Income Tax Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 7 — Community investment tax relief
Chapter 4 — General conditions
189

349
No pre-arranged protection against risks
(1)
Any arrangements—
(a)
under which the investment is made, or
(b)
made, before the investor makes the investment, in relation to or in
connection with the making of the investment,
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must not include excluded arrangements.
(2)
For the purposes of subsection (1) “excluded arrangements”—
(a)
means arrangements the main purpose or one of the main purposes of
which is (by means of any insurance, indemnity or guarantee or
otherwise) to provide partial or complete protection for the investor
10
against what would otherwise be the risks attached to making the
investment, but
(b)
does not include any arrangements which are confined to the provision
for the investor of any protection against those risks which might
reasonably be expected to be provided for commercial reasons if the
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investment were made in the course of a business of banking.
(3)
For the purposes of this section “arrangements” includes any scheme,
agreement or understanding, whether or not legally enforceable.
Chapter 4
General conditions
20
350
No control of CDFI by investor
(1)
The investor must not control the CDFI at any time during the 5 year period.
(2)
In this section references to the investor include any person connected with the
investor.
(3)
If the CDFI is a body corporate, the question whether the investor controls the
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CDFI is, for the purposes of this section, determined in accordance with section
995.

This is subject to subsection (6).
(4)
In any other case the investor is treated, for those purposes, as having control
of the CDFI if the investor has power to secure, as a result of—
30
(a)
the possession of voting power in the CDFI, or
(b)
any powers conferred by the constitution of, or any other document
regulating, the CDFI,

that the affairs of the body are conducted in accordance with the investor’s
wishes.
35

This is subject to subsections (5) and (6).
(5)
If—
(a)
the CDFI is a partnership, and
(b)
the investor is a member of that partnership,

for the purposes of determining in accordance with this section whether the
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investor controls the CDFI, the other members of that partnership are not, as a
result of their membership of the CDFI, treated as partners of the investor.

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Part 7 — Community investment tax relief
Chapter 5 — Claims for and attribution of CITR
190

(6)
In determining whether the investor controls the CDFI there are attributed to
the investor (so far as it would not otherwise be the case)—
(a)
any rights or powers that the investor is entitled to acquire at a future
date or will, at a future date, become entitled to acquire, and
(b)
any rights or powers which another person holds on behalf of the
5
investor or may be required to exercise, by direction, on the investor’s
behalf.
351
Investor must have beneficial ownership
(1)
The investor must be the sole beneficial owner of the investment when it is
made.
10
(2)
If the investment consists of a loan, the person beneficially entitled to
repayment of the loan is treated as the beneficial owner of the loan for the
purposes of this Part.
352
No acquisition of share in partnership
(1)
If the CDFI is a partnership, the investment must not consist of or include any
15
amount of capital contributed by the investor on becoming a member of the
partnership.
(2)
For this purpose the amount of capital contributed by the investor on becoming
a member of the partnership includes any amount which—
(a)
purports to be provided by the investor by way of loan capital, and
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(b)
is accounted for as partners’ capital in the accounts of the partnership.
353
No tax avoidance purpose
The investment must not be made as part of a scheme or arrangement the main
purpose or one of the main purposes of which is the avoidance of tax.
Chapter 5
25
Claims for and attribution of CITR
Claims
354
Loans: no claim after disposal or excessive repayments or receipts of value
(1)
If the investment consists of a loan, no claim may be made in respect of a tax
year if—
30
(a)
the investor disposes of the whole or any part of the loan before the
qualifying date relating to that year,
(b)
at any time after the investment is made but before that qualifying date,
the amount of the capital outstanding on the loan is reduced to nil, or
(c)
before that qualifying date, paragraphs (a) and (b) of section 362(1)
35
(repayments of loan in 5 year period exceeding permitted limits) apply
in relation to the investment (whether by virtue of section 363 (receipts
of value treated as repayments) or otherwise).

Income Tax Bill
Part 7 — Community investment tax relief
Chapter 5 — Claims for and attribution of CITR
191

