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Income Tax Bill


Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 2 — The investor

84

 

164     

The no linked loans requirement

(1)   

No linked loan is to be made by any person, at any time in period A, to the

investor or an associate of the investor.

(2)   

In this section “linked loan” means any loan which—

(a)   

would not have been made, or

5

(b)   

would not have been made on the same terms,

   

if the investor had not subscribed for the relevant shares, or had not been

proposing to do so.

(3)   

References in this section to the making by any person of a loan to the investor

or an associate of the investor include references—

10

(a)   

to the giving by that person of any credit to the investor or any associate

of the investor, and

(b)   

to the assignment to that person of a debt due from the investor or any

associate of the investor.

165     

The no tax avoidance requirement

15

The relevant shares must be subscribed for by the investor 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.

Meaning of connection with issuing company

166     

Connection with issuing company

20

(1)   

For the purposes of this Chapter (except section 168(4)), an individual is

connected with the issuing company if the individual or an associate of the

individual is connected with that company under—

(a)   

section 167 (employees, directors and partners),

(b)   

section 170 (persons interested in capital etc of company), or

25

(c)   

section 171 (persons subscribing for shares under certain

arrangements).

(2)   

See too section 257(2).

167     

Employees, directors and partners

(1)   

An individual is connected with the issuing company if the individual—

30

(a)   

is an employee of—

(i)   

the issuing company,

(ii)   

any subsidiary of the issuing company, or

(iii)   

a partner of the issuing company or any of its subsidiaries,

(b)   

is a partner of—

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(i)   

the issuing company, or

(ii)   

any subsidiary of the issuing company, or

(c)   

subject to section 168, is a director of—

(i)   

the issuing company,

(ii)   

any subsidiary of the issuing company, or

40

 
 

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 2 — The investor

85

 

(iii)   

a company which is a partner of the issuing company or any of

its subsidiaries.

(2)   

In subsection (1) “subsidiary”, in relation to the issuing company, means a

company which at any time in period A is a 51% subsidiary of the issuing

company, whether or not it is such a subsidiary while the individual or

5

associate concerned is such an employee, partner or director as is mentioned in

that subsection.

(3)   

For the purposes of this section and sections 168 and 169, in the case of an

individual (“A”) who is both a director and an employee of a company—

(a)   

references (however expressed) to A in A’s capacity as a director of the

10

company include A in A’s capacity as an employee of the company, but

(b)   

(apart from that) A is to be treated as a director, and not as an employee,

of the company.

168     

Directors excluded from connection

(1)   

An individual is not connected with the issuing company under section 167

15

merely because the individual, or an associate of the individual, is a director of

that or another company unless the individual or associate (or a partnership of

which the individual or associate is a member)—

(a)   

receives a payment from the issuing company or a related person

during the period mentioned in section 163, or

20

(b)   

is entitled to receive such a payment in respect of that period or any

part of it.

(2)   

For the purposes of subsection (1) the following are ignored—

(a)   

any payment or reimbursement of travelling or other expenses wholly,

exclusively and necessarily incurred by the individual or an associate

25

of the individual in the performance of the individual’s or associate’s

duties as a director,

(b)   

any interest which represents no more than a reasonable commercial

return on money lent to the issuing company or a related person,

(c)   

any dividend or other distribution which does not exceed a normal

30

return on the investment,

(d)   

any payment for the supply of goods which does not exceed their

market value,

(e)   

any payment of rent for any property occupied by the issuing company

or a related person which does not exceed a reasonable and commercial

35

rent for the property, and

(f)   

any necessary and reasonable remuneration which meets the

conditions in subsection (3).

(3)   

The conditions are that the remuneration—

(a)   

is paid for services rendered to the issuing company or related person

40

in the course of a trade or profession carried on wholly or partly in the

United Kingdom (not being secretarial or managerial services or

services of a kind provided by the person to whom they are rendered),

and

(b)   

is taken into account in calculating for tax purposes the profits of that

45

trade or profession.

