Income Tax Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
118

(ii)
any person who, at any time in period C relating to the relevant
shares, is an associate of that recipient (whether or not the
person is such an associate at the material time),
(c)
any payment for the acquisition of an asset which does not exceed its
market value,
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(d)
any payment, as rent for any property occupied by—
(i)
the original recipient, or
(ii)
any person who, at any time in period C relating to the relevant
shares, is an associate of that recipient (whether or not the
person is such an associate at the material time),
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of an amount not exceeding a reasonable and commercial rent for the
property,
(e)
any payment in discharge of an ordinary trade debt, and
(f)
any payment for shares in or securities of any company in
circumstances that do not fall within subsection (4)(a)(ii).
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(6)
For the purposes of this section, the amount of the replacement value is—
(a)
in a case within paragraph (a) of subsection (4), the sum of—
(i)
the amount of any payment within sub-paragraph (i) of that
paragraph, and
(ii)
the difference between the market value of any asset to which
20
sub-paragraph (ii) or (iii) of that paragraph applies and the
amount or value of the consideration (if any) received for it,
(b)
in a case within subsection (4)(b), the same as the amount of the original
value, and
(c)
in a case within subsection (4)(c), the amount or value of the
25
consideration received by the original supplier.

Section 217 applies for the purpose of determining the amount of the original
value.
(7)
In this section—
(a)
any reference to a payment to a person (however expressed) includes a
30
reference to a payment made to the person indirectly or to the person’s
order or for the person’s benefit, and
(b)
“ordinary trade debt” has the meaning given by section 216(10).
223
Section 222: supplementary
(1)
The receipt of the replacement value by the original supplier is ignored for the
35
purposes of section 222(1) to the extent to which it has previously been set
(under that section) against a receipt of value to prevent any reduction or
withdrawal of EIS relief under section 213.
(2)
The receipt of the replacement value by the original supplier (“the event”) is
ignored for the purposes of section 222 if—
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(a)
the event occurs before period C relating to the relevant shares,
(b)
if the event occurs after the time the original recipient receives the
original value, it does not occur as soon after that time as is reasonably
practicable in the circumstances, or
(c)
if an appeal has been brought by the investor against an assessment to
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withdraw or reduce any EIS relief attributable to the relevant shares
because of the receipt of the original value, the event occurs more than

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
119

60 days after the day on which the amount of relief which falls to be
withdrawn has been finally determined.

But nothing in section 222 or this section requires the replacement value to be
received after the original value.
(3)
This subsection applies if—
5
(a)
the receipt of the replacement value by the original supplier is a
qualifying receipt for the purposes of section 222(1), and
(b)
in consequence of the receipt any receipts of value are ignored for the
purposes of section 213 as that section applies in relation to the shares
in question or any other shares subscribed for by the investor, and
10
(c)
the event which gives rise to the receipt is (or includes) a subscription
for shares by—
(i)
the investor, or
(ii)
any person who at any time in period C relating to the relevant
shares is an associate of the investor (whether or not the person
15
is such an associate at the material time).
(4)
If either of the following applies—
(a)
subsection (3), and
(b)
paragraph 13C(3) of Schedule 5B to TCGA 1992 (which makes
corresponding provision in relation to relief under that Schedule in
20
respect of re-investment under EIS),

the person who subscribes for the shares is not to be eligible for any EIS relief
in relation to those shares or any other shares in the same issue.
(5)
In this section “the original recipient”, “the original supplier” and “replacement
value” have the same meaning as in section 222.
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Repayments etc of share capital to other persons
224
Repayments etc of share capital to other persons
(1)
This section applies if any EIS relief is attributable to shares held by an
individual and, at any time in period C, the issuing company or any
subsidiary—
30
(a)
repays, redeems or repurchases any of its share capital which belongs
to any member other than—
(i)
the individual, or
(ii)
a person who falls within subsection (4), or
(b)
makes any payment to any such member for giving up the member’s
35
right to any of the share capital of the company or subsidiary on its
cancellation or extinguishment.
(2)
The EIS relief must—
(a)
if it is greater than the amount given by the formula set out below, be
reduced by that amount, and
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(b)
in any other case, be withdrawn.

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
120


The formula is—

where—
R is the amount received by the member, 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—
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(a)
section 225 (insignificant repayments ignored for the purposes of this
section),
(b)
section 226 (amount of repayments etc where there is more than one
issue of shares),
(c)
section 227 (single issue affecting more than one individual),
10
(d)
section 228 (single issue treated as made partly in previous tax year),
(e)
section 229 (maximum relief not obtained for share issue),
(f)
section 230 (repayment of authorised minimum within 12 months), and
(g)
section 231 (restriction on withdrawal of relief).

Sections 226 to 229 are to be applied in the order in which they appear in this
15
Part.
(4)
A person falls within this subsection if the repayment—
(a)
causes any EIS relief attributable to that person’s shares in the issuing
company to be withdrawn or reduced by virtue of—
(i)
section 209 (disposal of shares), or
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(ii)
section 216(2)(a) (receipt of value by virtue of repayment of
share capital etc),
(b)
causes any investment relief under Schedule 15 to FA 2000 (the
corporate venturing scheme) attributable to that person’s shares in the
issuing company to be withdrawn or reduced by virtue of—
25
(i)
paragraph 46 of that Schedule (disposal of shares), or
(ii)
paragraph 49(1)(a) of that Schedule (receipt of value by virtue of
repayment of share capital etc), or
(c)
gives rise to a qualifying chargeable event within the meaning of
paragraph 14(4) of Schedule 5B to TCGA 1992 (EIS: deferral relief) in
30
respect of that person’s shares in the issuing company.
(5)
A repayment is treated as having the effect mentioned in subsection (4)(a), (b)
or (c) if it would have that effect were it not a receipt of insignificant value for
the purposes of whichever of the following is applicable—
(a)
section 213,
35
(b)
paragraph 47 of Schedule 15 to FA 2000, and
(c)
paragraph 13 of Schedule 5B to TCGA 1992.
(6)
A repayment is to be ignored, for the purposes of this section, to the extent to
which EIS relief attributable to any shares has already been withdrawn or
reduced on its account.
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(7)
In this section and sections 225 to 231—

