House of Commons - Explanatory Note
Income Tax Bill - continued          House of Commons

back to previous text

Clause 152: Losses from miscellaneous transactions

517.     This clause provides relief for losses from certain transactions (known as "Case VI losses" before the enactment of ITTOIA). It is based on section 392 of ICTA.

518.     The provisions relating to "Case VI income" are in Chapter 8 of Part 5 of ITTOIA. That Act amended section 392 of ICTA (which operates by reference to section 836B of ICTA, also inserted by Schedule 1 to ITTOIA). Section 836B of ICTA is rewritten as clause 950 of this Bill.

519.     A person can make a claim to deduct a loss incurred in a relevant transaction in computing the person's net income of the tax year or of a subsequent tax year, but only from the person's miscellaneous income from relevant transactions. Transactions are relevant if any profits from them would be liable to income tax under a provision listed in clause 950.

Clause 153: How relief works

520.     This clause explains how the deductions are made. It is based on section 392(2) and (5) of ICTA.

Clause 154: Transactions in deposit rights

521.     This clause explains the application of the loss relief against miscellaneous income rules as they apply to transactions in deposit rights. It is based on section 398 of ICTA.

Clause 155: Time limit for claiming relief

522.     This clause sets out the time limits for making claims for loss relief against miscellaneous income. It is based on section 392(6) and (7) of ICTA.

Part 5: Enterprise investment scheme

Overview

523.     This Part provides income tax reductions to individuals who subscribe for shares in smaller unquoted trading (and some other) companies with which they are not connected.

524.     A tax reduction is available where an individual provides additional "full risk" equity finance by subscribing money for shares and holds those shares, in most cases, for at least three years and the other conditions of the scheme are met.

525.     The structure of the Part is as follows:

  • The tax reduction and an overview (Chapter 1);

  • Conditions relating to the investor (Chapter 2);

  • Conditions relating to money raised and other matters (Chapter 3);

  • Conditions relating to the issuing company (Chapter 4);

  • Claiming the tax reduction and attributing the reduction to shares (Chapter 5);

  • Withdrawing tax reductions that prove to be excessive (Chapter 6);

  • Method of withdrawing tax reduction and related matters (Chapter 7); and

  • Supplementary provisions (Chapter 8).

526.     As set out in clause 156(3), this Part has effect only in relation to shares issued on or after 6 April 2007 in accordance with clause 967(3). This is subject to provisions in Schedule 2, in particular the general provisions concerning the continuity of the law in Part 1 and the transitional provisions in Part 7 of that Schedule.

527.     For example, the effect of Part 1 of Schedule 2 on clause 218 (value received when there is more than one issue of shares) is that the clause is read, in relation to shares issued before 6 April 2007, as a reference to the corresponding provision in the source legislation.

528.     As a result of the commencement basis applying to Part 5, the minor changes in the law made by this Bill will not affect shares issued before 6 April 2007, subject to one exception. This exception is the consequential amendment to section 312(2A) of ICTA, explained in the explanatory note on this section in Schedule 1.

529.     Clause 967(3) also provides that consequential amendments and repeals associated with Part 5 have effect only in relation to shares issued on or after 6 April 2007. So enterprise investment scheme (EIS) shares and BES shares (BES is the common name for the business expansion scheme) issued before that date are unaffected.

Chapter 1: Introduction

Overview

530.     This Chapter sets out the conditions for an individual to be entitled to a tax reduction and quantifies the amount of the entitlement. It also gives an overview of the Part, labels certain concepts and provides signposts to other material related to EIS.

Clause 156: Meaning of "EIS relief" and commencement

531.     This clause says the relief is a tax reduction and provides labels for the scheme and the relief. It is based on section 312(1) of ICTA.

532.     Subsection (3) sets out the commencement basis for Part 5 in accordance with clause 967(3). See the notes in the general overview to this Part.

Clause 157: Eligibility for EIS relief

533.     This clause states the conditions to be satisfied for the relief to be available and indicates where further detail can be found on certain conditions. It is based on sections 289(1), 290(1) and 291(1) of ICTA.

Clause 158: Form and amount of EIS relief

534.     This clause quantifies the amount of the income tax reduction to which an individual is entitled if the individual claims EIS relief for a tax year. It is based on sections 289A(1) to (4) and 290(2) of ICTA.

535.     Subsection (1) provides that an individual may, if that individual wishes, claim EIS relief in respect of some, but not all, of the shares in relation to which the individual is eligible for relief. See Change 36 in Annex 1. There are consequential changes in later clauses to deal with cases where an individual claims EIS relief in relation to some, but not all, of the shares in relation to which the individual is eligible for relief. The commentary on those later clauses refers back to the commentary on this clause.