(4)   

In this section—

 
 

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 2 — The investor

86

 

(a)   

“related person”, in relation to the issuing company, means—

(i)   

any company of which the individual or an associate of the

individual is a director and which is a subsidiary or partner of

the issuing company, or a partner of a subsidiary of the issuing

company, and

5

(ii)   

any person connected with the issuing company or with a

company falling within sub-paragraph (i), and

(b)   

any reference to a payment to an individual includes a payment made

to the individual indirectly or to the individual’s order or for the

individual’s benefit.

10

(5)   

In this section and section 169 “subsidiary”, in relation to the issuing company,

means a company which at any time in period A is a 51% subsidiary of the

issuing company.

169     

Directors qualifying for relief despite connection

(1)   

Section 163(1) does not prevent the investor from being a qualifying investor

15

despite the investor’s connection with the issuing company at any time in

period A relating to the relevant shares if—

(a)   

the investor is connected with that company merely because of the

investor, or the investor’s associate—

(i)   

being a director of, or of a company which is a partner of, the

20

issuing company or a subsidiary of the issuing company, and

(ii)   

being in receipt of, or entitled to receive, remuneration as such,

and

(b)   

conditions A and B and (where applicable) condition C are met.

(2)   

Condition A is that, in relation to the director (“D”), whether D is the investor

25

or an associate of the investor—

(a)   

D’s remuneration, or

(b)   

the remuneration to which D is entitled,

   

consists only of remuneration which is reasonable remuneration for services

rendered to the company of which D is a director in D’s capacity as such.

30

(3)   

Condition B is that the investor was issued with the relevant shares, or a

previous issue of shares in the issuing company which meet the requirements

of section 173(2), at a time when the investor had never been—

(a)   

connected with the issuing company, or

(b)   

involved in carrying on (whether on the investor’s own account or as a

35

partner, director or employee) the whole or any part of the trade,

business or profession carried on by the issuing company or a

subsidiary of that company.

(4)   

Condition C is that, if the issue of the relevant shares did not meet condition B,

they were issued before the termination date relating to the latest issue of

40

shares which met that condition.

(5)   

For the purposes of condition A any necessary and reasonable remuneration

falling within section 168(2)(f) is to be left out of account.

(6)   

In this section “remuneration” includes any benefit or facility.

 
 

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 2 — The investor

87

 

170     

Persons interested in capital etc of company

(1)   

An individual is connected with the issuing company if the individual directly

or indirectly possesses or is entitled to acquire more than 30% of—

(a)   

the ordinary share capital of the company or any subsidiary of the

company,

5

(b)   

the loan capital and issued share capital of the company or any such

subsidiary, or

(c)   

the voting power in the company or any such subsidiary.

(2)   

An individual is connected with the issuing company if the individual directly

or indirectly possesses or is entitled to acquire such rights as would—

10

(a)   

in the event of the winding up of the company or any subsidiary of the

company, or

(b)   

in any other circumstances,

   

entitle the individual to receive more than 30% of the assets of the company or

subsidiary (“the company in question”) which would then be available for

15

distribution to equity holders of the company in question.

(3)   

For the purposes of subsection (2)—

(a)   

the persons who are equity holders of the company in question, and

(b)   

the percentage of the assets of the company in question to which the

individual would be entitled,

20

   

are determined in accordance with paragraphs 1 and 3 of Schedule 18 to ICTA.

(4)   

In making that determination—

(a)   

references in paragraph 3 of that Schedule 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

25

references to any other circumstances in which assets of the company

in question are available for distribution to its equity holders.

(5)   

An individual is not connected with a company merely because one or more

shares in the company are held by the individual or by an associate of the

individual, at a time when the company—

30

(a)   

has not issued any shares other than subscriber shares, and

(b)   

has not begun to carry on, or make preparations for carrying on, any

trade or business.

(6)   

An individual is connected with the issuing company if the individual has

control of the issuing company or of any subsidiary of that company.

35

(7)   

In this section “subsidiary”, in relation to the issuing company, means a

company which at any time in period A is a 51% subsidiary of the issuing

company, whether or not it is such a subsidiary while the individual concerned

has, or is entitled to acquire, such capital, voting power, rights or control as are

mentioned in this section.

