2)(b) if it has previously formed part
of a total amount falling within subsection (2)(c).
215
Meaning of “receipts of insignificant value”
(1)
This section applies for the purposes of section 214.
(2)
“A receipt of insignificant value” means a receipt of an amount of insignificant
10
value, that is, an amount of value which—
(a)
is not more than £1,000, or
(b)
if it is more than £1,000, is insignificant in relation to the amount
subscribed by the investor for the relevant shares.

This is subject to subsection (3).
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(3)
If at any time in the period—
(a)
beginning 12 months before the issue of the relevant shares, and
(b)
ending at the end of the issue date,

repayment arrangements are in existence, no amount of value received by the
investor is treated as a receipt of insignificant value.
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(4)
For this purpose “repayment arrangements” means arrangements which
provide for the investor to receive, or to be entitled to receive, any value from
the issuing company at any time in period C relating to the relevant shares.
(5)
For the purposes of this section—
(a)
the references to the investor include references to any person who at
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any time in period C relating to the relevant shares is an associate of the
investor (whether or not that person is such an associate at the material
time), and
(b)
the reference in subsection (4) to the issuing company includes a
reference to a person who at any time in period C relating to the
30
relevant shares is connected with that company (whether or not that
person is so connected at the material time).
216
When value is received
(1)
This section applies for the purposes of sections 213 (value received by the
investor) and 218 (value received where there is more than one issue of shares).
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(2)
The investor receives value from the issuing company at any time when the
issuing company—
(a)
repays, redeems or repurchases any of its share capital or securities
which belong to the investor or makes any payment to the investor for
giving up the investor’s right to any of the issuing company’s share
40
capital or any security on its cancellation or extinguishment,
(b)
repays, in pursuance of any arrangements for or in connection with the
acquisition of the shares in respect of which EIS relief is claimed, any
debt owed to the investor other than a debt which was incurred by the
company—
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Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
113

(i)
on or after the date of issue of those shares, and
(ii)
otherwise than in consideration of the extinguishment of a debt
incurred before that date,
(c)
makes to the investor any payment for giving up on its extinguishment
the investor’s right to any debt, other than a debt in respect of a
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repayment of the kind mentioned in section 168(2)(a) or (f) (ignoring of
certain expenses or remuneration) or an ordinary trade debt,
(d)
releases or waives any liability of the investor to the issuing company
or discharges or undertakes to discharge any liability of the investor to
a third person,
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(e)
makes a loan or advance to the investor which has not been repaid in
full before the issue of the shares in respect of which EIS relief is
claimed,
(f)
provides a benefit or facility for the investor,
(g)
transfers an asset to the investor for no consideration or for
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consideration less than its market value or acquires an asset from the
investor for consideration greater than its market value, or
(h)
makes to the investor any other payment except—
(i)
a payment of a kind mentioned in any of the provisions of
section 168(2) (ignoring of certain payments), or
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(ii)
a payment in discharge of an ordinary trade debt.
(3)
For the purposes of subsection (2)(d) the issuing company is to be treated as
having released or waived a liability if the liability is not discharged within 12
months of the time when it ought to have been discharged.
(4)
For the purposes of subsection (2)(e) the following is to be treated as if it were
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a loan made by the issuing company to the investor—
(a)
the amount of any debt (other than an ordinary trade debt) incurred by
the investor to the issuing company, and
(b)
the amount of any debt due from the investor to a third party which has
been assigned to the issuing company.
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(5)
The investor also receives value from the issuing company if—
(a)
in respect of ordinary shares held by the investor any payment or asset
is received in a winding up or in connection with a dissolution of the
company, and
(b)
the winding up or dissolution falls within section 182(4) (no tax
35
avoidance).
(6)
The investor also receives value from the issuing company if any person who
would, for the purposes of section 163, be treated as connected with the
company—
(a)
purchases any of its share capital or securities which belong to the
40
investor, or
(b)
makes any payment to the investor for giving up any right in relation
to any of the company’s share capital or securities.
(7)
If because of the investor’s disposal of shares in a company any EIS relief
attributable to those shares is withdrawn or reduced under section 209, the
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investor is not to be treated as receiving value from the company in respect of
the disposal.
(8)
The investor is not to be treated as receiving value from the issuing company
merely because of the payment to the investor, or any associate of the investor,

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Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
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of any remuneration for services rendered to that company as a director if the
remuneration is reasonable remuneration.
(9)
Section 167(3) (director also an employee) applies for the purposes of
subsection (8) as it applies for the purposes of section 167, and the reference in
that subsection to the payment of remuneration includes the provision of any
5
benefit or facility.
(10)
In this section “ordinary trade debt” means any debt for goods or services
supplied in the ordinary course of a trade or business if any credit given—
(a)
is for not more than 6 months, and
(b)
is not longer than that normally given to customers of the person
10
carrying on the trade or business.
217
The amount of value received
In a case falling within a provision listed in column 1 of the following table, the
amount of value received for the purposes of sections 213 and 218 is given by
the corresponding entry in column 2 of the table.
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Provision
The amount of value received

Section 216(2)(a), (b) or
The amount received by the investor or, if

(c)
greater, the market value of the shares,

securities or debt

Section 216(2)(d)
The amount of the liability

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Section 216(2)(e)
The amount of the loan or advance, less the

amount of any repayment made before the

issue of the relevant shares

Section 216(2)(f)
The cost to the issuing company of

providing the benefit or facility, less any

25

consideration given for it by the investor

Section 216(2)(g)
The difference between the market value of

the asset and the consideration (if any)

given for it

Section 216(2)(h)
The amount of the payment

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Section 216(5)
The amount of the payment or the market

value of the asset

Section 216(6)
The amount received by the investor or, if

greater, the market value of the shares or

securities

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218
Value received where there is more than one issue of shares
(1)
This section applies if—
(a)
two or more issues of shares in the issuing company have been made to
the investor which include shares in respect of which the investor
obtains EIS relief, and
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Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
115

