Clause 182: Ceasing to meet trading requirement because of administration or receivership

607.     This clause provides an exception to clause 181 in the cases specified. It is based on section 293(4A) to (6) and (8A) of ICTA.

608.     The cases specified relate to administration or receivership carried out for commercial reasons and which do not have tax avoidance as a main purpose.

609.     The meanings of "in administration" and "in receivership" are provided by clause 252.

Clause 183: The issuing company to carry on the qualifying business activity requirement

610.     This clause requires that, subject to the rules in the clause, during period B it is only the issuing company or a qualifying 90% subsidiary of the issuing company that carries on the qualifying business activity for which money was raised by the share issue. It is based on section 289(1A) to (1E) and (8) and section 312(1) of ICTA.

611.     Section 289(1)(ba) of ICTA, stating that the requirements of section 289(1A) must be met, is not reproduced explicitly. Instead it is implicit in clause 180(b), as part of the list of the requirements in relation to the issuing company.

Clause 184: The unquoted status requirement

612.     This clause requires that when the relevant shares are issued:

• the issuing company is unquoted; and

• no arrangements as are mentioned in the clause are in existence.

It is based on sections 293(1A), (1B) and (8A) and 312(1), (1B), (1C) and (1E) of ICTA.

613.     The words in brackets in section 293(1) of ICTA "whether it is resident in the United Kingdom or elsewhere" have not been rewritten. The words do not add anything to the tests in clause 179 (meaning of "qualifying business activity").

614.     The definition of unquoted company in section 312 of ICTA is set out in this clause, rather than in Chapter 8, since this is the only mention of unquoted status in the EIS provisions.

615.     Section 312(1D) of ICTA is not rewritten in this Part. It concerns orders made by the Commissioners for Her Majesty's Revenue and Customs and is covered by clause 948 which is based on section 828 of ICTA.

616.     FA 2001 removed the requirement that the issuing company remain unquoted throughout the relevant period. Following that change, section 312(1E) of ICTA has little or no practical significance, but in exceptional circumstances this provision could still apply in relation to the "arrangements" in section 293(1B) of ICTA, (rewritten in subsection (1)(b) and (c)). Section 312(1E) has therefore been rewritten in subsection (6).

617.     "Arrangements" are defined in clause 257(1).

Clause 185: The control and independence requirement

618.     This clause is based on section 293(8) and (8A) of ICTA. It broadly requires that throughout period B:

• any company that the issuing company (on its own or together with connected persons) controls is a qualifying subsidiary of the issuing company

• the issuing company is not a 51% subsidiary of or controlled by another company (on its own or together with connected persons); and

• there are no arrangements which could lead the issuing company to fail either of these tests.

619.     Section 293(3) of ICTA has not been rewritten. The definition of "a qualifying subsidiary of another company" is contained in clause 191.

620.     In subsection (1)(a) the words "of the issuing company" have been added after "a qualifying subsidiary". See Change 44 in Annex 1.

621.     "Control" in subsection (2)(a) is defined in clause 929. The meaning of "control" in subsection (1)(a) is different and is given by clause 257(3).

Clause 186: The gross assets requirement

622.     This clause sets out the limits that apply to the value of a company's gross assets before and after a share issue. It is based on section 293(6A) to (6C) of ICTA.

623.     The requirement differentiates between a "single company" and a "parent company". Both these terms are defined in clause 257(1).

624.     Section 293(6D) of ICTA has not been rewritten as a separate provision. The term the "company's group" and the reference to "in relation to any time" are not needed given the definitions in clause 257(1) and the way in which this clause as a whole is drafted.

625.     Subsection (3)(b) sets out more clearly what is meant in relation to a group of companies by the words "aggregate value at that time of the gross assets" in section 293(6B)(b) of ICTA. Similar wording is used in paragraph 12(3) of Schedule 5 to ITEPA (enterprise management incentives).

Clause 187: The qualifying subsidiaries requirement

626.     This clause requires that during period B any subsidiary of the issuing company must be a qualifying subsidiary. It is based on sections 293(3A) and 308(1) and (5A) of ICTA.

Clause 188: The property managing subsidiaries requirement

627.     This clause requires that any property managing subsidiary of the issuing company must also be its qualifying 90% subsidiary. It is based on section 293(6ZA) to (6ZC) and (8A) of ICTA.

628.     In section 293(6ZC) of ICTA "land" and "property deriving its value from land" take the meaning in section 776 of ICTA. Subsection (3), applying for the purposes of subsection (2) of the rewritten clause, provides the definition of "property deriving its value from land". "Land" itself is not defined in this Bill and instead relies on the definition in Schedule 1 to the Interpretation Act 1978. See the commentary on clause 705.

