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 3 — General requirements
90

176
The minimum period requirement
(1)
The issue of shares which includes the relevant shares must meet—
(a)
the requirement of subsection (2) in a case where the money raised by
an issue of shares is raised wholly for the purpose of a qualifying
business activity falling within section 179(2),
5
(b)
the requirement of subsection (3) in a case where the money raised by
an issue of shares is raised wholly or partly for the purpose of a
qualifying business activity falling within section 179(4).
(2)
The requirement is that—
(a)
the trade concerned must have been carried on for a period of at least 4
10
months ending at or after the time of the issue, and
(b)
throughout that period—
(i)
the trade must have been carried on by the issuing company or
a qualifying 90% subsidiary of that company, and
(ii)
the trade must not have been carried on by any other person.
15
(3)
The requirement is that—
(a)
the research and development concerned must have been carried on for
a period of at least 4 months ending at or after the time of the issue, and
(b)
throughout that period—
(i)
the research and development must have been carried on by the
20
issuing company or a qualifying 90% subsidiary of that
company, and
(ii)
the research and development must not have been carried on by
any other person.
(4)
If—
25
(a)
merely because of the issuing company or any other company being
wound up, or dissolved without winding up—
(i)
the trade is carried on as mentioned in subsection (2), or
(ii)
the research and development is carried on as mentioned in
subsection (3),
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for a period shorter than 4 months, and
(b)
the winding up or dissolution—
(i)
is for genuine commercial reasons, and
(ii)
is not part of a scheme or arrangement the main purpose or one
of the main purposes of which is the avoidance of tax,
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subsection (2) or, as the case may be, (3) has effect as if it referred to that shorter
period.
(5)
If—
(a)
merely because of anything done as a result of the issuing company or
any other company being in administration or receivership—
40
(i)
the trade is carried on as mentioned in subsection (2), or
(ii)
the research and development is carried on as mentioned in
subsection (3),

for a period shorter than 4 months, and
(b)
the entry into administration or receivership, and everything done as a
45
result of the company concerned being in administration or
receivership—
(i)
is for genuine commercial reasons, and

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Part 5 — Enterprise investment scheme
Chapter 3 — General requirements
91

(ii)
is not part of a scheme or arrangement the main purpose or one
of the main purposes of which is the avoidance of tax,

subsection (2) or, as the case may be, (3) has effect as if it referred to that shorter
period.
177
The no pre-arranged exits requirement
5
(1)
The issuing arrangements for the relevant shares must not include—
(a)
arrangements with a view to the subsequent repurchase, exchange or
other disposal of those shares or of other shares in or securities of the
issuing company,
(b)
arrangements for or with a view to the cessation of any trade which is
10
being or is to be or may be carried on by the issuing company or a
person connected with that company,
(c)
arrangements for the disposal of, or of a substantial amount (in terms
of value) of, the assets of the issuing company or of a person connected
with that company, or
15
(d)
arrangements the main purpose or one of the main purposes of which
is (by means of any insurance, indemnity or guarantee or otherwise) to
provide partial or complete protection for persons investing in shares
in the issuing company against what would otherwise be the risks
attached to making the investment.
20
(2)
The arrangements referred to in subsection (1)(a) do not include any
arrangements with a view to such an exchange of shares, or shares and
securities, as is mentioned in section 247(1).
(3)
The arrangements referred to in subsection (1)(b) and (c) do not include any
arrangements applicable only on the winding up of a company except in a case
25
where—
(a)
the issuing arrangements include arrangements for the company to be
wound up, or
(b)
the arrangements are applicable on the winding up of the company
otherwise than for genuine commercial reasons.
30
(4)
The arrangements referred to in subsection (1)(d) do not include any
arrangements which are confined to the provision—
(a)
for the issuing company itself, or
(b)
if the issuing company is a parent company that meets the trading
requirement in section 181(2)(b), for the issuing company itself, for the
35
issuing company itself and one or more of its subsidiaries or for one or
more of its subsidiaries,

of any such protection against the risks arising in the course of carrying on its
business as might reasonably be expected to be provided in normal
commercial circumstances.
40
(5)
In this section “the issuing arrangements” means—
(a)
the arrangements under which the shares are issued to the individual,
and
(b)
any arrangements made before the issue of the shares to the individual
in relation to or in connection with that issue.
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Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 3 — General requirements
92

178
The no tax avoidance requirement
The relevant shares must be issued 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 "qualifying business activity"
5
179
Meaning of “qualifying business activity”
(1)
In this Part “qualifying business activity”, in relation to the issuing company,
means—
(a)
activity A, or
(b)
activity B,
10

if it is carried on by the company or a qualifying 90% subsidiary of the
company.