(b)
value is received by the investor at any time in the applicable periods
for two or more of those issues.
(2)
Section 213(2) has effect in relation to the shares included in each of the issues
referred to in subsection (1)(b) as if the amount of value referred to as “R” were
reduced by multiplying it by the fraction—
5

where—

A is the amount on which the investor obtains EIS relief in respect of the
shares included in the issue in question, and
B is the sum of that amount and the corresponding amount or amounts in
10
respect of the other issue or issues.
(3)
For the purposes of subsection (1) “the applicable period” for an issue of shares
is period C in relation to those shares.
219
Value received where part of share issue treated as made in previous tax year
(1)
This section applies if—
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(a)
section 213(2) applies to an issue of shares, and
(b)
section 158(1) and (2) (form and amount of EIS relief) applies in the case
of that issue as if part of the issue had been issued in a previous tax year.
(2)
This subsection explains how the calculation under section 213(2) is to be
made.
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Step 1

Apportion the amount referred to as “R” between the tax year in which the
shares were issued and the previous tax year by multiplying that amount by
the fraction—
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where—
A is the amount on which the investor obtains EIS relief in respect of the
shares treated as issued in the tax year in question, and
B is the sum of that amount and the corresponding amount in respect of
the shares treated as issued in the other tax year.
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Step 2

In relation to each of the amounts (“R1” and “R2”) so apportioned to the two
tax years, calculate the amounts (“X1” and “X2”) that would be given by the
formula if there were separate issues of shares in those tax years.
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Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
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In calculating amounts X1 and X2, apply section 220 if appropriate but do not
apply section 218.


Step 3

Add amounts X1 and X2 together.
5

The result is the required amount.
220
Cases where maximum EIS relief not obtained
(1)
If the investor’s liability to income tax is reduced for any tax year in respect of
any issue of shares and—
(a)
the amount of the reduction (“A”), is less than
10
(b)
the amount (“B”) which is equal to income tax at the savings rate for
that year on the amount on which the investor claims EIS relief in
respect of the shares,

section 213(2) has effect in relation to any value received as if the amount
referred to as “R” were reduced by multiplying it by the fraction—
15
(2)
If the amount of EIS relief attributable to any of the relevant shares has been
reduced before the EIS relief was obtained, the amount referred to in
subsection (1) as “A” is to be treated for the purposes of that subsection as the
amount that it would have been without that reduction.
(3)
Subsection (2) does not apply to a reduction of EIS relief by virtue of section
20
201(4) (attribution of EIS relief where there is a corresponding issue of bonus
shares).
221
Receipts of value by and from connected persons etc
In sections 213, 214 and 216 to 218—
(a)
any reference to a payment or transfer to the investor includes a
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reference to a payment or transfer made to the investor indirectly or to
the investor’s order or for the investor’s benefit,
(b)
any reference to the investor includes a reference to an associate of the
investor, and
(c)
any reference to the issuing company includes a reference to a person
30
who at any time in period A relating to the relevant shares is connected
with that company (whether or not that person is so connected at the
material time).
222
Receipt of replacement value
(1)
If—
35
(a)
any EIS relief attributable to the relevant shares would, in the absence
of this section, be reduced or withdrawn under section 213 because of
a receipt of value within section 216(2) or (6) (“the original value”),

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Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
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(b)
the original supplier receives value (“the replacement value”) from the
original recipient and the receipt is a qualifying receipt, and
(c)
the amount of the replacement value is at least the amount of the
original value,

section 213 does not, because of the receipt of the original value, have effect to
5
reduce or withdraw the EIS relief.

This is subject to section 223(1) and (2).
(2)
For the purposes of this section—
“the original recipient” means the person who receives the original value,
“the original supplier” means the person from whom that value was
10
received.
(3)
If the amount of the original value is, by virtue of section 218, treated as
reduced for the purposes of section 213(2) as it applies in relation to the
relevant shares in question, the reference in subsection (1)(c) to the amount of
the original value is to be read as a reference to the amount of that value
15
ignoring the reduction.
(4)
A receipt of the replacement value is a qualifying receipt for the purposes of
subsection (1) if it arises—
(a)
because of the original recipient doing one or more of the following—
(i)
making a payment to the original supplier, other than a
20
payment within paragraph (c) or a payment to which
subsection (5) applies,
(ii)
acquiring any asset from the original supplier for a
consideration the amount or value of which is more than the
market value of the asset,
25
(iii)
disposing of any asset to the original supplier for no
consideration or for a consideration the amount or value of
which is less than the market value of the asset,
(b)
if the receipt of the original value was within section 216(2)(d), because
of an event the effect of which is to reverse the event which constituted
30
the receipt of the original value, or
(c)
if the receipt of the original value was within section 216(6), because of
the original recipient repurchasing the share capital or securities in
question, or (as the case may be) re-acquiring the right in question, for
a consideration the amount or value of which is at least the amount of
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the original value.
(5)
This subsection applies to—
(a)
any payment for any goods, services or facilities, provided (whether in
the course of trade or otherwise) by—
(i)
the original supplier, or
40
(ii)
any other person who, at any time in period C relating to the
relevant shares, is an associate of, or is connected with, that
supplier (whether or not the other person is such an associate,
or is so connected, at the material time),

which is reasonable in relation to the market value of those goods,
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services or facilities,
(b)
any payment of any interest which represents no more than a
reasonable commercial return on any money lent to—
(i)
the original recipient, or