Income Tax Bill

House of Commons

Session 2006 - 07
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Income Tax Bill

Income Tax Bill
Part 6 — Venture capital trusts
Chapter 4 — Qualifying holdings
163

Definitions
300
Meaning of “qualifying trade”
(1)
For the purposes of this Chapter, a trade is a qualifying trade if—
(a)
it is conducted on a commercial basis and with a view to the realisation
of profits, and
5
(b)
it does not consist wholly or as to a substantial part in the carrying on
of excluded activities (see sections 303 to 310).
(2)
The carrying on of any activities of research and development from which it is
intended—
(a)
that a trade will be derived which—
10
(i)
will be a qualifying trade, and
(ii)
will be carried on wholly or mainly in the United Kingdom, or
(b)
that a trade will benefit which—
(i)
is or will be a qualifying trade, and
(ii)
is or will be carried on wholly or mainly in the United Kingdom,
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is to be treated as the carrying on of a qualifying trade.
(3)
But preparing to carry on such activities does not count as preparing to carry
on a qualifying trade.
(4)
References in this section to a trade are to be read without regard to the
definition of “trade” in section 989.
20
301
Meaning of “qualifying 90% subsidiary”
(1)
For the purposes of this Chapter, a company (“the subsidiary”) is a qualifying
90% subsidiary of the relevant company at any time when the following
conditions are met—
(a)
the relevant company possesses at least 90% of the issued share capital
25
of, and at least 90% of the voting power in, the subsidiary,
(b)
the relevant company would—
(i)
in the event of a winding up of the subsidiary, or
(ii)
in any other circumstances,

be beneficially entitled to receive at least 90% of the assets of the
30
subsidiary which would then be available for distribution to equity
holders of the subsidiary,
(c)
the relevant company is beneficially entitled to receive at least 90% of
any profits of the subsidiary which are available for distribution to
equity holders of the subsidiary,
35
(d)
no person other than the relevant company has control of the
subsidiary, and
(e)
no arrangements are in existence by virtue of which any of the
conditions in paragraphs (a) to (d) would cease to be met.
(2)
Subsections (3), (4) and (5) of section 302 apply in relation to the conditions in
40
subsection (1)—
(a)
as they apply in relation to the conditions in subsection (2) of that
section, but
(b)
with the omission from subsection (5) of “or (as the case may be) by
another subsidiary of that company”.
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Income Tax Bill
Part 6 — Venture capital trusts
Chapter 4 — Qualifying holdings
164

(3)
For the purposes of subsection (1)—
(a)
the persons who are equity holders of the subsidiary, and
(b)
the percentage of the assets of the subsidiary to which an equity holder
would be entitled,

are to be determined in accordance with paragraphs 1 and 3 of Schedule 18 to
5
ICTA.
(4)
In making that determination—
(a)
references in paragraph 3 of that Schedule to the first company are to
be read as references to an equity holder, and
(b)
references in that paragraph to a winding up are to be read as including
10
references to any other circumstances in which assets of the subsidiary
are available for distribution to its equity holders.
302
Meaning of “qualifying subsidiary”
(1)
For the purposes of this Chapter, a company (“the subsidiary”) is a qualifying
subsidiary of the relevant company if the following conditions are met.
15
(2)
The conditions are that—
(a)
the subsidiary is a 51% subsidiary of the relevant company,
(b)
no person other than the relevant company, or another of its
subsidiaries, has control of the subsidiary, and
(c)
no arrangements are in existence by virtue of which either of the
20
conditions in paragraphs (a) and (b) would cease to be met.
(3)
The conditions do not cease to be met merely because the subsidiary or any
other company is wound up, if the winding up—
(a)
is for genuine commercial reasons, and
(b)
is not part of a scheme or arrangement the main purpose or one of the
25
main purposes of which is the avoidance of tax.
(4)
The conditions do not cease to be met merely because of anything done as a
consequence of the subsidiary or any other company being in administration
or receivership, if—
(a)
the entry into administration or receivership, and
30
(b)
everything done as a consequence of the company concerned being in
administration or receivership,

