Income Tax Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
116


section 213(2) has effect in relation to any value received as if the amount
referred to as “R” were reduced by multiplying it by the fraction—
(2)
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
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amount that it would have been without that reduction.
(3)
Subsection (2) does not apply to a reduction of EIS relief by virtue of section
201(4) (attribution of EIS relief where there is a corresponding issue of bonus
shares).
221
Receipts of value by and from connected persons etc
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In sections 213, 214 and 216 to 218—
(a)
any reference to a payment or transfer to the investor includes a
reference to a payment or transfer made to the investor indirectly or to
the investor’s order or for the investor’s benefit,
(b)
any reference to the investor includes a reference to an associate of the
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investor, and
(c)
any reference to the issuing company includes a reference to a person
who at any time in period A relating to the relevant shares is connected
with that company (whether or not that person is so connected at the
material time).
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222
Receipt of replacement value
(1)
If—
(a)
any EIS relief attributable to the relevant shares would, in the absence
of this section, be reduced or withdrawn under section 213 because of
a receipt of value within section 216(2) or (6) (“the original value”),
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(b)
the original supplier receives value (“the replacement value”) from the
original recipient and the receipt is a qualifying receipt, and
(c)
the amount of the replacement value is at least the amount of the
original value,

section 213 does not, because of the receipt of the original value, have effect to
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reduce or withdraw the EIS relief.

This is subject to section 223(1) and (2).
(2)
For the purposes of this section—
“the original recipient” means the person who receives the original value,
“the original supplier” means the person from whom that value was
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received.
(3)
If the amount of the original value is, by virtue of section 218, treated as
reduced for the purposes of section 213(2) as it applies in relation to the
relevant shares in question, the reference in subsection (1)(c) to the amount of

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
117

the original value is to be read as a reference to the amount of that value
ignoring the reduction.
(4)
A receipt of the replacement value is a qualifying receipt for the purposes of
subsection (1) if it arises—
(a)
because of the original recipient doing one or more of the following—
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(i)
making a payment to the original supplier, other than a
payment within paragraph (c) or a payment to which
subsection (5) applies,
(ii)
acquiring any asset from the original supplier for a
consideration the amount or value of which is more than the
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market value of the asset,
(iii)
disposing of any asset to the original supplier for no
consideration or for a consideration the amount or value of
which is less than the market value of the asset,
(b)
if the receipt of the original value was within section 216(2)(d), because
15
of an event the effect of which is to reverse the event which constituted
the receipt of the original value, or
(c)
if the receipt of the original value was within section 216(6), because of
the original recipient repurchasing the share capital or securities in
question, or (as the case may be) re-acquiring the right in question, for
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a consideration the amount or value of which is at least the amount of
the original value.
(5)
This subsection applies to—
(a)
any payment for any goods, services or facilities, provided (whether in
the course of trade or otherwise) by—
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(i)
the original supplier, or
(ii)
any other person who, at any time in period C relating to the
relevant shares, is an associate of, or is connected with, that
supplier (whether or not the other person is such an associate,
or is so connected, at the material time),
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which is reasonable in relation to the market value of those goods,
services or facilities,
(b)
any payment of any interest which represents no more than a
reasonable commercial return on any money lent to—
(i)
the original recipient, or
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(ii)
any person who, at any time in period C relating to the relevant
shares, is an associate of that recipient (whether or not the
person is such an associate at the material time),
(c)
any payment for the acquisition of an asset which does not exceed its
market value,
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(d)
any payment, as rent for any property occupied by—
(i)
the original recipient, or
(ii)
any person who, at any time in period C relating to the relevant
shares, is an associate of that recipient (whether or not the
person is such an associate at the material time),
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of an amount not exceeding a reasonable and commercial rent for the
property,
(e)
any payment in discharge of an ordinary trade debt, and
(f)
any payment for shares in or securities of any company in
circumstances that do not fall within subsection (4)(a)(ii).
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Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
118

(6)
For the purposes of this section, the amount of the replacement value is—
(a)
in a case within paragraph (a) of subsection (4), the sum of—
(i)
the amount of any payment within sub-paragraph (i) of that
paragraph, and
(ii)
the difference between the market value of any asset to which
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sub-paragraph (ii) or (iii) of that paragraph applies and the
amount or value of the consideration (if any) received for it,
(b)
in a case within subsection (4)(b), the same as the amount of the original
value, and
(c)
in a case within subsection (4)(c), the amount or value of the
10
consideration received by the original supplier.

