Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
97

(6)
The arrangements referred to in subsection (1)(b) and (c)(ii) do not include
arrangements in consequence of which any shares, stocks, debentures or other
securities of the company are at any subsequent time—
(a)
listed on a stock exchange that is a recognised stock exchange by virtue
of an order made under section 939, or
5
(b)
listed on an exchange, or dealt in by any means, designated by an order
made for the purposes of subsection (3)(b) or (c),

if the order was made after the beginning of period B.
185
The control and independence requirement
(1)
The control element of the requirement is that—
10
(a)
the issuing company must not at any time in period B control (whether
on its own or together with any person connected with it) any company
which is not a qualifying subsidiary of the issuing company, and
(b)
no arrangements must be in existence at any time in that period by
virtue of which the issuing company could fail to meet paragraph (a)
15
(whether during that period or otherwise).
(2)
The independence element of the requirement is that—
(a)
the issuing company must not at any time in period B—
(i)
be a 51% subsidiary of another company, or
(ii)
be under the control of another company (or of another
20
company and any other person connected with that other
company), without being a 51% subsidiary of that other
company, and
(b)
no arrangements must be in existence at any time in that period by
virtue of which the issuing company could fail to meet paragraph (a)
25
(whether during that period or otherwise).
(3)
This section is subject to section 247(4) (exchange of shares).
186
The gross assets requirement
(1)
In the case of relevant shares issued by a single company, the value of the
company’s assets—
30
(a)
must not exceed £7 million immediately before the relevant share issue,
and
(b)
must not exceed £8 million immediately afterwards.
(2)
In the case of relevant shares issued by a parent company, the value of the
group assets—
35
(a)
must not exceed £7 million immediately before the relevant share issue,
and
(b)
must not exceed £8 million immediately afterwards.
(3)
In this section—
(a)
the relevant share issue is the issue of shares in the company that
40
includes the relevant shares, and
(b)
the value of the group assets is the sum of the values of the gross assets
of each of the members of the group, ignoring any that consist in rights
against, or shares in or securities of, another member of the group.

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
98

187
The qualifying subsidiaries requirement
Any subsidiary that the issuing company has at any time in period B must be
a qualifying subsidiary of the company.
188
The property managing subsidiaries requirement
(1)
Any property managing subsidiary that the issuing company has at any time
5
in period B must be a qualifying 90% subsidiary of the company.
(2)
“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.
(3)
In subsection (2) references to property deriving its value from land include—
10
(a)
any shareholding in a company deriving its value directly or indirectly
from land,
(b)
any partnership interest deriving its value directly or indirectly from
land,
(c)
any interest in settled property deriving its value directly or indirectly
15
from land, and
(d)
any option, consent or embargo affecting the disposition of land.
Definitions
189
Meaning of “qualifying trade”
(1)
For the purposes of this Part, a trade is a qualifying trade if—
20
(a)
it is conducted on a commercial basis and with a view to the realisation
of profits, and
(b)
it does not at any time in period B consist wholly or as to a substantial
part in the carrying on of excluded activities.
(2)
References in this section and sections 192 to 198 to a trade are to be read
25
without regard to the definition of “trade” in section 923.
190
Meaning of “qualifying 90% subsidiary”
(1)
For the purposes of this Part, a company (“the subsidiary”) is a qualifying 90%
subsidiary of another company (“the relevant company”) if the following
conditions are met—
30
(a)
the relevant company possesses at least 90% of the issued share capital
of, and at least 90% of the voting power in, the subsidiary,
(b)
the relevant company would—
(i)
in the event of a winding up of the subsidiary, or
(ii)
in any other circumstances,
35

be beneficially entitled to receive at least 90% of the assets of the
subsidiary which would then be available for distribution to equity
holders of the subsidiary,
(c)
the relevant company is beneficially entitled to receive at least 90% of
any profits of the subsidiary which are available for distribution to
40
equity holders of the subsidiary,

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
99

(d)
no person other than the relevant company has control of the
subsidiary, and
(e)
no arrangements are in existence by virtue of which any of the
conditions in paragraphs (a) to (d) would cease to be met.
(2)
Subsections (3), (4) and (5) of section 191 (conditions not regarded as ceasing to
5
be met because of winding up, dissolution, administration, receivership or
arrangements for disposal not having tax avoidance as main purpose) apply in
relation to the conditions in subsection (1)—
(a)
as they apply in relation to the conditions in subsection (2) of that
section, but
10
(b)
with the omission from subsection (5) of “or (as the case may be) by
another subsidiary”.
(3)
For the purposes of subsection (1)—
(a)
the persons who are equity holders of the subsidiary, and
(b)
the percentage of the assets of the subsidiary to which an equity holder
15
would be entitled,