40

(8)   

For the purposes of this section the loan capital of a company is treated as

including any debt incurred by the company—

(a)   

for any money borrowed or capital assets acquired by the company,

(b)   

for any right to receive income created in favour of the company, or

(c)   

for consideration the value of which to the company was (at the time

45

when the debt was incurred) substantially less than the amount of the

debt (including any premium on it).

 
 

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 3 — General requirements

88

 

(9)   

For the purposes of this section—

(a)   

an individual is treated as entitled to acquire anything which the

individual is entitled to acquire at a future date or will at a future date

be entitled to acquire, and

(b)   

there is attributed to any individual any rights or powers of any other

5

person who is an associate of the individual.

(10)   

In determining for the purposes of this section whether an individual is

connected with a company, no debt incurred by—

(a)   

the company, or

(b)   

any subsidiary of the company,

10

   

by overdrawing an account with a person carrying on a business of banking is

to be treated as loan capital of the company or subsidiary if the debt arose in

the ordinary course of that business.

171     

Persons subscribing for shares under certain arrangements

(1)   

This section applies if an individual (“A”) subscribes for shares in a company

15

(“the company”) with which A is not connected under section 167 or 170.

(2)   

If—

(a)   

A subscribes for the shares as part of an arrangement, and

(b)   

the arrangement provides for another person to subscribe for shares in

another company with which (assuming it to be the issuing company)

20

A, or any other individual who is a party to the arrangement, is

connected,

   

A is connected with the company under this section.

Chapter 3

General requirements

25

Introduction

172     

Overview of Chapter

The general requirements are met in respect of the relevant shares if the

requirements of this Chapter are met as to—

(a)   

the shares (see section 173),

30

(b)   

the purpose of the issue (see section 174),

(c)   

the use of the money raised (see section 175),

(d)   

the minimum period (see section 176),

(e)   

no pre-arranged exits (see section 177), and

(f)   

no tax avoidance (see section 178).

35

The requirements

173     

The shares requirement

(1)   

The relevant shares must meet—

(a)   

the requirements of subsection (2), and

 
 

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 3 — General requirements

89

 

(b)   

unless they are bonus shares, the requirements of subsection (3).

(2)   

Shares meet the requirements of this subsection if they are ordinary shares

which do not, at any time during period B, carry—

(a)   

any present or future preferential right to dividends or to a company’s

assets on its winding up, or

5

(b)   

any present or future right to be redeemed.

(3)   

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.

(4)   

Shares are not fully paid up for the purposes of subsection (3)(b) if there is any

10

undertaking to pay cash to any person at a future date in respect of the

acquisition of the shares.

174     

The purpose of the issue requirement

The relevant shares (other than any of them which are bonus shares) must be

issued in order to raise money for the purpose of a qualifying business activity.

15

175     

The use of the money raised requirement

(1)   

The requirement of this section is that—

(a)   

at least 80% of the money raised by the issue of—

(i)   

the relevant shares (other than any of them which are bonus

shares), and

20

(ii)   

all other shares (if any) in the company of the same class which

meet the requirements of section 173(2) and are issued on the

same day,

   

is employed wholly for the purpose of the qualifying business activity

for which it was raised not later than the time mentioned in subsection

25

(3), and

(b)   

all of the money so raised is employed wholly for that purpose not later

than 12 months after that time.

(2)   

The requirements in subsection (1)(a) and (b) do not fail to be met merely

because an amount of money which is not significant is employed for another

30

purpose.

(3)   

The time referred to in subsection (1)(a) is—

(a)   

the end of the period of 12 months beginning with the issue of the

shares, or

(b)   

in the case of money raised only for the purpose of an activity to which

35

section 179(2) applies, the end of the period of 12 months beginning

with—

(i)   

the issue of the shares, or

(ii)   

if later, the time when the company or a qualifying 90%

subsidiary of the company begins to carry on the qualifying

40

trade.

(4)   

In determining for the purposes of subsection (3)(b) when a qualifying trade is

begun to be carried on by a qualifying 90% subsidiary of a company, any

carrying on by it of the trade before it became such a subsidiary is ignored.

 
 

 
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