Section 217 applies for the purpose of determining the amount of the original
value.
(7)
In this section—
(a)
any reference to a payment to a person (however expressed) includes a
15
reference to a payment made to the person indirectly or to the person’s
order or for the person’s benefit, and
(b)
“ordinary trade debt” has the meaning given by section 216(10).
223
Section 222: supplementary
(1)
The receipt of the replacement value by the original supplier is ignored for the
20
purposes of section 222(1) to the extent to which it has previously been set
(under that section) against a receipt of value to prevent any reduction or
withdrawal of EIS relief under section 213.
(2)
The receipt of the replacement value by the original supplier (“the event”) is
ignored for the purposes of section 222 if—
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(a)
the event occurs before period C relating to the relevant shares,
(b)
if the event occurs after the time the original recipient receives the
original value, it does not occur as soon after that time as is reasonably
practicable in the circumstances, or
(c)
if an appeal has been brought by the investor against an assessment to
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withdraw or reduce any EIS relief attributable to the relevant shares
because of the receipt of the original value, the event occurs more than
60 days after the day on which the amount of relief which falls to be
withdrawn has been finally determined.

But nothing in section 222 or this section requires the replacement value to be
35
received after the original value.
(3)
This subsection applies if—
(a)
the receipt of the replacement value by the original supplier is a
qualifying receipt for the purposes of section 222(1), and
(b)
in consequence of the receipt any receipts of value are ignored for the
40
purposes of section 213 as that section applies in relation to the shares
in question or any other shares subscribed for by the investor, and
(c)
the event which gives rise to the receipt is (or includes) a subscription
for shares by—
(i)
the investor, or
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(ii)
any person who at any time in period C relating to the relevant
shares is an associate of the investor (whether or not the person
is such an associate at the material time).

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
119

(4)
If either of the following applies—
(a)
subsection (3), and
(b)
paragraph 13C(3) of Schedule 5B to TCGA 1992 (which makes
corresponding provision in relation to relief under that Schedule in
respect of re-investment under EIS),
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the person who subscribes for the shares is not to be eligible for any EIS relief
in relation to those shares or any other shares in the same issue.
(5)
In this section “the original recipient”, “the original supplier” and “replacement
value” have the same meaning as in section 222.
Repayments etc of share capital to other persons
10
224
Repayments etc of share capital to other persons
(1)
This section applies if any EIS relief is attributable to shares held by an
individual and, at any time in period C, the issuing company or any
subsidiary—
(a)
repays, redeems or repurchases any of its share capital which belongs
15
to any member other than—
(i)
the individual, or
(ii)
a person who falls within subsection (4), or
(b)
makes any payment to any such member for giving up the member’s
right to any of the share capital of the company or subsidiary on its
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cancellation or extinguishment.
(2)
The EIS relief 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.
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The formula is—

where—
R is the amount received by the member, 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—
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(a)
section 225 (insignificant repayments ignored for the purposes of this
section),
(b)
section 226 (amount of repayments etc where there is more than one
issue of shares),
(c)
section 227 (single issue affecting more than one individual),
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(d)
section 228 (single issue treated as made partly in previous tax year),
(e)
section 229 (maximum relief not obtained for share issue),
(f)
section 230 (repayment of authorised minimum within 12 months), and
(g)
section 231 (restriction on withdrawal of relief).