are to be 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
20
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 subsidiary
are available for distribution to its equity holders.
191
Meaning of “qualifying subsidiary”
25
(1)
For the purposes of this Part, a company (“the subsidiary”) is a qualifying
subsidiary of another company (“the relevant company”) if the following
conditions are met.
(2)
The conditions are that—
(a)
the subsidiary is a 51% subsidiary of the relevant company,
30
(b)
no person other than the relevant company, or another of its
subsidiaries, has control of the subsidiary, and
(c)
no arrangements are in existence by virtue of which either of the
conditions in paragraphs (a) and (b) would cease to be met.
(3)
The conditions do not cease to be met merely because the subsidiary or any
35
other company is wound up, or dissolved without winding up, if the winding
up or dissolution—
(a)
is for genuine commercial reasons, and
(b)
is not part of a scheme or arrangement the main purpose or one of the
main purposes of which is the avoidance of tax.
40
(4)
The conditions do not cease to be met merely because of anything done as a
consequence of the subsidiary or any other company being in administration
or receivership, if—
(a)
the entry into administration or receivership, and
(b)
everything done as a consequence of the company concerned being in
45
administration or receivership,

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
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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)
The conditions do not cease to be met merely because arrangements are in
existence for the disposal by the relevant company or (as the case may be) by
another subsidiary of all its interest in the subsidiary, if the disposal—
5
(a)
is to be for genuine commercial reasons, and
(b)
is not to be part of a scheme or arrangement the main purpose or one of
the main purposes of which is the avoidance of tax.
Excluded activities
192
Meaning of “excluded activities”
10
(1)
The following are excluded activities for the purposes of sections 181 and 189—
(a)
dealing in land, in commodities or futures or in shares, securities or
other financial instruments,
(b)
dealing in goods otherwise than in the course of an ordinary trade of
wholesale or retail distribution,
15
(c)
banking, insurance, money-lending, debt-factoring, hire-purchase
financing or other financial activities,
(d)
leasing (including letting ships on charter or other assets on hire),
(e)
receiving royalties or licence fees,
(f)
providing legal or accountancy services,
20
(g)
property development,
(h)
farming or market gardening,
(i)
holding, managing or occupying woodlands, any other forestry
activities or timber production,
(j)
operating or managing hotels or comparable establishments or
25
managing property used as an hotel or comparable establishment,
(k)
operating or managing nursing homes or residential care homes or
managing property used as a nursing home or residential care home,
and
(l)
any activities which are excluded activities under section 199
30
(provision of services or facilities for another business).
(2)
Subsection (1) is supplemented by the following provisions—
(a)
section 193 (wholesale and retail distribution),
(b)
section 194 (leasing of ships),
(c)
section 195 (receipt of royalties and licence fees),
35
(d)
section 196 (property development),
(e)
section 197 (hotels and comparable establishments), and
(f)
section 198 (nursing homes and residential care homes).
193
Excluded activities: wholesale and retail distribution
(1)
This section supplements section 192(1)(b).
40
(2)
In this section—
(a)
subsections (3) and (4) are for determining whether a trade is a trade of
wholesale or retail distribution, and

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Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
101

(b)
subsections (5) and (6) are for determining whether a trade of wholesale
or retail distribution is an ordinary trade of wholesale or retail
distribution.
(3)
A trade of wholesale distribution is one in which goods are offered for sale and
sold to persons for resale by them, or for processing and resale by them, to
5
members of the general public for their use or consumption.
(4)
A trade of retail distribution is one in which goods are offered or exposed for
sale and sold to members of the general public for their use or consumption.
(5)
A trade of wholesale or retail distribution is not an ordinary trade of wholesale
or retail distribution if—
10
(a)
it consists to a substantial extent—
(i)
in dealing in goods of a kind which are collected or held as an
investment, or
(ii)
in that activity and any other excluded activity taken together,
and
15
(b)
a substantial proportion of those goods are held for a period which is
significantly longer than the period for which the trader would
reasonably be expected to hold them while trying to dispose of them at
their market value.
(6)
In determining whether a trade of wholesale or retail distribution is an
20
ordinary trade of wholesale or retail distribution regard is to be had to the
extent to which it has the following features—
(a)
the goods are bought by the trader in quantities larger than those in
which the trader sells them,
(b)
the goods are bought and sold by the trader in different markets,
25
(c)
the trader employs staff and incurs expenses in the trade in addition to
the cost of the goods and, in the case of a trade carried on by a company,
in addition to any remuneration paid to any person connected with it,
(d)
there are purchases from or sales to persons who are connected with the
trader,
30
(e)
purchases are matched with forward sales or vice versa,
(f)
the goods are held by the trader for longer than is normal for goods of
the kind in question,
(g)
the trade is carried on otherwise than at a place or places commonly
used for wholesale or retail trade,
35
(h)
the trader does not take physical possession of the goods.
(7)
In subsection (6)—
(a)
the features in paragraphs (a) to (c) are regarded as indications that the
trade is an ordinary trade of wholesale or retail distribution, and
(b)
those in paragraphs (d) to (h) are regarded as indications to the
40
contrary.
194
Excluded activities: leasing of ships
(1)
This section supplements section 192(1)(d) so far as it relates to the leasing of
ships other than offshore installations or pleasure craft.
(2)
In the following provisions “ship” accordingly means a ship other than an
45
offshore installation or a pleasure craft.

