House of Commons - Explanatory Note
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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. They both include in subsection (7) a definition of "non-qualifying activities" which is identical to that in clause 181(8) and a definition of "excluded activities" which by cross reference to clause 192 is identical to that applying for the purposes of clause 181.

The change made in clause 194 is, accordingly, replicated in the definition of "non-qualifying activities" for the purposes of clause 137 of this Bill and section 576B of ICTA. See also Schedule 2 Part 6 (excluded activities: leasing of ships).

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 44: EIS and share loss relief: companies controlled by the issuing company must be its own qualifying subsidiaries: clauses 139 and 185, Schedule 1 (section 576D of ICTA) and Schedule 2 Part 6 (the control and independence requirement)

This change makes it explicit that during period B the issuing company cannot control (alone or with connected persons) companies which are not qualifying subsidiaries of the issuing company.

EIS

Section 293 of ICTA contains various conditions that the issuing company must meet if it is to be a "qualifying company" in relation to an issue of shares. Section 293(8)(a) requires that throughout the relevant period the issuing company must not:

control (whether on its own or together with any person connected with it) any company which is not a qualifying subsidiary ..

Despite the absence of explicit words to that effect, the context of section 293 of ICTA indicates that section 293(8)(a) is referring to a qualifying subsidiary of the issuing company.

The reference to relevant period in section 293(8)(a) of ICTA is also indicative of this interpretation.

Section 293(3) of ICTA defines "qualifying subsidiary" as follows (emphasis added):

in relation to a company, means a subsidiary of a kind which that company may hold by virtue of section 308.

This is in line with section 312(1) of ICTA, which defines a subsidiary as follows (emphasis added):

in relation to any company, (except in the expression "51% subsidiary" or where otherwise defined) means a subsidiary of that company of a kind which that company may hold under section 308.

Section 308 of ICTA is framed in terms of a qualifying company and a relevant period as it provides (emphasis added):

A qualifying company may, in the relevant period, have..

So although a qualifying subsidiary is defined as a subsidiary in relation to a company which is not identified, the reference to "the relevant period" in section 293(8) of ICTA links the qualifying subsidiary here to the company (the issuing company in the rewritten clauses) which is a qualifying company if it meets the requirements in section 293 of ICTA.

There is a similar requirement in relation to "the relevant company", the equivalent in this context to the issuing company in the venture capital trust (VCT) scheme. In paragraph 9(1)(a) of Schedule 28B to ICTA, the Schedule dealing with the meaning of qualifying holdings for VCTs, the wording is (emphasis added) that the relevant company must not be a company which:

controls (whether on its own or together with any person connected with it) any company that is not a qualifying subsidiary of the relevant company.

The form EIS 1 which contains the company statement, (required under section 306(3) of ICTA) interprets section 293(8)(b) of that Act to mean that the qualifying subsidiary is a qualifying subsidiary of the company.

This interpretation of section 293(8)(b) of ICTA, that the qualifying subsidiary is a qualifying subsidiary of the issuing company, is reflected in clause 185(1)(a).

Share loss relief

Clause 139, relating to share loss relief under Chapter 6 of Part 4 of this Bill, and new section 576D of ICTA introduced by Schedule 1 of this Bill relating to share loss relief under Chapter 5A of Part 13 of ICTA, correspond to clause 185, with modifications.

The change in clause 185(1)(a) is, accordingly, replicated in clause 139(1)(a) of this Bill and in section 576D(1)(a) of ICTA. See also Schedule 2 Part 6 (the control and independence requirement).

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

Change 45: EIS, VCT and share loss relief: excluded activities: wholesale and retail distribution: clauses 193 and 304 and Schedule 2 Parts 6 and 8 (excluded activities: wholesale and retail distribution)

This change substitutes references to "the company" with references to "the trader" in the EIS and VCT provisions that define an ordinary trade of wholesale and retail distribution. The new wording makes it clear that these provisions apply whether or not the person holding the goods is a company. In principle this is a change that could be adverse to a taxpayer, but it is unlikely that circumstances have arisen, or will arise, where this point is in question.

EIS

Section 297 of ICTA defines a "qualifying trade" and lists a number of activities that may prevent a trade being a qualifying trade.

Section 297(3) of ICTA, which operates for the purpose of section 297(2)(b), interprets an ordinary trade of wholesale or retail distribution. Section 297(3)(d) of ICTA refers to "the trader" in each of its sub-paragraphs (i), (ii), (iii), (iv), (vi) and (viii) that deal with identity. The reference in section 297(3)(d)(iii) to the "case of a trade carried on by a company" concerns a distinct subset of "the trader".

Section 297(3)(c)(ii) is an exception to the rest of section 297(3) of ICTA because it refers to goods held by the company:

A substantial proportion of goods is held by the company for a period..