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
120


Sections 226 to 229 are to be applied in the order in which they appear in this
Part.
(4)
A person falls within this subsection if the repayment—
(a)
causes any EIS relief attributable to that person’s shares in the issuing
company to be withdrawn or reduced by virtue of—
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(i)
section 209 (disposal of shares), or
(ii)
section 216(2)(a) (receipt of value by virtue of repayment of
share capital etc),
(b)
causes any investment relief under Schedule 15 to FA 2000 (the
corporate venturing scheme) attributable to that person’s shares in the
10
issuing company to be withdrawn or reduced by virtue of—
(i)
paragraph 46 of that Schedule (disposal of shares), or
(ii)
paragraph 49(1)(a) of that Schedule (receipt of value by virtue of
repayment of share capital etc), or
(c)
gives rise to a qualifying chargeable event within the meaning of
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paragraph 14(4) of Schedule 5B to TCGA 1992 (EIS: deferral relief) in
respect of that person’s shares in the issuing company.
(5)
A repayment is treated as having the effect mentioned in subsection (4)(a), (b)
or (c) if it would have that effect were it not a receipt of insignificant value for
the purposes of whichever of the following is applicable—
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(a)
section 213,
(b)
paragraph 47 of Schedule 15 to FA 2000, and
(c)
paragraph 13 of Schedule 5B to TCGA 1992.
(6)
A repayment is to be ignored, for the purposes of this section, to the extent to
which EIS relief attributable to any shares has already been withdrawn or
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reduced on its account.
(7)
In this section and sections 225 to 231—
(a)
“repayment” means a repayment, redemption, repurchase or payment
mentioned in subsection (1)(a) or (b), and
(b)
references to a subsidiary of a company are references to a company
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which, at any time in period A relating to the shares in question, is a
51% subsidiary of the company, whether or not it is such a subsidiary
at the time of the repayment.
225
Insignificant repayments ignored for purposes of section 224
(1)
A repayment is ignored for the purposes of section 224 (repayments etc of
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share capital to other persons) if both—
(a)
the market value of the shares to which it relates (“the target shares”)
immediately before the event occurs, and
(b)
the amount received by the member in question,

are insignificant in relation to the market value of the remaining issued share
40
capital of the issuing company (or, as the case may be, the subsidiary)
immediately after the event occurs.

This is subject to subsection (3).
(2)
For the purposes of subsection (1) it is assumed that the target shares are
cancelled at the time the repayment is made.
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Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 6 — Withdrawal or reduction of EIS relief
121

(3)
Subsection (1) does not apply if repayment arrangements are in existence 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.
(4)
For this purpose “repayment arrangements” means arrangements which
5
provide—
(a)
for a repayment by the issuing company or any subsidiary of that
company (whether or not it is such a subsidiary at the time the
arrangements are made), or
(b)
for anyone to be entitled to such a repayment,
10

at any time in period C relating to the relevant shares.
226
Amount of repayments etc where there is more than one issue of shares
(1)
This section applies if, in relation to the same repayment, section 224(2) applies
to EIS relief attributable to two or more issues of shares.
(2)
Section 224(2) has effect in relation to the shares included in each of those issues
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as if the amount referred to as “R” were reduced by multiplying it by the
fraction—

where—
A is the amount on which EIS relief was obtained by the individuals in
respect of shares which are included in the issue and to which EIS relief
20
is or, but for section 224(2)(b), would be attributable, and
B is the sum of that amount and the corresponding amount or amounts in
respect of the other issue or issues.
227
Single issue affecting more than one individual
(1)
This section applies if, in relation to the same repayment, section 224(2) applies
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to EIS relief attributable to shares held by two or more individuals.
(2)
Section 224(2) has effect in relation to each individual as if the amount referred
to as “R” were reduced by multiplying it by the fraction—

where—
A is the amount on which the individual obtains EIS relief in respect of the
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shares to which EIS relief is or, but for section 224(2)(b), would be
attributable, and
B is the sum of that amount and the corresponding amount or amounts on
which the other individual or individuals obtain EIS relief in respect of
such shares.
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