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This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 38: EIS: individuals connected with issuing company: clause 166

This change makes it explicit when the definition of an individual being connected with the issuing company applies.

Section 291(2) of ICTA applies the definition solely for section 291 of that Act. But the expressions in section 291A(5)(b)(i) of ICTA:

[at time when he had never been] connected with the issuing company

and section 291B(5) of ICTA:

that or any other individual who is a party to the arrangement is connected

also depend on whether an individual is connected with the issuing company (or is not connected with the issuing company).

It might be thought that sections 291A(5)(b)(i) and 291B(5) of ICTA use some alternative meaning of an individual being connected with the issuing company. But it is not obvious what alternative meaning would apply for these provisions or why any alternative is needed.

Clause 166(1) applies the definition of "connected with the issuing company" to Chapter 2 of Part 5 of this Bill with the exception of clause 168(4). This means that the definition of an individual being connected to the issuing company also applies to clauses 169(3)(a) and 171 (deriving from sections 291A(5)(b)(i) and 291B(5) of ICTA respectively). Clause 166(2) provides a signpost to clause 257(2) which explains what definition of connection applies in clause 168(4).

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 39: EIS: clarification of the definition of related person in section 291A(2)(i) of ICTA: clause 168

This change eliminates a possible ambiguity in section 291A(2)(i) of ICTA as to the subsidiaries referred to in that provision.

Section 291A(1) of ICTA provides that an individual is not connected with the issuing company in some cases. But section 291A(1) does not apply in some cases involving a related person of the issuing company.

Section 291A(2)(i) of ICTA includes in the definition of "related person" in relation to the issuing company (emphasis added):

    any company of which the individual or his associate is a director and which is a subsidiary or a partner of the issuing company or of a subsidiary,..

The emphasised words may be capable of being read as including both:

  • a subsidiary of the issuing company; and

  • a subsidiary of a subsidiary [of the issuing company].

Section 291A(6) of ICTA defines "subsidiary" purely in relation to the issuing company. That is an indication that the emphasised words do not extend as far as the second bullet point above. And policy and practice (see eg the guidance material in Venture Capital Schemes Manual paragraph 25060) has been to treat the emphasised words as not extending to a subsidiary of a subsidiary [of the issuing company].

The words in clause 168(4)(a)(i):

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

represent a change in accordance with this policy and practice.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 40: EIS: carrying on qualifying business activity for four months is a condition of eligibility for EIS relief rather than a condition for claiming it: clause 176

This change makes the requirement, that the qualifying business activity is to be carried on for a certain minimum period, one of the conditions that must be met in order for an individual to be eligible for EIS relief. In ICTA the corresponding requirement is a condition that must be met in order for an individual to claim EIS relief.

Section 289(1) of ICTA contains a number of conditions that must be met in order for an individual to eligible for relief. The opening words of section 289(1) say that an individual:

..is eligible for relief.. if..

Section 289A(6) and (7) of ICTA then contains additional conditions that must be met before the individual may claim the relief for which that individual is eligible. Section 289A(6) says that a:

..claim for relief .. shall not be allowed unless..

This distinction in ICTA seems to be a legacy of the scheme in Chapter 2 of Part 4 of FA 1981 (relief for investment in new corporate trades) where:

  • there had to be a new company;

  • there had to be a new trade; and

  • no claim could be made to the Inland Revenue (for it to give effect to the relief) until the tax year following that in which the shares were issued.

There is no reason for the enterprise investment scheme to split conditions between (a) those that must be met to be eligible for relief and (b) those that must be met to claim relief.

Clause 176(1) removes this split by making the requirement, that the qualifying business activity be carried on for a certain minimum period, an additional condition of eligibility for EIS relief. Clause 202(1)(a) (time for making claims for EIS relief) preserves the position that claims may not be made until the qualifying business activity has been carried on for the required period.

This change has no implications for the amount of tax due, who pays it or when. It affects (in principle but not in practice) only administrative matters.

