Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
109

(a)
if it is greater than the amount given by the formula set out below, be
reduced by that amount, and
(b)
in any other case, be withdrawn.

The formula is—

where—
5
R is the amount or value of the consideration received by the investor for
the shares, and
S is the savings rate for the tax year for which the EIS relief was obtained.
(4)
This section does not apply to a disposal of shares to which an amount of EIS
relief is attributable if—
10
(a)
the disposal was made by an individual (“A”) to another individual
(“B”), and
(b)
A and B were married to, or were civil partners of, each other and living
together at the time of the disposal.
(5)
Section 246 contains rules for determining which shares of any class are treated
15
as disposed of for the purposes of this section if the investor disposes of some
but not all the shares of that class which are held by the investor.
210
Cases where maximum EIS relief not obtained
(1)
If the investor’s liability to income tax is reduced for any tax year in respect of
any issue of shares and—
20
(a)
the amount of the reduction (“A”), is less than
(b)
the amount (“B”) which is equal to tax at the savings rate for that year
on the amount on which the investor claims EIS relief in respect of the
shares,

section 209(3) has effect in relation to a disposal of any of the shares as if the
25
amount or value referred to as “R” were reduced by multiplying it by the
fraction—
(2)
If section 158(1) and (2) applies in the case of any issue of shares as if part of the
issue had been issued in a previous tax year, subsection (1) has effect as if that
part and the remainder were separate issues of shares (and that part had been
30
issued on a day in the previous tax year).
(3)
If the amount of EIS relief attributable to any of the relevant shares has been
reduced before the EIS relief was obtained, the amount referred to in
subsection (1) as A is to be treated for the purposes of that subsection as the
amount that it would have been without that reduction.
35

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
110

(4)
Subsection (3) does not apply to a reduction of EIS relief by virtue of section
201(4) (attribution of EIS relief if there is a corresponding issue of bonus
shares).
211
Call options
(1)
This section applies if the investor grants an option which, if exercised, would
5
bind the investor to sell any of the relevant shares.
(2)
The grant of the option is treated for the purposes of section 209 as a disposal
of the shares to which the option relates.
(3)
Nothing in this section prejudices section 177 (no pre-arranged exits).
212
Put options
10
(1)
This section applies if, at any time in period A, a person grants the investor an
option which, if exercised, would bind the grantor to purchase any of the
relevant shares.
(2)
Any EIS relief attributable to the shares to which the option relates must be
withdrawn.
15
(3)
For the purposes of subsection (2) the shares to which an option relates are
those which, if—
(a)
the option were exercised immediately after the grant, and
(b)
any shares in the issuing company acquired by the investor after the
grant were disposed of immediately after being acquired,
20

would be treated for the purposes of section 209 as disposed of in pursuance of
the option.
Value received by investor
213
Value received by the investor
(1)
This section applies if the investor receives any value from the issuing
25
company at any time in period C relating to the relevant shares.
(2)
Any EIS relief attributable to the shares must—
(a)
if it is greater than the amount given by the formula set out below, be
reduced by that amount, and
(b)
in any other case, be withdrawn.
30

The formula is—

where—
R is the amount of the value received by the investor, and
S is the savings rate for the tax year for which the EIS relief was obtained.
(3)
This section is subject to the following sections—
35

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
111

(a)
section 214 (value received: receipts of insignificant value),
(b)
section 218 (value received where there is more than one issue of
shares),
(c)
section 219 (value received where part of share issue treated as made in
previous tax year),
5
(d)
section 220 (cases where maximum EIS relief not obtained),
(e)
section 221 (receipts of value by and from connected persons etc), and
(f)
section 222 (receipt of replacement value).

Sections 218 to 220 are to be applied in the order in which they appear in this
Part.
10
(4)
Value received is to be ignored, for the purposes of this section, to the extent to
which EIS relief attributable to the shares has already been withdrawn or
reduced on its account.
(5)
For the purposes of this section and sections 214 to 223, an individual who
acquires any relevant shares on such a transfer as is mentioned in section 245
15
(spouses or civil partners) is treated as the investor.
214
Value received: receipts of insignificant value
(1)
Section 213(2) does not apply if the receipt of value is a receipt of insignificant
value.