536.     Subsection (1) is expressed in terms of the individual's entitlement to a tax reduction. Clauses 27 and 29 (within the calculation of income tax liability Chapter in Part 2) contain provisions about how effect is given to the entitlement to a reduction and how the actual reduction is quantified.

537.     Subsection (2)(a) adds the words "and claims", before "EIS relief", to make explicit a requirement that is implied when sections 289A(1) and 289A(2)(a) of ICTA are considered together.

538.     Subsection (2)(b) provides that there is an upper limit on the amount of an individual's entitlement to EIS relief rather than an upper limit on the subscriptions in respect of which the relief may be claimed. See Change 37 in Annex 1.

Clause 159: Periods A, B and C

539.     This clause labels and defines periods (relating to an issue of shares) that are referred to in other clauses in this Part. It is based on section 312(1) and (1A) of ICTA.

Clause 160: Overview of other Chapters of Part

540.     This clause indicates the content of Chapters that are not mentioned in clause 157. It is new.

Clause 161: Other tax reliefs relating to EIS

541.     This clause signposts other reliefs and material that may be relevant to EIS. It is new.

Chapter 2: The investor

Overview

542.     This Chapter sets out the conditions which the investor must meet in order to be a "qualifying investor" in relation to the issue of shares in question.

Clause 162: Overview of Chapter

543.     This clause states the three conditions that must be met by an investor in order to be a qualifying investor and indicates where further detail can be found about them. It is new.

Clause 163: The no connection with the issuing company requirement

544.     This clause provides that the investor must not be connected with the issuing company during the period indicated. It is based on section 291(1) of ICTA.

545.     There is a reference to connection before the issuing company is incorporated. This covers for example a former employee of a company which becomes a subsidiary or partner of the issuing company within the prescribed period, see clause 167(1)(a).

Clause 164: The no linked loans requirement

546.     This clause denies relief in the cases set out (loans connected with the subscription for the relevant shares). It is based on section 299A of ICTA.

547.     The effect of the cross-reference, to section 307(6)(ca) of ICTA, in section 299A(2) of ICTA is achieved by making reference in clause 239(1) (date from which interest is chargeable) to the meaning of "the making of the loan" in this clause.

548.     Clause 942(1) notes that "assignation" is the term used in Scotland for "assignment". Both terms are used in section 299A(2)(b) of ICTA.

Clause 165: The no tax avoidance requirement

549.     This clause stops the investor being a qualifying investor if the subscription was not for commercial reasons or if a main purpose was tax avoidance. It is based on section 289(6) of ICTA. There is a complementary requirement in respect of the issue of the shares in Chapter 3 of this Part.

550.     Section 289(6) has introductory wording about the investor "not being eligible for relief". There is no need for similar introductory words in this clause, because clause 162 already provides that the investor is not a qualifying investor if the no tax avoidance requirement is not met, and is therefore not eligible for EIS relief (clause 157(1)(b)).

551.     To be consistent with related legislation, for example paragraph 14 of Schedule 15 to FA 2000 (corporate venturing scheme), this clause refers to "commercial reasons" rather than "commercial purposes".

Clause 166: Connection with issuing company

552.     This clause defines, for the purposes of this Chapter, the meaning of an individual being connected with the issuing company and provides signposts to the clauses that provide further detail of the way in which such connection can occur. It is based on section 291(2) of ICTA.

553.     This clause applies the definition more widely than section 291(2). See Change 38 in Annex 1.

Clause 167: Employees, directors and partners

554.     This clause defines how an individual can be connected with the issuing company as a result of a person being "an employee, director or partner". It is based on section 291(2), (3) and (4) of ICTA.

555.     Subsection (3) is based on section 291(4). It provides that an individual who is both a director and an employee of the issuing company is covered by subsection (1)(c) rather than subsection (1)(a) and so can benefit from the let-outs in clauses 168 and 169. In such a case, references in clauses 167 to 169 to an individual in his or her capacity as a director also includes the individual in his or her capacity as an employee. So, for example, in these cases any remuneration received as an employee is taken into account in clause 169(2).

Clause 168: Directors excluded from connection

556.     This clause provides that an individual will, in specific circumstances, not be connected with the issuing company. It is based on sections 291(5) and 291A(1), (2), (3) and (6) of ICTA.

557.     This clause allows, in limited cases, the investor to be eligible for EIS relief in relation to a share issue even if the investor (or an associate) is a director of the issuing company. Such limited cases broadly include those where:

  • the sole reason for connection would have been the relationship as director; but

  • in relation to the period over which connection is tested;

-----?     any such payments fall to be disregarded by virtue of subsection (2).

558.     Subsection (4)(a)(i) narrows the definition of "related person". See Change 39 in Annex 1.

559.     The meaning of "connected" in subsection (4)(a)(ii) is found in clause 927. This differs from the other references to "connected" in this Chapter, which take their meaning from clause 166.