Change 41: EIS, VCT and share loss relief: research and development (R&D) benefiting qualifying trade of a group company: clauses 137, 179, 181, 290 and 300, Schedule 1 (section 576B of ICTA) and Schedule 2 Part 6 (the trading requirement) and Part 8 (the trading requirement and meaning of "qualifying trade")

This change permits R&D that benefits a qualifying trade to meet the requirements in EIS and VCT in prescribed circumstances. The change aligns these schemes more closely with the corporate venturing scheme (CVS).

EIS

Section 289(2)(b) of ICTA permits the carrying on of R&D to be a qualifying business activity. But this permission is limited to cases where it is intended that a future qualifying trade will be derived from that R&D. Section 289(2)(b) says:

Research and development ..from which it is intended that a qualifying trade ..will be derived ..

Paragraph 25(2) of Schedule 15 to FA 2000 (CVS) is the provision that broadly corresponds with section 289(2)(b) of ICTA. But in CVS this corresponding provision goes further by also allowing the R&D to benefit an existing or future qualifying trade within the company or group concerned. Paragraph 25(2) says (emphasis added):

.. intended that..a connected qualifying trade will be derived or benefit..

In practice, R&D that benefits an existing trade falls, in many cases, within section 289(2)(a) of ICTA as the R&D is part of preparing to carry on, or carrying on a qualifying trade. But basing clause 179(4)(b)(ii) and (5)(b) on paragraph 25(2) of Schedule 15 to FA 2000 by adding a reference to R&D benefiting a trade makes it clearer that this kind of R&D may be a qualifying business activity.

For the purpose of determining what is the business of a trading group, section 293(3D)(b) of ICTA provides that the holding and managing of property used by the company or any of its subsidiaries in certain cases is disregarded in considering what are the activities of a member of the group. This includes property used for R&D:

from which it is intended that a qualifying trade to be carried on by the company or any of its subsidiaries will be derived.

To be consistent with the change made in the definition of a qualifying business activity and with CVS (where the meaning of qualifying trade in paragraph 25 of Schedule 15 to FA 2000 is carried over into paragraph 23(7)(b) for the purposes of a parallel disregard) clause 181(6)(d) provides as follows:

..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

(ii)     that a qualifying trade carried on or to be carried on by a group company will benefit.

VCT

Schedule 28B to ICTA explains the meaning of a qualifying holding. Paragraph 1(1) says:

This Schedule applies, where any shares in or securities of any company ("the relevant company") are at any time held by another company ("the trust company"), for determining whether and to what extent those shares or securities ("the relevant holding") are, for the purposes of section 842AA, to be regarded as at that time comprised in the trust company's qualifying holdings.

In the rewrite the trust company is called "the investing company".

Paragraph 4(1)(b) of Schedule 28B to ICTA provides that the carrying on of any activities of R&D is treated as the carrying on of a qualifying trade where it is intended that:

there will be derived a trade that will comply with this paragraph.

Paragraph 25(2) of Schedule 15 to FA 2000 (CVS) shares some elements with the VCT sub-paragraph. But in CVS the provision goes further by also allowing the R&D to benefit an existing or future qualifying trade within the company or group concerned. Paragraph 25(2) says (emphasis added):

..intended that..a connected qualifying trade will be derived or benefit..

In practice, in many cases, R&D that benefits an existing trade falls within paragraph 3(3)(b) of Schedule 28B to ICTA as the R&D is part of preparing to carry on a qualifying trade. But basing clause 300(2) on paragraph 25(2) of Schedule 15 to FA 2000 by adding a reference to R&D benefiting a trade makes it clearer that this kind of R&D may be a qualifying business activity.

The rewritten provision, clause 300(2)(b), provides that the carrying on of R&D from which it is intended:

..a trade will benefit which ..is or will be a qualifying trade .. is to be treated as the carrying on of a qualifying trade.