is for genuine commercial reasons, and is not part of a scheme or arrangement
the main purpose or one of the main purposes of which is the avoidance of tax.
(5)
The conditions do not cease to be met merely because arrangements are in
35
existence for the disposal by the relevant company or (as the case may be) by
another subsidiary of that company of all its interest in the subsidiary, if the
disposal—
(a)
is to be for genuine commercial reasons, and
(b)
is not to be part of a scheme or arrangement the main purpose or one of
40
the main purposes of which is the avoidance of tax.

Income Tax Bill
Part 6 — Venture capital trusts
Chapter 4 — Qualifying holdings
165

Excluded activities
303
Meaning of “excluded activities”
(1)
The following are excluded activities for the purposes of sections 290 and 300—
(a)
dealing in land, in commodities or futures or in shares, securities or
other financial instruments,
5
(b)
dealing in goods otherwise than in the course of an ordinary trade of
wholesale or retail distribution,
(c)
banking, insurance, money-lending, debt-factoring, hire-purchase
financing or other financial activities,
(d)
leasing (including letting ships on charter or other assets on hire),
10
(e)
receiving royalties or licence fees,
(f)
providing legal or accountancy services,
(g)
property development,
(h)
farming or market gardening,
(i)
holding, managing or occupying woodlands, any other forestry
15
activities or timber production,
(j)
operating or managing hotels or comparable establishments or
managing property used as an hotel or comparable establishment,
(k)
operating or managing nursing homes or residential care homes or
managing property used as a nursing home or residential care home,
20
and
(l)
any activities which are excluded activities under section 310
(provision of services or facilities for another business).
(2)
Subsection (1) is supplemented by the following provisions—
(a)
section 304 (wholesale and retail distribution),
25
(b)
section 305 (leasing of ships),
(c)
section 306 (receipt of royalties and licence fees),
(d)
section 307 (property development),
(e)
section 308 (hotels and comparable establishments), and
(f)
section 309 (nursing homes and residential care homes).
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304
Excluded activities: wholesale and retail distribution
(1)
This section supplements section 303(1)(b).
(2)
In this section—
(a)
subsections (3) and (4) are for determining whether a trade is a trade of
wholesale or retail distribution, and
35
(b)
subsections (5) and (6) are for determining whether a trade of wholesale
or retail distribution is an ordinary trade of wholesale or retail
distribution.
(3)
A trade of wholesale distribution is one in which goods are offered for sale and
sold to persons for resale by them, or for processing and resale by them, to
40
members of the general public for their use or consumption.
(4)
A trade of retail distribution is one in which goods are offered or exposed for
sale and sold to members of the general public for their use or consumption.

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Part 6 — Venture capital trusts
Chapter 4 — Qualifying holdings
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(5)
A trade of wholesale or retail distribution is not an ordinary trade of wholesale
or retail distribution if—
(a)
it consists to a substantial extent—
(i)
in dealing in goods of a kind which are collected or held as an
investment, or
5
(ii)
in that activity and any other excluded activity taken together,
and
(b)
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
10
their market value.
(6)
In determining whether a trade of wholesale or retail distribution is an
ordinary trade of wholesale or retail distribution regard is to be had to the
extent to which it has the following features—
(a)
the goods are bought by the trader in quantities larger than those in
15
which the trader sells them,
(b)
the goods are bought and sold by the trader in different markets,
(c)
the trader employs staff and incurs expenses in the trade in addition to
the cost of the goods and, in the case of a trade carried on by a company,
in addition to any remuneration paid to any person connected with it,
20
(d)
there are purchases or sales from or to persons who are connected with
the trader,
(e)
purchases are matched with forward sales or vice versa,
(f)
the goods are held by the trader for longer than is normal for goods of
the kind in question,
25
(g)
the trade is carried on otherwise than at a place or places commonly
used for wholesale or retail trade, and
(h)
the trader does not take physical possession of the goods.
(7)
In subsection (6)—
(a)
the features in paragraphs (a) to (c) are regarded as indications that the
30
trade is an ordinary trade of wholesale or retail distribution, and
(b)
those in paragraphs (d) to (h) are regarded as indications to the
contrary.
305
Excluded activities: leasing of ships
(1)
This section supplements section 303(1)(d) so far as it relates to the leasing of
35
ships other than offshore installations or pleasure craft.
(2)
In the following provisions “ship” accordingly means a ship other than an
offshore installation or a pleasure craft.
(3)
If the requirements of subsection (4) are met, a trade is not to be regarded as
consisting in the carrying on of excluded activities within section 303(1)(d) as
40
a result only of its consisting in letting ships on charter.
(4)
The requirements of this subsection are that—
(a)
every ship let on charter by the company carrying on the trade is
beneficially owned by the company,
(b)
every ship beneficially owned by the company is registered in the
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United Kingdom,