This is subject to subsections (3) and (5).
(2)
Activity A is—
(a)
the carrying on of a qualifying trade which, on the date the relevant
15
shares are issued, the company or a qualifying 90% subsidiary of the
company is carrying on, or
(b)
the activity of preparing to carry on (or preparing to carry on and then
carrying on) a qualifying trade—
(i)
which, on that date, is intended to be carried on wholly or
20
mainly in the United Kingdom by the company or such a
subsidiary, and
(ii)
which is begun to be carried on by the company or such a
subsidiary within two years after that date.
(3)
But activity A is a qualifying business activity only if, at any time in period B
25
when the qualifying trade is so carried on, the qualifying trade is carried on
wholly or mainly in the United Kingdom.
(4)
Activity B is the carrying on of research and development—
(a)
which, on the date the relevant shares are issued, the company or a
qualifying 90% subsidiary of the company is carrying on, or which the
30
company or such a subsidiary begins to carry on immediately
afterwards, and
(b)
from which, on that date, it is intended—
(i)
that a qualifying trade which the company or such a subsidiary
will carry on wholly or mainly in the United Kingdom will be
35
derived, or
(ii)
that a qualifying trade which the company or such a subsidiary
is carrying on, or will carry on, wholly or mainly in the United
Kingdom will benefit.
(5)
But activity B is a qualifying business activity only if, at any time in period B
40
when—
(a)
the research and development is carried on, or
(b)
the qualifying trade which is derived, or which benefits or is intended
to benefit, from the research and development is carried on,

the research and development or, as the case may be, the qualifying trade is
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carried on wholly or mainly in the United Kingdom.

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Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
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(6)
In determining—
(a)
for the purposes of subsection (2)(b) when a qualifying trade is begun
to be carried on by a qualifying 90% subsidiary of the company, or
(b)
for the purposes of subsection (4)(a) when research and development is
begun to be carried on by such a subsidiary,
5

any carrying on of the trade or, as the case may be, the research and
development by it before it became such a subsidiary is ignored.
(7)
References in subsection (2)(b)(i) or (4)(b) to a qualifying 90% subsidiary of the
company include references to any existing or future company which will be
such a subsidiary at any future time.
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Chapter 4
The issuing company
Introduction
180
Overview of Chapter
The issuing company is a qualifying company in relation to the relevant shares
15
if the requirements of this Chapter are met as to—
(a)
trading (see section 181),
(b)
the issuing company to carry on the qualifying business activity (see
section 183),
(c)
unquoted status (see section 184),
20
(d)
control and independence (see section 185),
(e)
gross assets (see section 186),
(f)
qualifying subsidiaries (see section 187), and
(g)
property managing subsidiaries (see section 188).
The requirements
25
181
The trading requirement
(1)
The issuing company must meet the trading requirement throughout period B.
(2)
The trading requirement is that—
(a)
the company, ignoring any incidental purposes, exists wholly for the
purpose of carrying on one or more qualifying trades, or
30
(b)
the company is a parent company and the business of the group does
not consist wholly or as to a substantial part in the carrying on of non-
qualifying activities.
(3)
If the company intends that one or more other companies should become its
qualifying subsidiaries with a view to their carrying on one or more qualifying
35
trades—
(a)
the company is treated as a parent company for the purposes of
subsection (2)(b), and
(b)
the reference in subsection (2)(b) to the group includes the company
and any existing or future company that will be its qualifying
40
subsidiary after the intention in question is carried into effect.

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Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
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This subsection does not apply at any time after the abandonment of that
intention.
(4)
For the purpose of subsection (2)(b) the business of the group means what
would be the business of the group if the activities of the group companies
taken together were regarded as one business.
5
(5)
For the purpose of determining the business of a group, activities are ignored
so far as they are activities carried on by a mainly trading subsidiary otherwise
than for its main purpose.
(6)
For the purposes of determining the business of a group, activities of a group
company are ignored so far as they consist in—
10
(a)
the holding of shares in or securities of a qualifying subsidiary of the
parent company,
(b)
the making of loans to another group company,
(c)
the holding and managing of property used by a group company for
the purpose of one or more qualifying trades carried on by a group
15
company, or
(d)
the holding and managing of property used by a group company for
the purpose of research and development from which it is intended—
(i)
that a qualifying trade to be carried on by a group company will
be derived, or
20
(ii)
that a qualifying trade carried on or to be carried on by a group
company will benefit.
(7)
Any reference in subsection (6)(d)(i) or (ii) to a group company includes a
reference to any existing or future company which will be a group company at
any future time.
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(8)
In this section—
“incidental purposes” means purposes having no significant effect (other
than in relation to incidental matters) on the extent of the activities of
the company in question,
“mainly trading subsidiary” means a qualifying subsidiary which, apart
30
from incidental purposes, exists wholly for the purpose of carrying on
one or more qualifying trades, and any reference to the main purpose
of such a subsidiary is to be read accordingly, and
“non-qualifying activities” means—
(a)
excluded activities, and
35
(b)
activities (other than research and development) carried on
otherwise than in the course of a trade.
(9)
This section is supplemented by section 189 (meaning of “qualifying trade”)
and sections 192 to 199 (excluded activities).
182
Ceasing to meet trading requirement because of administration or
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receivership
(1)
A company is not regarded as ceasing to meet the trading requirement merely
because of anything done in consequence of the company or any of its
subsidiaries being in administration or receivership.