(2)
For the purposes of subsection (1)(a) any repayment of the loan is to be
ignored.
(3)
For the purposes of this section the qualifying date relating to a tax year is the
next anniversary of the investment date to occur after the end of that year.
355
Securities or shares: no claim after disposal or excessive receipts of value
5
(1)
If the investment consists of securities or shares, a claim made in respect of a
tax year must relate only to those securities or shares held by the investor, as
sole beneficial owner, continuously throughout the period—
(a)
beginning when the investment is made, and
(b)
ending immediately before the qualifying date relating to the tax year.
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(2)
No claim for CITR may be made in relation to a tax year if before the qualifying
date relating to that year paragraphs (a) to (d) of section 364(1) (receipts of
value in the 5 year period exceeding permitted limits) apply in relation to the
investment or any part of it.
(3)
For the purposes of this section the qualifying date relating to a tax year is the
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next anniversary of the investment date to occur after the end of that year.
356
No claim after loss of accreditation by the CDFI
(1)
If the CDFI ceases to be accredited under Chapter 2 with effect from a time
(“the relevant time”) within the 5 year period, no claim for CITR relating to the
investment may be made by the investor—
20
(a)
for the relevant tax year, or
(b)
for any later tax year.
(2)
For the purposes of subsection (1) the relevant tax year is—
(a)
if the relevant time falls within the first year of the 5 year period, the tax
year in which the investment date fell, and
25
(b)
in any other case, the year in which fell the last anniversary of that date
before the relevant time (or, if the relevant time itself falls on an
anniversary of the investment date, the year in which that anniversary
falls).
Attribution
30
357
Attribution: general
(1)
In this Part references to the CITR attributable to any loan, securities or shares
in respect of a tax year are read as references to the reduction which—
(a)
is made in the investor’s liability to income tax for that year, and
(b)
is attributed to that loan, or those securities or shares, in accordance
35
with this section and section 358.

This is subject to the provisions of Chapter 6 for the withdrawal or reduction
of CITR.
(2)
Subsections (3) and (4) apply if the investor’s liability to income tax is reduced
for a tax year under this Part.
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Chapter 5 — Claims for and attribution of CITR
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(3)
If the reduction is obtained because of one loan, or securities or shares included
in one issue, the amount of the tax reduction is attributed to that loan or those
securities or shares.
(4)
If the reduction is obtained because of a loan or loans, securities or shares
included in two or more investments, the reduction—
5
(a)
is apportioned between the loan or loans, securities or shares in each of
those investments in the same proportions as the invested amounts in
respect of the loan or loans, securities or shares for the year, and
(b)
is attributed to that loan or those loans, securities or shares accordingly.
(5)
If under this section an amount of any reduction of income tax is attributed to
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any securities in the same issue, a proportionate part of that amount is
attributed to each security.
(6)
If under this section an amount of any reduction of income tax is attributed to
any shares in the same issue, a proportionate part of that amount is attributed
to each of those shares.
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(7)
If CITR attributable to a loan or any securities or shares falls to be withdrawn
under Chapter 6, the CITR attributable to that loan or each of those securities
or shares is reduced to nil.
(8)
If CITR attributable to any securities or shares falls to be reduced under that
Chapter by any amount, the CITR attributable to each of those securities or
20
shares is reduced by a proportionate part of that amount.
358
Attribution: bonus shares
(1)
This section applies if—
(a)
corresponding bonus shares are issued to the investor in respect of any
shares (“the original shares”) included in the investment, and
25
(b)
the original shares have been continuously held by the investor, as sole
beneficial owner, from the time they were issued until the issue of the
bonus shares.
(2)
A proportionate part of any amount attributed to the original shares, in respect
of a tax year, immediately before the bonus shares are issued is attributed to
30
each of the shares in the holding consisting of the original shares and the bonus
shares, in respect of that year.
(3)
After the issue of the bonus shares this Part applies as if—
(a)
the original issue had included the bonus shares, and
(b)
the bonus shares had been held by the investor, as sole beneficial
35
owner, continuously from the time the original shares were issued until
the bonus shares were issued.
(4)
In this section—
“corresponding bonus shares” means bonus shares that are in the same
company, are of the same class, and carry the same rights as the original
40
shares,
“original issue” means the issue of shares forming the investment.

Income Tax Bill
Part 7 — Community investment tax relief
Chapter 6 — Withdrawal or reduction of CITR
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Chapter 6
Withdrawal or reduction of CITR
Introduction
359
Overview of Chapter
(1)
This Chapter provides for CITR to be withdrawn or reduced under—
5
(a)
section 360 (disposal of loan during 5 year period),
(b)
section 361 (disposal of securities or shares during 5 year period),
(c)
section 362 (repayment of loan capital during 5 year period),
(d)
section 363 (value received by investor during 6 year period where
investment consists of a loan),
10
(e)
section 364 (value received by investor during 6 year period where the
investment consists of securities or shares),
(f)
section 371 (CITR subsequently found not to have been due).
(2)
This Chapter also provides for the manner in which CITR is to be withdrawn
or reduced (see section 372).
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(3)
In this Chapter “the 6 year period” in relation to the investment is the period of
6 years beginning 12 months before the investment date.
Disposals
360
Disposal of loan during 5 year period
(1)
If the investment consists of a loan and within the 5 year period—
20
(a)
the investor disposes of the whole of the investment, otherwise than by
way of a permitted disposal, or
(b)
the investor disposes of a part of the investment,

any CITR attributable to the investment in respect of any tax year must be
withdrawn.
25
(2)
For the purposes of this section—
(a)
a disposal is “permitted” if—
(i)
it is by way of a distribution in the course of dissolving or
winding up the CDFI,
(ii)
it is a disposal within section 24(1) of TCGA 1992 (entire loss,
30
destruction, dissipation or extinction of asset),
(iii)
it is a deemed disposal under section 24(2) of that Act (claim
that value of asset has become negligible), or
(iv)
it is made after the CDFI has ceased to be accredited under this
Part, and
35
(b)
a full or partial repayment of the loan is not treated as giving rise to a
disposal.
361
Disposal of securities or shares during 5 year period
(1)
This section applies if the investment consists of securities or shares and—