Income Tax Bill
Part 6 — Venture capital trusts
Chapter 4 — Qualifying holdings
167

(c)
the company is solely responsible for arranging the marketing of the
services of its ships, and
(d)
the conditions mentioned in subsection (5) are met in relation to every
letting on charter by the company.
(5)
The conditions referred to in subsection (4)(d) are—
5
(a)
the letting is for a period not exceeding 12 months and no provision is
made at any time (whether in the charterparty or otherwise) for
extending it beyond that period otherwise than at the option of the
charterer,
(b)
no provision for the grant of a new letting to end more than 12 months
10
after the provision is made (whether in the charterparty or otherwise)
is in force during the period of the letting otherwise than at the option
of the charterer,
(c)
the letting is by way of a bargain at arm’s length between the company
and a person who is not connected with it,
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(d)
under the terms of the charter the company is responsible as
principal—
(i)
for taking, throughout the period of the charter, management
decisions in relation to the ship, other than those of a kind
generally regarded by persons engaged in trade of the kind in
20
question as matters of husbandry, and
(ii)
for defraying all expenses in connection with the ship
throughout that period, or substantially all such expenses, other
than those directly incidental to a particular voyage or to the
employment of the ship during that period, and
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(e)
no arrangements exist by virtue of which a person other than the
company may be appointed to be responsible for the matters
mentioned in paragraph (d) on behalf of the company.
(6)
If in the case of the company carrying on the trade (“the letting company”) the
charterer is also a company and—
30
(a)
the charterer is a qualifying subsidiary of the letting company, or
(b)
the letting company is a qualifying subsidiary of the charterer, or
(c)
both companies are qualifying subsidiaries of a third company,

subsection (5) has effect with the omission of paragraph (c).
(7)
If any of the requirements of subsection (4) is not met in relation to any lettings
35
of ships, the trade is not, as a result, to be treated as consisting in the carrying
on of excluded activities if—
(a)
those lettings, and
(b)
any other excluded activities

do not, taken together, amount to a substantial part of the trade.
40
(8)
In this section “pleasure craft” means any ship of a kind primarily used for
sport or recreation.
306
Excluded activities: receipt of royalties and licence fees
(1)
This section supplements section 303(1)(e) (receipt of royalties and licence
fees).
45
(2)
If the requirement of subsection (3) is met, a trade is not to be regarded as
consisting in the carrying on of excluded activities within section 303(1)(e) as a