Clause 189: Meaning of "qualifying trade"

629.     This clause gives the meaning of "qualifying trade". It is based on sections 297(2) and (8) and 298(3) and (5) of ICTA.

630.     The wording of subsection (1)(b) is more compact than section 297(2). The comparable wording is that the trade must not "consist of one or more of the following activities if that activity amounts, or those activities when taken together amount, to a substantial part of the trade".

631.     Excluded activities referred to in this subsection are set out in clause 192.

632.     Subsection (2) excepts references to a trade in certain sections in this Chapter from the extended meaning of "trade" in clause 923, based on the definition in section 832(1) of ICTA.

Clause 190: Meaning of "qualifying 90% subsidiary"

633.     This clause gives the meaning of "qualifying 90% subsidiary". It is based on section 289(9) to (13) of ICTA.

Clause 191: Meaning of "qualifying subsidiary"

634.     This clause defines "qualifying subsidiary". It is based on section 308(2) to (4) and (5B) of ICTA.

635.     The term "51% subsidiary" in subsection (2)(a), which is based on section 308(2)(ca), takes its meaning from the definition in clause 923. The definition provides a signpost to section 838 of ICTA. Section 308(5B) of ICTA, which applies section 838(2) to (10) to section 308(2)(ca), has not been rewritten as it is unnecessary.

Clause 192: Meaning of "excluded activities"

636.     This clause gives the meaning of "excluded activities". It is based on section 297(2) of ICTA.

637.     The meaning of excluded activities is needed to determine whether a trade is a qualifying trade and the extent to which the business of a group includes non-qualifying activities.

638.     Subsection (2) indicates where further detail can be found on certain of the activities listed in subsection (1).

Clause 193: Excluded activities: wholesale and retail distribution

639.     This clause supplements clause 192(1)(b). It is based on section 297(3) of ICTA.

640.     Subsection (2) makes it clear that there are two sets of determinants, one set establishing what is a trade of wholesale and retail distribution and the other what is an ordinary trade of wholesale and retail distribution.

641.     The words "or exposed" before "for sale" have been added in subsection (4). This is intended to reflect the normal description of a trade of retail distribution in United Kingdom statute law.

642.     Subsection (5)(b) refers to "the trader" rather than "the company" which is referred to in section 297(3)(c)(ii) of ICTA. See Change 45 in Annex 1.

Clause 194: Excluded activities: leasing of ships

643.     This clause supplements clause 192(1)(d). It is based on sections 297(6) and (7) and 298(5) of ICTA.

644.     Subsection (2) takes paragraph 18(2) of Schedule 5 to ITEPA (enterprise management incentives) as its model. This additional material, which is not in the source legislation, makes it clear that the requirements of subsection (4) do not have to be met in relation to offshore installations and pleasure craft.

645.     Change 43 applies for the purposes of subsection (7). See the commentary on clause 181.

Clause 195: Excluded activities: receipt of royalties and licence fees

646.     This clause supplements clause 192(1)(e). It is based on section 297(4) to (5C) of ICTA.

Clause 196: Excluded activities: property development

647.     This clause supplements clause 192(1)(g). It is based on section 298(5), (5B) and (5C) of ICTA.

Clause 197: Excluded activities: hotels and comparable establishments

648.     This clause supplements clause 192(1)(j). It is based on sections 297(3A) and 298(5A) of ICTA.

Clause 198: Excluded activities: nursing homes and residential care homes

649.     This clause supplements clause 192(1)(k). It is based on sections 297(3A) and 298(5) of ICTA.

Clause 199: Excluded activities: provision of services or facilities for another business

650.     This clause treats the provision of services or facilities as excluded activities if:

• the services or facilities are provided to businesses which themselves consist largely of excluded activities; and

• the specified control requirements exist.

It is based on sections 297(2) and 298(1) to (3) of ICTA.

651.     The clause is written in terms of a "business". As a consequence, the way in which the definition of a trade in section 298(3), governing sections 297 and 298, is applied within those sections has been simplified. See Change 46 in Annex 1.

652.     Clause 200: Power to amend by Treasury order

653.     This clause allows the Treasury to make orders amending the provisions mentioned in the clause. It is based on section 298(4) of ICTA.

Chapter 5: Attribution of and claims for EIS relief

Overview

654.     This Chapter deals with attributing EIS relief to shares, claiming the relief and associated matters.

Clause 201: Attribution of EIS relief to shares

655.     This clause attributes EIS relief for a tax year:

• first, to the issues of shares on which relief is claimed; and

• second, to shares included in those issues.

It is based on section 289B(1) to (3A) and (5) and (6) of ICTA.

656.     These attributions are needed because the investor may have subscribed to more than one share issue of a single company, or to share issues of more than one company, during the tax year. Each such share issue to the investor may have different periods associated with it for the purpose of recovery or withdrawal of relief. And the question of whether relief is attributable to shares disposed of is also relevant to relief for losses on shares and for capital gains tax purposes.