This wording could restrict the application of section 297(2)(g) of ICTA to section 297(3)(c)(ii) of that Act.

Section 297(2)(g) of ICTA concerns the activity of:

providing services or facilities for any trade carried on by another person .. which consists to any substantial extent of activities within any of paragraphs (a) to (fe) above and in which a controlling interest is held by a person who also has a controlling interest in the trade carried on by the company ..

The reference in this sub-paragraph to a "trade carried on by another person" means that section 297(2)(g) of ICTA is clearly applicable in the case where the person carrying on that trade is not a company. But it is not as clearly applicable to a non-corporate person in the particular circumstances of section 297(3)(c)(ii) of ICTA.

In clause 193(5)(b) the rewrite of section 297(3)(c)(ii) of ICTA is as follows:

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.

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 of Schedule 28B to ICTA defines a "qualifying trade" and lists a number of activities that may prevent a trade being a qualifying trade. The list includes in paragraph 4(2)(b) the activity of:

dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution ..

Paragraph 4(3) and (4) of Schedule 28B to ICTA interpret an ordinary trade of wholesale or retail distribution. Paragraph 4(4) refers to "that person" in sub-paragraphs (a) to (h): "that person" is the person who carries on the trade. The reference in paragraph 4(4)(c) to the "case of a trade carried on by a company" concerns a distinct subset of "the trader".

Paragraph 4(3)(c)(ii) of Schedule 28B to ICTA is an exception to paragraph 4(4) of that Schedule because it refers to goods held by the company:

A substantial proportion of goods is held by the company for a period..

This wording could restrict the application of paragraph 4(2)(f) of Schedule 28B to ICTA to paragraph 4(3)(c)(ii) of that Schedule.

Paragraph 4(2)(f) of Schedule 28B to ICTA concerns the activity of:

providing services or facilities for any such trade carried on by another person .. (which) consists to a substantial extent, in activities within any of paragraphs (a) to (ee) above and is a trade in which a controlling interest is held by a person who also has a controlling interest in the trade carried on by the company providing the services or facilities.

The reference in this section to a "trade carried on by another person" means that paragraph 4(2)(f) of Schedule 28B to ICTA is clearly applicable in the case where the person carrying on that trade is not a company. But it is not as clearly applicable to a non-corporate person in the particular circumstances of paragraph 4(3)(c)(ii) of that Schedule.

In clause 304(5)(b) the rewrite of paragraph 4(3)(c)(ii) of Schedule 28B to ICTA is as follows:

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.

Share loss relief

Clauses 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. They both include in subsection (7) a definition of "non-qualifying activities" which is identical to that in clause 181(8) and a definition of "excluded activities" which by cross reference to clause 192 is identical to that applying for the purposes of clause 181.

The change made in clause 193 is, accordingly, replicated in the definition of "non-qualifying activities" for the purposes of clause 137 of this Bill and section 576B of ICTA. See also Schedule 2 Part 6 (excluded activities: wholesale and retail distribution).

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

Change 46: EIS and share loss relief: excluded activities: the meaning of trade in relation to the provision of services or facilities for another business: clause 199 and Schedule 2 Part 6 (excluded activities: provision of services or facilities for another business)

This change simplifies the application of the definition of "trade" in section 298(3) of ICTA.

EIS

Section 297 of ICTA is concerned with the meaning of a qualifying trade. Section 298 of ICTA contains provisions that supplement section 297 of that Act. In particular, section 298(3) of ICTA contains an intricate definition of trade:

References in this section and in section 297 to a trade shall be construed without regard to so much of the definition of "trade" in section 832(1) as relates to adventures or concerns in the nature of trade; but the foregoing provisions do not affect the construction of references in section 297(2)(g) or subsection (1) above to a trade carried on by a person other than the company and those references shall be construed as including a reference to any business, profession or vocation.

Section 297(2) of ICTA lists a number of activities (called "excluded activities" in the draft rewritten clauses) that may prevent a trade being a qualifying trade.

Section 297(2)(g) of ICTA concerns services provided to other businesses and the activities it refers to are:

providing services or facilities for any trade carried on by another person .. which consists to any substantial extent of activities within any of paragraphs (a) to (fe) above and in which a controlling interest is held by a person who also has a controlling interest in the trade carried on by the company ..

Section 298(1) of ICTA gives the meaning of a controlling interest in a trade.

So the definition of trade in section 298(3) of ICTA differs depending on whether references are to "the company" or "to a person other than the company". "The company" here is the company which provides the services or facilities.

The way the definition applies has been simplified. The meaning of "trade" has been rewritten separately in clause 189(2) (meaning of qualifying trade) as:

References in this section and section 192 to 198 to a trade are to be read without regard to the definition of "trade" in section 923.

Clause 923 rewrites section 832(1) of ICTA.