This is subject to subsection (2).
20
(2)
If—
(a)
value is received (“the relevant receipt”) by the investor from the
issuing company at any time in period C relating to the relevant shares,
(b)
the investor has received from the issuing company one or more
receipts of insignificant value at a time or times—
25
(i)
during that period, but
(ii)
not later than the time of the relevant receipt, and
(c)
the total amount of the value of the receipts within paragraph (a) and
(b) is not an amount of insignificant value,

the investor is treated for the purposes of this Chapter as if the relevant receipt
30
had been a receipt of an amount of value equal to that total amount.
(3)
A receipt does not fall within subsection (2)(b) if it has previously formed part
of a total amount falling within subsection (2)(c).
215
Meaning of “receipts of insignificant value”
(1)
This section applies for the purposes of section 214.
35
(2)
“A receipt of insignificant value” means a receipt of an amount of insignificant
value, that is, an amount of value which—
(a)
is not more than £1,000, or
(b)
if it is more than £1,000, is insignificant in relation to the amount
subscribed by the investor for the relevant shares.
40

This is subject to subsection (3).
(3)
If at any time in the period—
(a)
beginning 12 months before the issue of the relevant shares, and
(b)
ending at the end of the issue date,

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
112


repayment arrangements are in existence, no amount of value received by the
investor is treated as a receipt of insignificant value.
(4)
For this purpose “repayment arrangements” means arrangements which
provide for the investor to receive, or to be entitled to receive, any value from
the issuing company at any time in period C relating to the relevant shares.
5
(5)
For the purposes of this section—
(a)
the references to the investor include references to any person who at
any time in period C relating to the relevant shares is an associate of the
investor (whether or not that person is such an associate at the material
time), and
10
(b)
the reference in subsection (4) to the issuing company includes a
reference to a person who at any time in period C relating to the
relevant shares is connected with that company (whether or not that
person is so connected at the material time).
216
When value is received
15
(1)
This section applies for the purposes of sections 213 (value received by the
investor) and 218 (value received where there is more than one issue of shares).
(2)
The investor receives value from the issuing company at any time when the
issuing company—
(a)
repays, redeems or repurchases any of its share capital or securities
20
which belong to the investor or makes any payment to the investor for
giving up the investor’s right to any of the issuing company’s share
capital or any security on its cancellation or extinguishment,
(b)
repays, in pursuance of any arrangements for or in connection with the
acquisition of the shares in respect of which EIS relief is claimed, any
25
debt owed to the investor other than a debt which was incurred by the
company—
(i)
on or after the date of issue of those shares, and
(ii)
otherwise than in consideration of the extinguishment of a debt
incurred before that date,
30
(c)
makes to the investor any payment for giving up on its extinguishment
the investor’s right to any debt, other than a debt in respect of a
repayment of the kind mentioned in section 168(2)(a) or (f) (ignoring of
certain expenses or remuneration) or an ordinary trade debt,
(d)
releases or waives any liability of the investor to the issuing company
35
or discharges or undertakes to discharge any liability of the investor to
a third person,
(e)
makes a loan or advance to the investor which has not been repaid in
full before the issue of the shares in respect of which EIS relief is
claimed,
40
(f)
provides a benefit or facility for the investor,
(g)
transfers an asset to the investor for no consideration or for
consideration less than its market value or acquires an asset from the
investor for consideration greater than its market value, or
(h)
makes to the investor any other payment except—
45
(i)
a payment of a kind mentioned in any of the provisions of
section 168(2) (ignoring of certain payments), or
(ii)
a payment in discharge of an ordinary trade debt.