For the purpose of determining what is the business of a trading group, paragraph 3(9)(b) of Schedule 28B to ICTA provides that the holding and managing of property used by the company or any of its qualifying subsidiaries, in certain cases, is disregarded in considering what are the activities of a member of the group. This includes property used for R&D:

from which it is intended that a     qualifying trade to be carried on by the company or any of its qualifying subsidiaries will be derived.

To be consistent with the change made in the definition of a qualifying trade and with CVS (where the meaning of qualifying trade in paragraph 25 of Schedule 15 to FA 2000 is carried over into paragraph 23(7)(b) for the purposes of a parallel disregard) clause 290(5)(d) provides as follows:

..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

(ii)     that a qualifying trade carried on or to be carried on by a group company will benefit.

Share loss relief

Clause 137, relating to share loss relief under Chapter 6 of Part 4 of this Bill, and new section 576B of ICTA introduced by Schedule 1, relating to share loss relief under Chapter 5A of Part 13 of ICTA, correspond to clause 181, with modifications.

The change in clause 181(6)(d) is, accordingly, replicated in clause 137(5)(d) of this Bill and in section 576B(5)(d) of ICTA. See also Schedule 2 Part 6 (the trading requirement).

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 42: EIS, VCT and share loss relief: meaning of "qualifying business activity" and the trading requirement: clauses 137, 179 and 181, Schedule 1 (section 576B of ICTA) and Schedule 2 Part 6 (the trading requirement)

This change enables certain requirements to be met in circumstances where the issuing company acquires a company after the issue of the relevant shares.

There are three aspects to this change.

The Change in clause 179(7)

Section 289(1)(b) of ICTA, rewritten as clause 174, requires that the relevant shares be issued in order to raise money for the purpose of a qualifying business activity. Clause 179 is based on section 289(2) and (3A) of ICTA and explains what is a qualifying business activity at the date of the issue of the shares.

The categories of qualifying business activity that consist of a trade in preparation and of R&D are described as follows in section 289(2) of ICTA (emphasis added):

In this Chapter "qualifying business activity", in relation to a company, means—

    (a)     the company or any qualifying 90% subsidiary of that company—

    (i)     ..

    (ii)     preparing to carry on, or carrying on, a qualifying trade which, on that date, is intended to be carried on wholly or mainly in the United Kingdom by the company or any such subsidiary and which is begun to be carried on by the company or any such subsidiary within two years after that date,

         .., or

    (b)     the company or any qualifying 90% subsidiary of that company carrying on research and development—

    (i)     which, on the date the shares are issued, the company or any such subsidiary is carrying on or which the company or any such subsidiary begins to carry on immediately afterwards, and

    (ii)     from which it is intended that a qualifying trade which the company or any such subsidiary will carry on wholly or mainly in the United Kingdom will be derived,..

There is an indication in section 289(3A)(a) of ICTA that participation in the qualifying business activity is not restricted to existing subsidiaries in relation to the commencement of the trade in section 289(2)(a)(ii) of that Act.

This is also the intention behind the references to "any such subsidiary" in section 289(2)(a)(ii) and (b)(ii) of ICTA. This phrase includes a subsidiary that is acquired after the date the shares are issued so long as other requirements such as those in section 289(1A) to (1E) of ICTA, rewritten in clause 183, are met.

But to make this clearer, clause 179(7) provides an interpretation of references to a qualifying 90% subsidiary:

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.

Clause 179 (2)(b)(i) rewrites the part about intention in section 289(2)(a)(ii) of ICTA. Clause 179 (4)(b) rewrites the part about intention in section 289(2)(b)(ii) of ICTA, (with Change 41 which extends the R&D in the frame to R&D that will benefit a qualifying trade).

The Change in clause 181(7)

Section 293(3D) of ICTA says (emphasis added):

Activities of a company or of any of its subsidiaries shall be disregarded for the purposes of subsections (3A) to (3C) above to the extent that they consist in—

    (a)     ..

