Income Tax Bill

House of Commons

Session 2006 - 07
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Income Tax Bill

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 2 — The investor
84

Meaning of connection with issuing company
166
Connection with issuing company
(1)
For the purposes of this Chapter (except section 168(4)), an individual is
connected with the issuing company if the individual or an associate of the
individual is connected with that company under—
5
(a)
section 167 (employees, directors and partners),
(b)
section 170 (persons interested in capital etc of company), or
(c)
section 171 (persons subscribing for shares under certain
arrangements).
(2)
See too section 257(2).
10
167
Employees, directors and partners
(1)
An individual is connected with the issuing company if the individual—
(a)
is an employee of—
(i)
the issuing company,
(ii)
any subsidiary of the issuing company, or
15
(iii)
a partner of the issuing company or any of its subsidiaries,
(b)
is a partner of—
(i)
the issuing company, or
(ii)
any subsidiary of the issuing company, or
(c)
subject to section 168, is a director of—
20
(i)
the issuing company,
(ii)
any subsidiary of the issuing company, or
(iii)
a company which is a partner of the issuing company or any of
its subsidiaries.
(2)
In subsection (1) “subsidiary”, in relation to the issuing company, means a
25
company which at any time in period A is a 51% subsidiary of the issuing
company, whether or not it is such a subsidiary while the individual or
associate concerned is such an employee, partner or director as is mentioned in
that subsection.
(3)
For the purposes of this section and sections 168 and 169, in the case of an
30
individual (“A”) who is both a director and an employee of a company—
(a)
references (however expressed) to A in A’s capacity as a director of the
company include A in A’s capacity as an employee of the company, but
(b)
(apart from that) A is to be treated as a director, and not as an employee,
of the company.
35
168
Directors excluded from connection
(1)
An individual is not connected with the issuing company under section 167
merely because the individual, or an associate of the individual, is a director of
that or another company unless the individual or associate (or a partnership of
which the individual or associate is a member)—
40
(a)
receives a payment from the issuing company or a related person
during the period mentioned in section 163, or
(b)
is entitled to receive such a payment in respect of that period or any
part of it.

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Part 5 — Enterprise investment scheme
Chapter 2 — The investor
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(2)
For the purposes of subsection (1) the following are ignored—
(a)
any payment or reimbursement of travelling or other expenses wholly,
exclusively and necessarily incurred by the individual or an associate
of the individual in the performance of the individual’s or associate’s
duties as a director,
5
(b)
any interest which represents no more than a reasonable commercial
return on money lent to the issuing company or a related person,
(c)
any dividend or other distribution which does not exceed a normal
return on the investment,
(d)
any payment for the supply of goods which does not exceed their
10
market value,
(e)
any payment of rent for any property occupied by the issuing company
or a related person which does not exceed a reasonable and commercial
rent for the property, and
(f)
any necessary and reasonable remuneration which meets the
15
conditions in subsection (3).
(3)
The conditions are that the remuneration—
(a)
is paid for services rendered to the issuing company or related person
in the course of a trade or profession carried on wholly or partly in the
United Kingdom (not being secretarial or managerial services or
20
services of a kind provided by the person to whom they are rendered),
and
(b)
is taken into account in calculating for tax purposes the profits of that
trade or profession.
(4)
In this section—
25
(a)
“related person”, in relation to the issuing company, means—
(i)
any company of which the individual or an associate of the
individual is a director and which is a subsidiary or partner of
the issuing company, or a partner of a subsidiary of the issuing
company, and
30
(ii)
any person connected with the issuing company or with a
company falling within sub-paragraph (i), and
(b)
any reference to a payment to an individual includes a payment made
to the individual indirectly or to the individual’s order or for the
individual’s benefit.
35
(5)
In this section and section 169 “subsidiary”, in relation to the issuing company,
means a company which at any time in period A is a 51% subsidiary of the
issuing company.
169
Directors qualifying for relief despite connection
(1)
Section 163(1) does not prevent the investor from being a qualifying investor
40
despite the investor’s connection with the issuing company at any time in
period A relating to the relevant shares if—
(a)
the investor is connected with that company merely because of the
investor, or the investor’s associate—
(i)
being a director of, or of a company which is a partner of, the
45
issuing company or a subsidiary of the issuing company, and
(ii)
being in receipt of, or entitled to receive, remuneration as such,
and

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Part 5 — Enterprise investment scheme
Chapter 2 — The investor
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(b)
conditions A and B and (where applicable) condition C are met.
(2)
Condition A is that, in relation to the director (“D”), whether D is the investor
or an associate of the investor—
(a)
D’s remuneration, or
(b)
the remuneration to which D is entitled,
5

consists only of remuneration which is reasonable remuneration for services
rendered to the company of which D is a director in D’s capacity as such.
(3)
Condition B is that the investor was issued with the relevant shares, or a
previous issue of shares in the issuing company which meet the requirements
of section 173(2), at a time when the investor had never been—
10
(a)
connected with the issuing company, or
(b)
involved in carrying on (whether on the investor’s own account or as a
partner, director or employee) the whole or any part of the trade,
business or profession carried on by the issuing company or a
subsidiary of that company.
15
(4)
Condition C is that, if the issue of the relevant shares did not meet condition B,
they were issued before the termination date relating to the latest issue of
shares which met that condition.
(5)
For the purposes of condition A any necessary and reasonable remuneration
falling within section 168(2)(f) is to be left out of account.
20
(6)
In this section “remuneration” includes any benefit or facility.
170
Persons interested in capital etc of company
(1)
An individual is connected with the issuing company if the individual directly
or indirectly possesses or is entitled to acquire more than 30% of—
(a)
the ordinary share capital of the company or any subsidiary of the
25
company,
(b)
the loan capital and issued share capital of the company or any such
subsidiary, or
(c)
the voting power in the company or any such subsidiary.
(2)
An individual is connected with the issuing company if the individual directly
30
or indirectly possesses or is entitled to acquire such rights as would—
(a)
in the event of the winding up of the company or any subsidiary of the
company, or
(b)
in any other circumstances,