560.     The words "at any time in period A" in subsection (5) are needed to convey the full meaning of the expression "51% subsidiary" in section 291A(6) of ICTA. For the source legislation, this expression has a specific definition in section 312(1) of ICTA, but this is not reproduced in the rewritten EIS clauses. Instead a "51% subsidiary" in this Part takes its meaning from section 838 of ICTA - see clause 923.

Clause 169: Directors qualifying for relief despite connection

561.     This clause provides an exception to the rule that a person is not a qualifying investor if that person is connected with the issuing company. It is based on section 291(5) and section 291A(4) and (5) of ICTA.

562.     This exception might apply to certain, otherwise unconnected, "business angel" investors whose only connection with the issuing company will be as directors. (A "business angel" is the term used for investors who also make their business expertise available to a company by becoming a director.)

563.     In subsection (3)(a) the reference to "connected" takes its meaning from clause 166, see Change 38 in Annex 1.

564.     In section 291A(5) of ICTA there is a reference to the word "trade" including "any business, profession or vocation". As an incorporated company cannot carry on a vocation there is now in subsection (3)(b) a reference to "the trade, business or profession" carried on by the company or its subsidiary.

Clause 170: Persons interested in capital etc of company

565.     This clause sets out cases in which an individual is treated as connected with the issuing company because of certain interests in that company or a subsidiary of that company. It is based on section 291(5) and section 291B of ICTA other than section 291B(5).

566.     In subsection (1)(a), based on section 291B(1)(a) of ICTA, there is a reference to ordinary share capital without the word "issued". This is because the definition of ordinary share capital in clause 923 defines ordinary share capital in terms of issued share capital.

567.     In subsections (1)(a), (2)(a) and (10), it has been made clear that the subsidiary referred to is the subsidiary of the issuing company.

568.     Subsection (6) refers to "the issuing company". This replaces a reference to "a company" in section 291B(4) of ICTA, on which subsection (6) is based. The clarification is consistent with the context of section 291B of ICTA generally and with the reference in section 291B(5) of ICTA to "another company .. assuming it to be an issuing company" in particular.

Clause 171: Persons subscribing for shares under certain arrangements

569.     This clause provides a further instance where an individual is treated as connected with the issuing company. It is based on section 291B(5) of ICTA.

570.     The references to "connected" take their meaning from clause 166, see Change 38 in Annex 1.

Chapter 3: General requirements

Overview

571.     This Chapter sets out conditions for the general requirements that need to be met in relation to the relevant shares.

Clause 172: Overview of Chapter

572.     This clause lists the various conditions that are contained in this Chapter and where further detail can be found. It is new.

Clause 173: The shares requirement

573.     This clause sets out the conditions that the relevant shares must satisfy. It is based on section 289(1), (7), (8) and (8A) of ICTA.

574.     The shares (apart from bonus shares) have to be fully paid up in cash at the time they are issued. Bonus shares are defined in clause 257.

575.     Subsection (2) provides in effect that the shares must also be "full-risk" ordinary shares throughout period B. The label "eligible shares" which appears in section 289(7) is no longer used. Instead of references to "eligible shares", there are now references elsewhere in this Part to shares which meet the requirements of this subsection.

576.     There are several instances in ICTA where the reference to eligible shares adds nothing to the meaning. The word eligible has been omitted in the Part where this is the case, and if identification of the shares in question is needed, an alternative such as "the relevant shares" has been used.

577.     Similarly the term "new ordinary shares" has not been reproduced. As EIS relief depends on subscribing for shares that are issued to the investor, it is not necessary to describe the shares as "new". This approach mirrors that in paragraph 35 of Schedule 15 to FA 2000 (corporate venturing scheme).

Clause 174: The purpose of the issue requirement

578.     This clause sets out the condition concerning the purpose for which the share issue raises money. It is based on section 289(1) of ICTA.

Clause 175: The use of the money raised requirement

579.     This clause sets out the requirements for the employment of the money raised by the issue of relevant shares. It is based on section 289(1), (3) and (3A) of ICTA.

580.     Subsection (1) contains a reference to bonus shares which are defined in clause 257(1). Such shares do not need to meet the tests of this clause. This enables for example clause 201(4) (attribution of EIS relief to shares) to work. As a result, under clause 201(4)(b) "this Part" applies as if the "original issue" of shares included "corresponding bonus shares".

581.     Clause 257(5) explains when shares are treated as being of the same class.

Clause 176: The minimum period requirement

582.     This clause requires that the companies mentioned in subsection (2) must carry on the qualifying business activity for a certain period of time. It is based on section 289A(6) to (8A) of ICTA.

583.     Subsection (1) makes the requirements of this clause a condition of eligibility for EIS relief instead of, as in section 289A(6), a condition for claiming the relief. See Change 40 in Annex 1.