Clause 189(2) does not apply to clause 199 which rewrites sections 297(2)(g) and 298(1) of ICTA. So clause 923 applies to define the reference to "trade" in clause 199(5)(b). There is no differentiation in clause 199 between "a person other than the company" and "the company".

In clause 199 there are consistent references to "business" rather than "trade". This includes references to "the business carried on by the company". Paragraph 33 of Schedule 15 to FA 2000 (corporate venturing scheme) has been used as a model for this.

Instead therefore of interpreting a trade as including a reference to "any business, profession or vocation", the approach in clause 199(5)(b) is the other way round:

"business" includes any trade, profession or vocation.

As with the application of clause 923 to "trade" in clause 199(5)(b), there is here no differentiation between "the company" and "a person other than a company"; but here it is in relation to the interpretation that (in effect) trade encompasses a business, profession and vocation.

It appears that this change can have no effect. The "trade carried on by the company" in section 297(2)(g) of ICTA is the trade of providing services or facilities. In whatever way "trade" is interpreted in relation to the provider of the services or facilities in clause 199, the activity of the provider, (whether this is the issuing company or a qualifying subsidiary) is required to be a qualifying trade for the other purposes of Chapter 4 of Part 5 of this Bill.

The change is similar but not identical to Change 64 in clause 310 (the venture capital trust scheme). The changes get rid of an extra layer of complexity and have little or no practical effect.

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. They both include in subsection (7) a definition of "non-qualifying activities" which is identical to that in clause 181(8) and a definition of "excluded activities" which by cross reference to clause 192 is identical to that applying for the purposes of clause 181.

The change made in clause 199 is, accordingly, replicated in the definition of "non-qualifying activities" for the purposes of clause 137 of this Bill and section 576B of ICTA. See also Schedule 2 Part 6 (excluded activities: provision of services or facilities for another business).

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

Change 47: EIS: HMRC to give notice of decisions on compliance certificates: clause 204

This change requires an officer of Revenue and Customs to notify his or her decision to a company that requests permission to issue compliance certificates to investors. The change is in line with practice.

Section 306(4) of ICTA prevents a company from issuing a compliance certificate without the permission of an officer of Revenue and Customs. Section 306(10) allows the company to appeal to an independent tribunal against the refusal by an officer of Revenue and Customs to give permission. But there is nothing in section 306 obliging an officer of Revenue and Customs to tell the company whether or not permission is given.

Clause 204(5) sets out that:

If an officer of Revenue and Customs—

(a) has been requested to give or renew an authority to issue a compliance certificate, and

(b) has decided whether or not to do so,

the officer must give notice of the officer's decision to the issuing company.

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

Change 48: EIS: "gross amount" of EIS relief used to determine whether maximum relief was obtained and adjustment where bonus shares issued: clauses 210, 220 and 229

This change makes it explicit that the "gross amount" of EIS relief is used in determining whether the investor has obtained full relief on the amount subscribed for the relevant shares. That determination may affect the rate at which EIS relief is reduced because of matters such as a receipt of value by the investor.

In certain cases, section 299(4) of ICTA reduces the amount of value that is used to calculate the withdrawal or reduction of EIS relief that was obtained by an individual. The cases are where the claim for EIS relief resulted in the individual obtaining a tax reduction (A) of less than [the amount in respect of which relief was claimed multiplied by the lower rate for the tax year in question] (B).

Section 312(4)(a)(ii) of ICTA provides that for EIS the references to the reduction of relief attributable to any shares includes a reference:

    where no relief has yet been given, to the reduction of the amount which apart from the provision would be the relief.

Section 312(4)(a)(ii) means that EIS relief can be "netted off" in an assessment if some reduction of EIS relief occurs before the assessment is final.

For example, assume the investor is eligible for EIS relief on the issue of shares for which £20,000 was subscribed and that the investor has received value of £5,000 from the issuing company. That value of £5,000 may have been received before the investor's self-assessment (which includes a claim for EIS relief on the subscription of £20,000) is final (or even submitted). Assume also that the investor has a tax liability, ignoring the claim for EIS relief, which is greater than £20,000 multiplied by the lower rate of tax (say 20%) for the year in which the shares are issued. The investor will obtain a "net amount" of EIS relief of £3,000 in the self-assessment.

That relief is composed of a "gross amount" of relief of £4,000 (being the £20,000 subscription multiplied by 20%) less a reduction of that relief of £1,000 (being £5,000 value received multiplied by 20%). The change clarifies that it is the gross amount of £4,000 that must be considered in deciding whether the investor has had relief at the maximum rate and therefore whether section 299(4) of ICTA applies.

If it were not the case that the gross amount of relief is considered for section 299(4) of ICTA then different results could follow according to whether a receipt of value occurred before or after the investor's self-assessment was finalised.