657.     Subsections (2) to (4) cater for cases where an individual claims EIS relief in respect of all of the shares in relation to which the individual is eligible for relief. They also cater for cases where an individual claims EIS relief in respect of some, but not all, of the shares in relation to which the individual is eligible for relief. See commentary on clause 158 and Change 36 in Annex 1.

Clause 202: Time for making claims for EIS relief

658.     This clause sets out the intervals during which claims for EIS relief can be made for a tax year. It is based on sections 289B(5) and 306(1) of ICTA.

Clause 203: Entitlement to claim

659.     This clause requires the investor to hold a certificate (compliance certificate) from the issuing company before claiming EIS relief. It is based on section 306(2), (7), and (8) of ICTA.

660.     Subsection (2) omits the words "and admitted" which are in section 306(7) of ICTA. Those words are not needed as there is no separate PAYE admittance procedure.

Clause 204: Compliance certificates

661.     This clause says what compliance certificates are and deals with matters associated with their issue to investors (including the pre-condition that the issuing company gives a compliance statement to HMRC). It is based on section 306(2), (3) and (4) of ICTA.

662.     The compliance certificate is commonly known as an EIS 3, the form provided by HMRC for the issuing company to issue to its investors.

663.     The reference to requirements for EIS relief being "for the time being met" in subsection (1)(b) is new. There is an explanation in Change 57 in Annex 1.

664.     Subsection (5) requires an officer of Revenue and Customs to notify the officer's decision on a request by the issuing company for permission to issue a compliance certificate. See Change 47 in Annex 1.

Clause 205: Compliance statements

665.     This clause says what compliance statements are and deals with associated matters (including the period during which they can be given). It is based on section 306(3), (3A), (5) and (11) of ICTA.

666.     The compliance statement is commonly known as an EIS 1, the form provided by HMRC for completion by the issuing company.

667.     The reference to requirements for EIS relief being "for the time being met" in subsection (1)(a) is new. There is an explanation in Change 57 in Annex 1.

Clause 206: Appeal against refusal to authorise compliance certificate

668.     This clause allows an issuing company to appeal, to an independent body, if the officer of Revenue and Customs refuses to authorise the issue of compliance certificates by the company. It is based on section 306(10) of ICTA.

Clause 207: Penalties for fraudulent certificate or statement etc

669.     This clause provides for penalties in the circumstances set out. It is based on section 306(6) of ICTA.

Chapter 6: Withdrawal or reduction of EIS relief

Overview

670.     This Chapter deals with cases in which EIS relief, otherwise available to the investor in relation to a share issue, is reduced or withdrawn.

Clause 208: Overview of Chapter

671.     This clause provides a signpost to the various ways in which EIS relief may be withdrawn or reduced. It is new.

Clause 209: Disposal of shares

672.     This clause withdraws or reduces EIS relief if the investor disposes of relevant shares before the end of period A relating to those shares. It is based on sections 299(1), (2) and (8) and 304(1) of ICTA.

673.     EIS relief is only reduced to the extent that the relief is attributable to the shares which are the subject of the disposal.

674.     Subsection (4) provides an exception in the case of certain disposals between spouses or civil partners.

675.     Section 299(3) of ICTA is not rewritten. It is not needed because other provisions identify the shares that are disposed of and calculate the appropriate proportion of the relief attributable to those shares.

Clause 210: Cases where maximum EIS relief not obtained

676.     This clause deals with the case where EIS relief on a subscription for shares was effectively obtained for a tax year at a rate that is below the savings rate of tax for the tax year concerned. It is based on sections 289B(5) and 299(4) of ICTA.

677.     Subsection (1) effectively reduces the rate at which clause 209(3)(a) recovers EIS relief on the proceeds from a disposal of the shares concerned. The rate of recovery is reduced, from the savings rate of tax for the year in which the shares were issued, to the rate at which EIS relief was effectively obtained.

678.     The subsection also caters for cases where an individual claims EIS relief in respect of some, but not all, of the shares in relation to which the individual is eligible for relief. See the commentary on clause 158 and Change 36 in Annex 1.

679.     Subsection (2) deals with the complication that arises where the investor has obtained relief on some of the shares as if they were issued in the previous tax year. Subsection (1) is then applied as if there were two separate issues. That is necessary because the investor may have obtained EIS relief at different effective rates in the two years concerned (and one or both of these effective rates could be less than the savings rate for the tax year concerned).

680.     Subsections (3) and (4) are new and correspond to provisions in paragraph 46(5) and (6) of Schedule 15 to FA 2000 (corporate venturing scheme - disposal of shares). See Change 48 in Annex 1.