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
121

(a)
“repayment” means a repayment, redemption, repurchase or payment
mentioned in subsection (1)(a) or (b), and
(b)
references to a subsidiary of a company are references to a company
which, at any time in period A relating to the shares in question, is a
51% subsidiary of the company, whether or not it is such a subsidiary
5
at the time of the repayment.
225
Insignificant repayments ignored for purposes of section 224
(1)
A repayment is ignored for the purposes of section 224 (repayments etc of
share capital to other persons) if both—
(a)
the market value of the shares to which it relates (“the target shares”)
10
immediately before the event occurs, and
(b)
the amount received by the member in question,

are insignificant in relation to the market value of the remaining issued share
capital of the issuing company (or, as the case may be, the subsidiary)
immediately after the event occurs.
15

This is subject to subsection (3).
(2)
For the purposes of subsection (1) it is assumed that the target shares are
cancelled at the time the repayment is made.
(3)
Subsection (1) does not apply if repayment arrangements are in existence at
any time in the period—
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(a)
beginning 12 months before the issue of the relevant shares, and
(b)
ending at the end of the issue date.
(4)
For this purpose “repayment arrangements” means arrangements which
provide—
(a)
for a repayment by the issuing company or any subsidiary of that
25
company (whether or not it is such a subsidiary at the time the
arrangements are made), or
(b)
for anyone to be entitled to such a repayment,

at any time in period C relating to the relevant shares.
226
Amount of repayments etc where there is more than one issue of shares
30
(1)
This section applies if, in relation to the same repayment, section 224(2) applies
to EIS relief attributable to two or more issues of shares.
(2)
Section 224(2) has effect in relation to the shares included in each of those issues
as if the amount referred to as “R” were reduced by multiplying it by the
fraction—
35

where—
A is the amount on which EIS relief was obtained by the individuals in
respect of shares which are included in the issue and to which EIS relief
is or, but for section 224(2)(b), would be attributable, and

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
122

B is the sum of that amount and the corresponding amount or amounts in
respect of the other issue or issues.
227
Single issue affecting more than one individual
(1)
This section applies if, in relation to the same repayment, section 224(2) applies
to EIS relief attributable to shares held by two or more individuals.
5
(2)
Section 224(2) has effect in relation to each individual as if the amount referred
to as “R” were reduced by multiplying it by the fraction—

where—
A is the amount on which the individual obtains EIS relief in respect of the
shares to which EIS relief is or, but for section 224(2)(b), would be
10
attributable, and
B is the sum of that amount and the corresponding amount or amounts on
which the other individual or individuals obtain EIS relief in respect of
such shares.
228
Single issue treated as made partly in previous tax year
15
(1)
This section applies if—
(a)
section 224(2) applies to EIS relief attributable to shares held by an
individual, and
(b)
part of the issue of shares has been treated as issued to the individual
in a previous tax year for the purposes of section 158(1) and (2) (form
20
and amount of EIS relief).
(2)
This subsection explains how the calculation under section 224(2) is to be
made.


Step 1
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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—

where—
A is the amount on which the individual obtains EIS relief in respect of the
30
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.


Step 2
35

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.

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
123


In calculating amounts X1 and X2, apply section 229 if appropriate but do not
apply section 226 or 227.


Step 3

Add amounts X1 and X2 together.
5

The result is the required amount.
229
Maximum relief not obtained for share issue
(1)
This section applies if section 224(2) applies to EIS relief attributable to shares
held by an individual and—
(a)
the amount of the reduction (“A”) in the individual’s liability to income
10
tax for any tax year in respect of the shares, is less than
(b)
the amount (“B”) which is equal to income tax at the savings rate for
that year on the amount on which the individual claims EIS relief in
respect of the shares.
(2)
Section 224(2) has effect as if the amount referred to as “R” were reduced by
15
multiplying it by the fraction—
(3)
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
subsections (1) and (2) as “A” is to be treated for the purposes of those
subsections as the amount that it would have been without that reduction.
20
(4)
Subsection (3) does not apply to a reduction of EIS relief by virtue of section
201(4) (attribution of EIS relief where there is a corresponding issue of bonus
shares).
230
Repayment of authorised minimum within 12 months
(1)
This section applies if—
25
(a)
a company issues share capital (“the original shares”) of nominal value
equal to the authorised minimum (within the meaning of the
Companies Act 1985 (c. 6)) for the purposes of complying with section
117 of that Act (public company not to do business unless requirements
as to share capital complied with), and
30
(b)
the registrar of companies issues the company with a certificate under
that section.
(2)
Section 224(2) does not apply in relation to any redemption of the original
shares within 12 months of the date on which they were issued.
(3)
In relation to companies incorporated under the law of Northern Ireland,
35
references in subsection (1) to the Companies Act 1985 and to section 117 of
that Act have effect as references to the Companies (Northern Ireland) Order
1986 (S.I. 1986/1032 (N.I. 6)) and to Article 127 of that Order.