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
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(3)
If the requirements of subsection (4) are met, a trade is not to be regarded as
consisting in the carrying on of excluded activities within section 192(1)(d) as
a result only of its consisting in letting ships on charter.
(4)
The requirements of this subsection are that—
(a)
every ship let on charter by the company carrying on the trade is
5
beneficially owned by the company,
(b)
every ship beneficially owned by the company is registered in the
United Kingdom,
(c)
throughout period B the company is solely responsible for arranging
the marketing of the services of its ships, and
10
(d)
the conditions mentioned in subsection (5) are met in relation to every
letting on charter by the company.
(5)
The conditions referred to in subsection (4)(d) are—
(a)
the letting is for a period not exceeding 12 months and no provision is
made at any time (whether in the charterparty or otherwise) for
15
extending it beyond that period otherwise than at the option of the
charterer,
(b)
no provision for the grant of a new letting to end more than 12 months
after the provision is made (whether in the charterparty or otherwise)
is in force during the period of the letting otherwise than at the option
20
of the charterer,
(c)
the letting is by way of a bargain at arm’s length between the company
and a person who is not connected with it,
(d)
under the terms of the charter the company is responsible as
principal—
25
(i)
for taking, throughout the period of the charter, management
decisions in relation to the ship, other than those of a kind
generally regarded by persons engaged in trade of the kind in
question as matters of husbandry, and
(ii)
for defraying all expenses in connection with the ship
30
throughout that period, or substantially all such expenses, other
than those directly incidental to a particular voyage or to the
employment of the ship during that period, and
(e)
no arrangements exist by virtue of which a person other than the
company may be appointed to be responsible for the matters
35
mentioned in paragraph (d) on behalf of the company.
(6)
If in the case of the company carrying on the trade (“the letting company”) the
charterer is also a company and—
(a)
the charterer is a qualifying subsidiary of the letting company, or
(b)
the letting company is a qualifying subsidiary of the charterer, or
40
(c)
both companies are qualifying subsidiaries of a third company,

subsection (5) has effect with the omission of paragraph (c).
(7)
If any of the requirements of subsection (4) is not met in relation to any lettings
of ships, the trade is not, as a result, to be treated as consisting in the carrying
on of excluded activities if—
45
(a)
those lettings, and
(b)
any other excluded activities

do not, taken together, amount to a substantial part of the trade.

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Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
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(8)
In this section “pleasure craft” means any ship of a kind primarily used for
sport or recreation.
195
Excluded activities: receipt of royalties and licence fees
(1)
This section supplements section 192(1)(e) (receipt of royalties and licence
fees).
5
(2)
If the requirement of subsection (3) is met, a trade is not to be regarded as
consisting in the carrying on of excluded activities within section 192(1)(e) as a
result only of its consisting to a substantial extent in the receiving of royalties
or licence fees.
(3)
The requirement of this subsection is that the royalties or licence fees (or all but
10
for a part that is not a substantial part in terms of value) are attributable to the
exploitation of relevant intangible assets.
(4)
For this purpose an intangible asset is a “relevant intangible asset” if the whole
or greater part (in terms of value) of it has been created—
(a)
by the company carrying on the trade, or
15
(b)
by a company which at all times during which it created the intangible
asset was—
(i)
the holding company of the company carrying on the trade, or
(ii)
a qualifying subsidiary of that holding company.
(5)
In the case of an intangible asset that is intellectual property, references to the
20
creation of an asset by a company are to its creation in circumstances in which
the right to exploit it vests in the company (whether alone or jointly with
others).
(6)
In this section—
“holding company” means a company that—
25
(a)
has one or more 51% subsidiaries, but
(b)
is not itself a 51% subsidiary of another company,
“intangible asset” means any asset which falls to be treated as an
intangible asset in accordance with generally accepted accountancy
practice,
30
“intellectual property” means—
(a)
any patent, trade mark, registered design, copyright, design
right, performer’s right or plant breeder’s right, or
(b)
any rights under the law of a country or territory outside the
United Kingdom which correspond or are similar to those
35
falling within paragraph (a).
196
Excluded activities: property development
(1)
This section supplements section 192(1)(g).
(2)
“Property development” means the development of land—
(a)
by a company which has, or at any time has had, an interest in the land,
40
and
(b)
with the sole or main object of realising a gain from the disposal of an
interest in the land when it is developed.
(3)
For this purpose “interest in land” means, subject to subsection (4)—