584.     Subsections (2) and (3) refer to "at or after the time of the issue" to make more obvious the fact that the period in question may end after the share issue has occurred.

Clause 177: The no pre-arranged exits requirement

585.     This clause denies relief if certain arrangements exist in connection with the issue of shares. It is based on section 299B of ICTA.

586.     The words in brackets in subsection (1)(c) "in terms of value" are not in section 299B(1)(c), although they do appear in paragraph 37(1) of Schedule 15 to FA 2000 (corporate venturing scheme). Introducing the words here is intended to clarify what is meant by "a substantial amount" in this context.

Clause 178: The no tax avoidance requirement

587.     This clause requires that there be commercial reasons for the issue of the relevant shares and that a main purpose is not tax avoidance. It is based on section 289(6) of ICTA.

588.     There is a complementary requirement in respect of the subscription for the shares in Chapter 2.

589.     To be consistent with related legislation, for example, in paragraph 14 of Schedule 15 to FA 2000 (corporate venturing scheme), this clause refers to "commercial reasons" rather than "commercial purposes".

Clause 179: Meaning of "qualifying business activity"

590.     This clause says what "qualifying business activity" means. It is based on section 289(2), (3A) and (8) of ICTA.

591.     For EIS relief to be available, the share issue must raise money for the purpose of a qualifying business activity. (See clause 174).

592.      In subsection (1) a qualifying business activity is explained by reference to activity A and activity B. The requirement is that these activities are carried out by the company or a qualifying 90% subsidiary.

593.     The phrase "or preparing to carry on and then carrying on" in subsection (2)(b) is intended to be clearer than the phrase "preparing to carry on, or carrying on," in section 289(2)(a)(ii) of ICTA. Each is concerned with money being raised both for the preparations for a trade and the subsequent carrying on of that trade.

594.     Subsections (4) and (5) extend the cases in which R&D activities can be treated as a qualifying business activity. See Change 41 in Annex 1.

595.     Subsection (7) enables certain requirements to be met in relation to a company that is not a qualifying 90% subsidiary at the time the shares are issued. See Change 42 in Annex 1.

Chapter 4: The issuing company

Overview

596.     This Chapter sets out the conditions to be met if the issuing company is to be a qualifying company in relation to the relevant shares.

Clause 180: Overview of Chapter

597.     This clause summarises the conditions to be met and indicates where further detail can be found. It is based on sections 289(1)(ba) and 293(1) of ICTA but there is no equivalent provision in ICTA that draws these conditions together.

598.     Where there are shared provisions, the order matches Chapter 4 of Part 6, "qualifying holdings" in the venture capital trust scheme (VCT), as far as possible.

Clause 181: The trading requirement

599.     This clause sets out the trading requirement which the issuing company must meet throughout period B. It is based on section 293(2), (3A) to (3F) and (8A) of ICTA.

600.     The nature of the requirement is set out in subsection (2). The requirement can be met in one or other of two ways. Either the issuing company must exist essentially for the purpose of carrying on one or more qualifying trades during period B, or it can be a parent company of a group that carries on qualifying activities. It can alternate between these two conditions providing that at all times within period B it meets one or other of them.

601.      The meaning of "qualifying trade" is explained in clause 189. "Parent company", "group" and "group company" are defined in clause 257(1). Only part of section 293(3A) appears in this clause: it is in subsection (4). The requirements in section 293(3A)(a) and (b) are covered respectively by the definition of "parent company" in clause 257(1) and by clause 187.

602.     Subsections (3) and (7) provide that certain requirements can be met in relation to a company that is not part of the group at the time the shares are issued. See Change 42 in Annex 1.

603.     The provision for property used for R&D in subsection (6)(d) has been extended. See Change 41 in Annex 1.

604.     The words "capable of" have been omitted in subsection (8), rewriting the definitions of "incidental purposes" and of "mainly trading subsidiary" in sections 293(2)(a) and 293(3F)(a) of ICTA. The intention is to make the definitions simpler to interpret. In practice the test will not change.

605.     The label "non-qualifying activities" in subsection (2)(b) is defined in subsection (8). Paragraph (a) of that definition refers to excluded activities. These are listed in clause 192. Clause 194 provides a let-out for certain leasing of ships from being treated as a non-qualifying activity.

606.     The way that subsection (8) interprets non-qualifying activities means that no distinction is made between the let-out in clause 194(4), derived from section 297(6)(a) to (d) of ICTA, and the let-out in clause 194(7), derived from the final words of section 297(6) of that Act. This contrasts with section 293(3C)(b) of ICTA. See Change 43 in Annex 1.

 
previous Section Bill Home page continue
 
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries ordering index

© Parliamentary copyright 2006
Prepared: 8 December 2006