Clause 211: Call options

681.     This clause treats the grant of a call option by the investor as if it were a disposal of shares for the purpose of clause 209 (disposal of shares). It is based on section 299(8) of ICTA.

Clause 212: Put options

682.     This clause deals with put options granted to the investor during period A relating to the relevant shares concerned. It is based on section 299(5), (5A) and (8) of ICTA.

683.     The grant of the put option to the investor leads to the withdrawal of any EIS relief attributable to the shares to which the put option relates.

Clause 213: Value received by the investor

684.     This clause sets out what happens if the investor receives value from the issuing company at any time during period C relating to an issue of shares. It is based on sections 300(1) to (1B), 301(4A), 301A(5) and 312(1) of ICTA.

685.     Any EIS relief attributable to the issue of shares is either withdrawn or reduced. The amount of value received by the investor is taken into account in determining whether there is a withdrawal or reduction of relief (and the size of any reduction).

686.     Subsection (3) makes explicit the order in which to apply clauses 218 to 220.

Clause 214: Value received: receipts of insignificant value

687.     This clause prevents clause 213 applying to insignificant amounts of value received by the investor. But such amounts are not ignored if, taken together with certain other receipts of value by the investor, the total amount received is not insignificant. It is based on section 300(1) and (1BC) and section 312(1) of ICTA.

Clause 215: Meaning of "receipts of insignificant value"

688.     This clause gives the meaning of "receipts of insignificant value" for the purpose of clause 214. It is based on section 301A(1) to (4) and section 312(1) of ICTA.

Clause 216: When value is received

689.     This clause sets out the time at which, and circumstances in which, the investor is treated as receiving value from the issuing company. It is based on sections 300(1D) to (3), (5) and (6) and 301(3), (4) and (5) of ICTA.

690.     Subsection (3) refers, for clarity, to "the issuing company" where the source legislation refers to "a company".

Clause 217: The amount of value received

691.     This clause contains a table which sets out the amount of value received by the investor in cases where clause 216 treats value as received by the investor. It is based on section 300(4) and (5) of ICTA.

Clause 218: Value received where there is more than one issue of shares

692.     This clause deals with cases where the investor receives value but there is more than one issue of shares from which clause 213 reduces or withdraws EIS relief. It is based on section 300(1BA) and (1BB) and section 312(1) of ICTA.

693.     Subsection (2) apportions the value received between the different share issues before the calculation in clause 213(2) takes place. Without such a provision the value received might be counted two, or more, times for reducing or withdrawing EIS relief.

694.     By referring to the amount on which the investor obtains relief the subsection also caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on clause 158 and Change 36 in Annex 1.

Clause 219: Value received where part of share issue treated as made in previous tax year

695.     This clause deals with a complication that can arise where clause 213(2) applies to an issue of shares. The complication occurs where the investor has obtained relief on part of that share issue as if that part of the share issue had taken place in the previous tax year. It is based on sections 289B(5), 299(4) and 300(1B) of ICTA.

696.     If that complication occurs, subsection (2) sets out the steps by which to arrive at the amount referred to in clause 213(2)(a). Setting out these steps is a change because the source legislation is not explicit on this aspect. See Change 49 in Annex 1.

697.     By referring to the amount on which the investor obtains relief Step 1 also caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on clause 158 and Change 36 in Annex 1.

698.     Step 2 includes a deeming of two separate issues of shares and apportionment of the value received between those two deemed issues. That is necessary because there may be a different savings rate of tax in each of the tax years.

699.     Step 2 also requires the application of clause 220, where appropriate, to deal with cases where the investor has not obtained EIS relief at the savings rate for one or both of the two years concerned in Step 2.

Clause 220: Cases where maximum EIS relief not obtained

700.     This clause deals with the case where EIS relief on a subscription for shares was obtained for a tax year at a rate which is less than the savings rate of tax for that tax year. It is based on sections 299(4) and 300(1B) of ICTA.

701.     Subsection (1) effectively lowers the rate at which clause 213(2) recovers EIS relief on value received by the investor. The rate of recovery is reduced to the rate at which EIS relief was effectively obtained. The subsection also caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on clause 158 and Change 36 in Annex 1.

702.     Subsections (2) and (3) are new and correspond to provisions in paragraph 52(2) and (3) of Schedule 15 to FA 2000 (corporate venturing scheme - cases where maximum relief not obtained). See Change 48 in Annex 1.

Clause 221: Receipts of value by and from connected persons etc

703.     This clause extends the meaning of terms used in some of the preceding clauses. It is based on sections 300(1C) and 301(6) and (6A) of ICTA.

704.     Without this extension the rules in preceding clauses about reduction or withdrawal of EIS relief might be avoided in various ways.