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Part 7 — Community investment tax relief
Chapter 6 — Withdrawal or reduction of CITR
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(a)
the investor disposes of the whole or any part of the investment (“the
former investment”) within the 5 year period,
(b)
the CDFI has not ceased to be accredited before the disposal, and
(c)
the disposal does not arise as a result of an event within section
366(1)(a) (repayment, redemption or repurchase of securities or shares
5
included in the investment).
(2)
If the disposal is not a qualifying disposal, any CITR attributable to the former
investment in respect of any tax year must be withdrawn.
(3)
If the disposal is a qualifying disposal, any CITR attributable to the former
investment for a tax year must—
10
(a)
if it is greater than A, be reduced by A, and
(b)
in any other case, be withdrawn.

For this purpose “A” is an amount equal to 5% of the amount or value of the
consideration (if any) which the investor receives for the former investment.
(4)
For the purposes of this section “qualifying disposal” means a disposal that
15
is—
(a)
by way of a bargain made at arm’s length, or
(b)
a permitted disposal (within the meaning of section 360).
(5)
If for any tax year—
(a)
the amount of CITR attributable to the former investment (“B”) is less
20
than
(b)
the amount (“C”) which is equal to 5% of the invested amount in respect
of the former investment for that year,

subsection (3)(a) has effect in relation to that year as if the amount or value
referred to in subsection (3) were reduced by multiplying it by the fraction—
25
(6)
If the amount of CITR attributable to the former investment in respect of a tax
year has been reduced before the CITR is obtained, the amount referred to in
subsection (5) as B is to be treated for the purposes of that subsection as the
amount it would have been without that reduction.
(7)
Subsection (6) does not apply to a reduction by virtue of section 358
30
(attribution: bonus shares).
Repayment of loans
362
Repayment of loan capital during 5 year period
(1)
If the investment consists of a loan and—
(a)
the average capital balance of the loan for the third, fourth or final year
35
of the 5 year period is less than the permitted balance for the year in
question, and
(b)
the difference between those balances is not an amount of insignificant
value,

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any CITR attributable to the investment in respect of any tax year must be
withdrawn.
(2)
For the purposes of this section—
“the average capital balance” of the loan for a period is the mean of the
daily balances of capital outstanding during that period, ignoring any
5
non-standard repayments of the loan made in that period or at any
earlier time, and
“the permitted balance” of the loan is—
(a)
for the third year of the 5 year period, 75% of the average capital
balance for the period of 6 months beginning 18 months after
10
the investment date,
(b)
for the fourth year of that period, 50% of that balance, and
(c)
for the final year of that period, 25% of that balance.
(3)
For the purposes of subsection (2) a repayment of the loan is a non-standard
repayment if subsection (4) or (5) applies.
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(4)
This subsection applies if the repayment is made at the choice or discretion of
the CDFI, and not as a direct or indirect consequence of any obligation
provided for under the terms of the loan agreement.
(5)
This subsection applies if the repayment is made as a result of the failure of the
CDFI to meet any obligation of the loan agreement which—
20
(a)
is imposed merely because of the commercial risks to which the
investor is exposed as lender under that agreement, and
(b)
is no more likely to be breached than any obligation that might
reasonably have been agreed in respect of the loan in the absence of this
Part.
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(6)
For the purposes of this section “an amount of insignificant value” means an
amount which—
(a)
is not more than £1,000, or
(b)
if it is more than £1,000, is insignificant in relation to the average capital
balance of the loan for the year of the 5 year period in question.
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Receipts of value
363
Value received by investor during 6 year period: loans
(1)
This section applies if the investment consists of a loan and the investor
receives any value (other than an amount of insignificant value) from the CDFI
during the 6 year period.
35
(2)
The investor is treated for the purposes of—
(a)
section 337 (determination of “invested amount”), and
(b)
section 362 (repayments of loan capital),

as having received a repayment of the loan of an amount equal to the amount
of the value received.
40
(3)
For those purposes the repayment is treated as made—
(a)
if the value is received in the first or second year of the 6 year period, at
the beginning of that second year, and