This has effect subject to subsections (2) and (3).
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(2)
Subsection (1) applies only if—

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Chapter 4 — The issuing company
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(a)
the entry into administration or receivership, and
(b)
everything done as a result of the company concerned being in
administration or receivership,

is for genuine commercial reasons, and is not part of a scheme or arrangement
the main purpose or one of the main purposes of which is the avoidance of tax.
5
(3)
A company ceases to meet the trading requirement if before the end of period
B—
(a)
a resolution is passed, or an order is made, for the winding up of the
company or any of its subsidiaries (or, in the case of a winding up
otherwise than under the Insolvency Act 1986 (c. 45) or the Insolvency
10
(Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)), any other act is
done for the like purpose), or
(b)
the company or any of its subsidiaries is dissolved without winding up.

This is subject to subsection (4).
(4)
Subsection (3) does not apply if the winding up or dissolution is for genuine
15
commercial reasons, and is not part of a scheme or arrangement the main
purpose or one of the main purposes of which is the avoidance of tax.
183
The issuing company to carry on the qualifying business activity requirement
(1)
The requirement of this section is met in relation to the issuing company if, at
no time in period B, is any of the following—
20
(a)
the relevant qualifying trade,
(b)
relevant preparation work (if any), and
(c)
relevant research and development (if any),

carried on by a person other than the issuing company or a qualifying 90%
subsidiary of that company.
25
(2)
Subsection (3) has effect for the purpose of determining whether the
requirement of this section is met in relation to the issuing company in a case
where relevant preparation work is carried out by that company or a
qualifying 90% subsidiary of that company.
(3)
The carrying on of the relevant qualifying trade by a company other than the
30
issuing company or a subsidiary of that company is to be ignored if it takes
place at any time in period B before the issuing company or any qualifying 90%
subsidiary of that company begins to carry on that trade.
(4)
The requirement of this section is not regarded as failing to be met in relation
to the issuing company if, merely because of any act or event within subsection
35
(5), the relevant qualifying trade—
(a)
ceases to be carried on in period B by the issuing company or any
qualifying 90% subsidiary of that company, and
(b)
is subsequently carried on in that period by a person who is not at any
time in period C connected with the issuing company.
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(5)
The following are acts and events within this subsection—
(a)
anything done as a consequence of the issuing company or any other
company being in administration or receivership, and
(b)
the issuing company or any other company being wound up, or
dissolved without being wound up.
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(6)
Subsection (4) applies only if—

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Chapter 4 — The issuing company
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(a)
the entry into administration or receivership, and everything done as a
consequence of the company concerned being in administration or
receivership, or
(b)
the winding up or dissolution,

is for genuine commercial reasons, and is not part of a scheme or arrangement
5
the main purpose or one of the main purposes of which is the avoidance of tax.
(7)
In this section—
“relevant preparation work” means preparations within section 179(2)(b)
which are the subject of the qualifying business activity mentioned in
section 174,
10
“the relevant qualifying trade” means the qualifying trade which is the
subject of that qualifying business activity,
“relevant research and development” means—
(a)
research and development within section 179(4) which is the
subject of that qualifying business activity, and
15
(b)
any other preparations for the carrying on of the qualifying
trade which is the subject of that activity.
184
The unquoted status requirement
(1)
At the beginning of period B—
(a)
the issuing company must be an unquoted company,
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(b)
there must be no arrangements in existence for the issuing company to
cease to be an unquoted company, and
(c)
there must be no arrangements in existence for the issuing company to
become a subsidiary of another company (“the new company”) by
virtue of an exchange of shares, or shares and securities, if—
25
(i)
section 247 applies in relation to the exchange, and
(ii)
arrangements have been made with a view to the new company
ceasing to be an unquoted company.
(2)
In this section “unquoted company” means a company none of whose shares,
stocks, debentures or other securities are marketed to the general public.
30
(3)
For the purposes of subsection (2), shares, stocks, debentures or other securities
are marketed to the general public if they are—
(a)
listed on the Stock Exchange or a stock exchange that is a recognised
stock exchange by virtue of an order made under section 939,
(b)
listed on a designated exchange in a country outside the United
35
Kingdom, or
(c)
dealt in outside the United Kingdom by such means as may be
designated.
(4)
In subsection (3)(b) and (c) “designated” means designated by an order made
by the Commissioners for Her Majesty’s Revenue and Customs for the
40
purposes of that provision.
(5)
An order made for the purposes of subsection (3)(b) may designate an
exchange by name, or by reference to any class or description of exchanges,
including a class or description framed by reference to any authority or
approval given in a country outside the United Kingdom.
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