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Part 6 — Venture capital trusts
Chapter 4 — Qualifying holdings
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result only of its consisting to a substantial extent in the receiving of royalties
or licence fees.
(3)
The requirement of this subsection is that the royalties or licence fees (or all but
for a part that is not a substantial part in terms of value) are attributable to the
exploitation of relevant intangible assets.
5
(4)
For this purpose an intangible asset is a “relevant intangible asset” if the whole
or greater part (in terms of value) of it has been created—
(a)
by the company carrying on the trade, or
(b)
by a company which at all times during which it created the intangible
asset was—
10
(i)
the holding company of the company carrying on the trade, or
(ii)
a company which, if that holding company were the relevant
company, would be a qualifying subsidiary of that company.
(5)
In the case of an intangible asset that is intellectual property, references to the
creation of an asset by a company are to its creation in circumstances in which
15
the right to exploit it vests in the company (whether alone or jointly with
others).
(6)
In this section—
“holding company” means a company that—
(a)
has one or more 51% subsidiaries, but
20
(b)
is not itself a 51% subsidiary of another company,
“intangible asset” means any asset which falls to be treated as an
intangible asset in accordance with generally accepted accountancy
practice, and
“intellectual property” means—
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(a)
any patent, trade mark, registered design, copyright, design
right, performer’s right or plant breeder’s right, or
(b)
any rights under the law of a country or territory outside the
United Kingdom which correspond or are similar to those
falling within paragraph (a).
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307
Excluded activities: property development
(1)
This section supplements section 303(1)(g).
(2)
“Property development” means the development of land—
(a)
by a company which has, or at any time has had, an interest in the land,
and
35
(b)
with the sole or main object of realising a gain from the disposal of an
interest in the land when it is developed.
(3)
For this purpose “interest in land” means, subject to subsection (4)—
(a)
any estate, interest or right in or over land, including any right affecting
the use or disposition of land, or
40
(b)
any right to obtain such an estate, interest or right from another which
is conditional on the other’s ability to grant it.
(4)
References in this section to an interest in land do not include—
(a)
the interest of a creditor (other than a creditor in respect of a rentcharge)
whose debt is secured by way of mortgage, an agreement for a
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mortgage or a charge of any kind over land, or

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Part 6 — Venture capital trusts
Chapter 4 — Qualifying holdings
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(b)
in the case of land in Scotland, the interest of a creditor in a charge or
security of any kind over land.
308
Excluded activities: hotels and comparable establishments
(1)
This section supplements section 303(1)(j).
(2)
The reference to a comparable establishment is to a guest house, hostel or other
5
establishment the main purpose of maintaining which is the provision of
facilities for overnight accommodation (with or without catering services).
(3)
The activities of a person are not to be taken to fall within section 303(1)(j)
unless that person has an estate or interest in, or is in occupation of, the hotel
or comparable establishment in question.
10
309
Excluded activities: nursing homes and residential care homes
(1)
This section supplements section 303(1)(k).
(2)
“Nursing home” means any establishment which exists wholly or mainly for
the provision of nursing care—
(a)
for persons suffering from sickness, injury or infirmity, or
15
(b)
for women who are pregnant or have given birth.
(3)
“Residential care home” means any establishment which exists wholly or
mainly for the provision of residential accommodation, together with board
and personal care, for persons in need of personal care because of—
(a)
old age,
20
(b)
mental or physical disability,
(c)
past or present dependence on alcohol or drugs,
(d)
any past illnesses, or
(e)
past or present mental disorder.
(4)
The activities of a person are not to be taken to fall within section 303(1)(k)
25
unless that person has an estate or interest in, or is in occupation of, the nursing
home or residential care home in question.
310
Excluded activities: provision of services or facilities for another business
(1)
Providing services or facilities for a business carried on by another person
(other than a company of which the provider of the services or facilities is a
30
qualifying subsidiary) is an excluded activity if—
(a)
the business consists wholly or as to a substantial part of activities
falling within any of paragraphs (a) to (k) of section 303(1), and
(b)
a controlling interest in the business is held by a person who also has a
controlling interest in the business carried on by the provider of the
35
services or facilities.
(2)
Subsections (3) to (5) explain what is meant by a controlling interest in a
business for the purposes of subsection (1)(b).
(3)
In the case of a business carried on by a company, a person (“A”) has a
controlling interest in the business if—
40
(a)
A controls the company,