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
113

(3)
For the purposes of subsection (2)(d) the issuing company is to be treated as
having released or waived a liability if the liability is not discharged within 12
months of the time when it ought to have been discharged.
(4)
For the purposes of subsection (2)(e) the following is to be treated as if it were
a loan made by the issuing company to the investor—
5
(a)
the amount of any debt (other than an ordinary trade debt) incurred by
the investor to the issuing company, and
(b)
the amount of any debt due from the investor to a third party which has
been assigned to the issuing company.
(5)
The investor also receives value from the issuing company if—
10
(a)
in respect of ordinary shares held by the investor any payment or asset
is received in a winding up or in connection with a dissolution of the
company, and
(b)
the winding up or dissolution falls within section 182(4) (no tax
avoidance).
15
(6)
The investor also receives value from the issuing company if any person who
would, for the purposes of section 163, be treated as connected with the
company—
(a)
purchases any of its share capital or securities which belong to the
investor, or
20
(b)
makes any payment to the investor for giving up any right in relation
to any of the company’s share capital or securities.
(7)
If because of the investor’s disposal of shares in a company any EIS relief
attributable to those shares is withdrawn or reduced under section 209, the
investor is not to be treated as receiving value from the company in respect of
25
the disposal.
(8)
The investor is not to be treated as receiving value from the issuing company
merely because of the payment to the investor, or any associate of the investor,
of any remuneration for services rendered to that company as a director if the
remuneration is reasonable remuneration.
30
(9)
Section 167(3) (director also an employee) applies for the purposes of
subsection (8) as it applies for the purposes of section 167, and the reference in
that subsection to the payment of remuneration includes the provision of any
benefit or facility.
(10)
In this section “ordinary trade debt” means any debt for goods or services
35
supplied in the ordinary course of a trade or business if any credit given—
(a)
is for not more than 6 months, and
(b)
is not longer than that normally given to customers of the person
carrying on the trade or business.
217
The amount of value received
40
In a case falling within a provision listed in column 1 of the following table, the
amount of value received for the purposes of sections 213 and 218 is given by
the corresponding entry in column 2 of the table.

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
114

Provision
The amount of value received

Section 216(2)(a), (b) or
The amount received by the investor or, if

(c)
greater, the market value of the shares,

securities or debt

Section 216(2)(d)
The amount of the liability

5

Section 216(2)(e)
The amount of the loan or advance, less the

amount of any repayment made before the

issue of the relevant shares

Section 216(2)(f)
The cost to the issuing company of

providing the benefit or facility, less any

10

consideration given for it by the investor

Section 216(2)(g)
The difference between the market value of

the asset and the consideration (if any)

given for it

Section 216(2)(h)
The amount of the payment

15

Section 216(5)
The amount of the payment or the market

value of the asset

Section 216(6)
The amount received by the investor or, if

greater, the market value of the shares or

securities

20
218
Value received where there is more than one issue of shares
(1)
This section applies if—
(a)
two or more issues of shares in the issuing company have been made to
the investor which include shares in respect of which the investor
obtains EIS relief, and
25
(b)
value is received by the investor at any time in the applicable periods
for two or more of those issues.
(2)
Section 213(2) has effect in relation to the shares included in each of the issues
referred to in subsection (1)(b) as if the amount of value referred to as “R” were
reduced by multiplying it by the fraction—
30

where—

A is the amount on which the investor obtains EIS relief in respect of the
shares included in the issue in question, and
B is the sum of that amount and the corresponding amount or amounts in
35
respect of the other issue or issues.

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
115

(3)
For the purposes of subsection (1) “the applicable period” for an issue of shares
is period C in relation to those shares.
219
Value received where part of share issue treated as made in previous tax year
(1)
This section applies if—
(a)
section 213(2) applies to an issue of shares, and
5
(b)
section 158(1) and (2) (form and amount of EIS relief) applies in the case
of that issue as if part of the issue had been issued in a previous tax year.
(2)
This subsection explains how the calculation under section 213(2) is to be
made.
Step 1
10

Apportion the amount referred to as “R” between the tax year in which the
shares were issued and the previous tax year by multiplying that amount by
the fraction—

where—
A is the amount on which the investor obtains EIS relief in respect of the
15
shares treated as issued in the tax year in question, and
B is the sum of that amount and the corresponding amount in respect of
the shares treated as issued in the other tax year.
Step 2

In relation to each of the amounts (“R1” and “R2”) so apportioned to the two
20
tax years, calculate the amounts (“X1” and “X2”) that would be given by the
formula if there were separate issues of shares in those tax years.

In calculating amounts X1 and X2, apply section 220 if appropriate but do not
apply section 218.
Step 3
25

Add amounts X1 and X2 together.

The result is the required amount.
220
Cases where maximum EIS relief not obtained
(1)
If the investor’s liability to income tax is reduced for any tax year in respect of
any issue of shares and—
30
(a)
the amount of the reduction (“A”), is less than
(b)
the amount (“B”) which is equal to income tax at the savings rate for
that year on the amount on which the investor claims EIS relief in
respect of the shares,