    (b)     the holding and managing of property used by the company or any of its subsidiaries for the purposes of—

    (i)     research and development from which it is intended that a qualifying trade to be carried on by the company or any of its subsidiaries will be derived; or ..

Consistent with the interpretation of section 289(2)(b)(ii) of ICTA, "any of its subsidiaries" in section 293(3D) of that Act applies to a subsidiary that is acquired after the date the shares are issued.

The provision is rewritten in clause 181(6)(c) and (d) (with "group company" instead of "any of its subsidiaries" and again with Change 41 which extends the R&D in the frame to R&D that will benefit a qualifying trade).

Clause 181(7) provides an interpretation of "group company", (as defined in clause 257(1)), which makes it clear that here this includes future group companies:

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.

The Change in clause 181(3)

Clause 181 rewrites the requirement in section 293 of ICTA for the parent company of a trading group.

Section 293(2) of ICTA requires that (emphasis added):

The company must throughout the relevant period be -

(a)     a company which exists wholly for the purpose of carrying on one or more qualifying trades..or

(aa)     the parent company of a trading group.

The parent company of a trading group is defined in section 293(3A) of ICTA:

For the purposes of this section a company is the parent company of a trading group if—

(a)     it has one or more subsidiaries;

(b)     each of its subsidiaries is a qualifying subsidiary of the company; and

(c)     the requirements of subsection (3B) below are fulfilled by what would be the business of the company and its subsidiaries if all the activities, taken together, of the company and its subsidiaries were regarded as one business.

This is rewritten in clause 181(4) (and in clause 187 and, by the definition of parent company, in clause 257(1)).

An extension of Change 42 in clause 181(3) ensures that an issuing company can qualify as a parent company where there is the intention that one or more companies will become a qualifying subsidiary:

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 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 subsidiary after the intention in question is carried into effect.

This subsection does not apply at any time after the abandonment of that intention.

Note

Clause 181(3) and (7) do not specify that the company that is not yet part of the group has to be a qualifying 90% subsidiary. But an issuing company has also to comply with other requirements such as those in clause 179, clause 175 and clause 183. This will determine whether the new subsidiary is required to be a qualifying subsidiary or a qualifying 90% subsidiary.

VCT (the Venture Capital Trust Scheme)

There are similar changes in Part 6, VCT, see Change 61.

Share loss relief

Clause 137, relating to share loss relief under Chapter 6 of Part 4 of this Bill, and new section 576B of ICTA introduced by Schedule 1, relating to share loss relief under Chapter 5A of Part 13 of ICTA, correspond to clause 181, with modifications.

The changes in clause 181(3) and (7) are, accordingly, replicated in clause 137(2) and (6) of this Bill and in section 576B(2) and (6) of ICTA. See also Schedule 2 Part 6 (the trading requirement).

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 43: EIS, VCT and share loss relief: the trading requirement: clauses 137, 181, 194, 290 and 305, Schedule 1 (section 576B of ICTA) and Schedule 2 Parts 6 and 8 (excluded activities: leasing of ships)

This change extends the scope of EIS and VCT relief by relaxing the way in which a restriction relating to the leasing of ships operates. This affects in a minor way the rules that determine whether a parent company and its group meets the trading requirement.

To meet the trading requirement, the business of the group must not consist wholly or as to a substantial part in carrying on non-qualifying activities. Non-qualifying activities consist of activities carried on otherwise than in the course of a trade and excluded activities.

Leasing is an excluded activity but there is an exception or let-out for certain types of ship leasing. The change concerns the way that this let-out is reflected in clauses 137, 181, and 290.

EIS

Section 293(3B) of ICTA lists activities that must not form a substantial part of a group's business if the parent company is to be regarded as the parent company of a trading group. Section 293(3B)(a) includes as such activities:

activities falling within section 297(2)(a) to (g) but not within subsection (3C) below ..

Section 297(2)(e) of ICTA refers to the activity of:

leasing (including letting ships on charter or other assets on hire) or..