Different results could also follow for investors in a single issue according to the dates on which their individual self-assessments were final for the year concerned.

Finally, in the example given above the 20% rate of reduction to apply to the £5,000 receipt was found by dividing the gross relief (£4,000) by the amount in respect of which relief had been given (£20,000). There would be circularity if the rate of reduction to apply depended on some figure for net relief. That is because the rate of reduction to apply to the £5,000 must be known before one can calculate any figure for net relief.

Clauses 210(3), 220(2) and 229(3) make explicit that regard is to be had to the gross amount of EIS relief in deciding whether or not to multiply value-received etc by the formula in those clauses.

For one special case, each of clauses 210(4), 220(3) and 229(4) provide an exception to the subsection that it follows. That special case is where EIS relief attributable to the relevant shares is reduced and reattributed because of a bonus issue and not because of a receipt of value.

There are corresponding explicit provisions in Schedule 15 to FA 2000 (corporate venturing scheme) - at paragraphs 46(5) and (6) (disposal of shares), 52(2) and (3) (cases where maximum investment relief not obtained) and 56(7) and (8) (value received by other persons).

This change aligns the enterprise investment scheme more closely with the corporate venturing scheme. It will prevent future contentions that regard should be had to something other than the gross amount of EIS relief.

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

Change 49: EIS: value received or repayment of share capital reduces EIS relief that was given for two separate tax years: clauses 219 and 228

This change provides detailed steps to calculate the withdrawal or reduction of EIS relief in cases where the relief being withdrawn or reduced was obtained for two separate tax years. It applies where the investor receives an amount of value or where a repayment etc of share capital is made to someone other than the investor.

Receipt of value by the investor

Section 300 of ICTA withdraws or reduces EIS relief if the investor receives an amount of value from the issuing company within a certain period. Section 300(1A)(a) says that the amount of any reduction is the amount given by section 300(1B).

The reduction given by section 300(1B) is clear in the simplest case (i) where full EIS relief was obtained and (ii) where that EIS relief was obtained for the year in which shares were issued. In such a case, section 300(1B) of ICTA effectively gives an amount of:

    where

         R     is the value received by the investor

         L     is the lower rate of tax for the year in which the share issue took place.

For more complicated cases, section 300(1B) of ICTA says:

    and section 299(4) above applies for the purposes of this subsection as it applies for the purposes of [section 299(2)].

Those words are clear enough to deal with the case where the investor obtains EIS relief for the year in which the shares were issued but at a rate lower than L.

But those words are not clear as to how section 300(1B) of ICTA deals with cases where EIS relief was obtained both for the tax year in which the shares were issued and for the preceding tax year (carry back cases). In carry back cases, different lower tax rates might apply for the two years involved (and the investor may not have obtained maximum relief for one or both of the years involved).

Section 300(1B) of ICTA contains one indication that it is meant to cater for carry back cases. That indication is the reference in section 300(1B) to L being the lower rate of tax for the tax year:

    for which the relief was given.

There is a second indication that section 300(1B) of ICTA is meant to cater for carry back cases. In the context of an investor treating part of a share issue as having taken place in the previous tax year, section 289B(5) of ICTA says

    section[s] 299(4) ..shall have effect as if that part and the remainder were separate issues.

That second indication is (a) the reference in section 300(1B) of ICTA (quoted earlier) to section 299(4) taken with (b) the reference in section 289B(5) of ICTA to section 299(4) applying as if the issue to the investor was two deemed separate issues in the years concerned. It is unlikely that R is to be used in the withdrawal or reduction calculation for both those deemed issues. That would "double-count" the value received. But none of section 300(1B), section 299(4) or section 289B(5) has an explicit apportionment of R between the two deemed issues.

Clause 219 of this Bill deals explicitly with cases where EIS relief, obtained for two separate years, is reduced as a result of value received in a certain period by the investor. This explicit treatment prevents an alternative construction being put forward (whether adverse or favourable to taxpayers) as to what happens in such cases.

Repayment etc of share capital to someone other than the investor

Section 303 of ICTA withdraws or reduces EIS relief from the investor in cases where someone other than the investor receives certain repayments etc of share capital within a certain period.

In this case section 303(1C) also refers (like section 300(1B)) both to:

    lower rate for the year .. for which the relief was given

and:

    section 299(4) applies for the purposes of this subsection as it applies for the purposes of [section 299(2)].

Carry back cases may involve different lower tax rates for the two years for which the investor obtains EIS relief (and the investor may have not have obtained maximum relief for one or both of the years involved).

Clause 228 of this Bill in relation to repayments etc of share capital to someone other than the investor, also deals explicitly with carry back cases. This explicit treatment prevents an alternative construction (whether adverse or favourable to taxpayers) being put forward as to what happens in such cases.

 
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Prepared: 8 December 2006