So leasing is an activity that is excluded in section 293(3B)(a) subject to exceptions provided by section 293(3C)(b) for certain types of ship leasing:

the letting of ships .. in circumstances where the requirements in paragraphs (a) to (d) of section 297(6) are satisfied in relation to the company so letting them

The reference in section 293(3C)(b) of ICTA to paragraphs (a) to (d) of section 297(6) means that the let-out for ship leasing from excluded activities does not extend to the part of section 297(6) of ICTA which follows paragraphs (a) to (d):

but where any of the requirements mentioned in paragraphs (a) to (d) above are not satisfied in relation to any lettings of such ships, the trade shall not thereby be treated as failing to comply with this section if those lettings and any other activity of a kind falling within subsection (2)(a) to (g) above do not, when taken together, amount to a substantial part of the trade.

In principle therefore when determining whether a parent company and its group meet the trading requirement, a trade of leasing ships would be an excluded activity if it failed to meet the requirements of section 297(6)(a) to (d) of ICTA even if the degree of failure was insubstantial.

The way in which clauses 181(8), 192 and 194 interact changes the position.

The definition of "non-qualifying activities" in clause 181(8) refers to "excluded activities". Clause 192 defines "excluded activities" (based on the list in section 297(2) of ICTA) and also lists provisions that supplement the definitions.

One of these provisions is clause 194 (excluded activities: leasing of ships), which provides a let-out for certain types of ship leasing. Clause 194(7) extends the let-out in the same way as the latter part of section 297(6) of ICTA.

The effect of this is that the definition of "non-qualifying activities" in clause 181(8) includes all the circumstances in clause 194 including those in clause 194(7).

VCT

Paragraph 3(7) of Schedule 28B to ICTA lists activities that must not form a substantial part of a group's business if the parent company is to be regarded as the parent company of a trading group. Paragraph 3(7)(a) includes as such activities:

activities falling within paragraph 4(2)(a) to (f) below but not within sub-paragraph (8) below ..

Paragraph 4(2)(d) of that Schedule refers to the activity of:

leasing (including letting ships on charter or other assets on hire) or..

So leasing is an activity that is excluded in paragraph 3(7) of Schedule 28B to ICTA subject to exceptions provided by paragraph 3(8)(b) for certain types of ship leasing:

the letting of ships .. in circumstances where the requirements in paragraphs (a) to (d) of paragraph 4(7) below are satisfied in relation to the company so letting them

The reference in paragraph 3(8)(b) of Schedule 28B to ICTA to paragraphs (a) to (d) of paragraph 4(7) means that the exception for ship leasing from excluded activities does not extend to the part of paragraph 4(7) of that Schedule which follows paragraphs (a) to (d):

but where any of the requirements mentioned in paragraphs (a) to (d) above are not satisfied in relation to any lettings, the trade shall not thereby be treated as failing to comply with this paragraph if those lettings and any other activity of a kind falling within sub-paragraph (2)(a) to (f) above do not, when taken together, amount to a substantial part of the trade.

In principle therefore when determining whether a parent company and its group meet the trading requirement, a trade of leasing ships would be an excluded activity if it failed to meet the requirements of paragraph 4(7)(a) to (d) of Schedule 28B to ICTA even if the degree of failure was insubstantial.

The way in which clauses 290(7), 303 and 305 interact changes the position.

The definition of "non-qualifying activities" in clause 290(7) refers to "excluded activities". Clause 303 defines "excluded activities" (based on the list in paragraph 4(2) of Schedule 28B to ICTA) and also lists provisions that supplement the definitions.

One of these provisions is clause 305 (excluded activities: leasing of ships), which provides a let-out for certain types of ship leasing. Clause 305(7) extends the let-out in the same way as the latter part of paragraph 4(7) of Schedule 28B to ICTA.

The effect of this is that the definition of non-qualifying activities in clause 290(7) includes all the circumstances in clause 305 including those in clause 305(7).

 
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Prepared: 8 December 2006