entitle the individual to receive more than 30% of the assets of the company or
35
subsidiary (“the company in question”) which would then be available for
distribution to equity holders of the company in question.
(3)
For the purposes of subsection (2)—
(a)
the persons who are equity holders of the company in question, and
(b)
the percentage of the assets of the company in question to which the
40
individual would be entitled,

are determined in accordance with paragraphs 1 and 3 of Schedule 18 to 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
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Part 5 — Enterprise investment scheme
Chapter 2 — The investor
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(b)
references in that paragraph to a winding up are to be read as including
references to any other circumstances in which assets of the company
in question are available for distribution to its equity holders.
(5)
An individual is not connected with a company merely because one or more
shares in the company are held by the individual or by an associate of the
5
individual, at a time when the company—
(a)
has not issued any shares other than subscriber shares, and
(b)
has not begun to carry on, or make preparations for carrying on, any
trade or business.
(6)
An individual is connected with the issuing company if the individual has
10
control of the issuing company or of any subsidiary of that company.
(7)
In this section “subsidiary”, in relation to the issuing company, means a
company which at any time in period A is a 51% subsidiary of the issuing
company, whether or not it is such a subsidiary while the individual concerned
has, or is entitled to acquire, such capital, voting power, rights or control as are
15
mentioned in this section.
(8)
For the purposes of this section the loan capital of a company is treated as
including any debt incurred by the company—
(a)
for any money borrowed or capital assets acquired by the company,
(b)
for any right to receive income created in favour of the company, or
20
(c)
for consideration the value of which to the company was (at the time
when the debt was incurred) substantially less than the amount of the
debt (including any premium on it).
(9)
For the purposes of this section—
(a)
an individual is treated as entitled to acquire anything which the
25
individual is entitled to acquire at a future date or will at a future date
be entitled to acquire, and
(b)
there is attributed to any individual any rights or powers of any other
person who is an associate of the individual.
(10)
In determining for the purposes of this section whether an individual is
30
connected with a company, no debt incurred by—
(a)
the company, or
(b)
any subsidiary of the company,

by overdrawing an account with a person carrying on a business of banking is
to be treated as loan capital of the company or subsidiary if the debt arose in
35
the ordinary course of that business.
171
Persons subscribing for shares under certain arrangements
(1)
This section applies if an individual (“A”) subscribes for shares in a company
(“the company”) with which A is not connected under section 167 or 170.
(2)
If—
40
(a)
A subscribes for the shares as part of an arrangement, and
(b)
the arrangement provides for another person to subscribe for shares in
another company with which (assuming it to be the issuing company)
A, or any other individual who is a party to the arrangement, is
connected,
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A is connected with the company under this section.

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Part 5 — Enterprise investment scheme
Chapter 3 — General requirements
88

Chapter 3
General requirements
Introduction
172
Overview of Chapter
The general requirements are met in respect of the relevant shares if the
5
requirements of this Chapter are met as to—
(a)
the shares (see section 173),
(b)
the purpose of the issue (see section 174),
(c)
the use of the money raised (see section 175),
(d)
the minimum period (see section 176),
10
(e)
no pre-arranged exits (see section 177), and
(f)
no tax avoidance (see section 178).
The requirements
173
The shares requirement
(1)
The relevant shares must meet—
15
(a)
the requirements of subsection (2), and
(b)
unless they are bonus shares, the requirements of subsection (3).
(2)
Shares meet the requirements of this subsection if they are ordinary shares
which do not, at any time during period B, carry—
(a)
any present or future preferential right to dividends or to a company’s
20
assets on its winding up, or
(b)
any present or future right to be redeemed.
(3)
Shares meet the requirements of this subsection if they—
(a)
are subscribed for wholly in cash, and
(b)
are fully paid up at the time they are issued.
25
(4)
Shares are not fully paid up for the purposes of subsection (3)(b) if there is any
undertaking to pay cash to any person at a future date in respect of the
acquisition of the shares.
174
The purpose of the issue requirement
The relevant shares (other than any of them which are bonus shares) must be
30
issued in order to raise money for the purpose of a qualifying business activity.
175
The use of the money raised requirement
(1)
The requirement of this section is that—
(a)
at least 80% of the money raised by the issue of—
(i)
the relevant shares (other than any of them which are bonus
35
shares), and

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Part 5 — Enterprise investment scheme
Chapter 3 — General requirements
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(ii)
all other shares (if any) in the company of the same class which
meet the requirements of section 173(2) and are issued on the
same day,

is employed wholly for the purpose of the qualifying business activity
for which it was raised not later than the time mentioned in subsection
5
(3), and
(b)
all of the money so raised is employed wholly for that purpose not later
than 12 months after that time.
(2)
The requirements in subsection (1)(a) and (b) do not fail to be met merely
because an amount of money which is not significant is employed for another
10
purpose.
(3)
The time referred to in subsection (1)(a) is—
(a)
the end of the period of 12 months beginning with the issue of the
shares, or
(b)
in the case of money raised only for the purpose of an activity to which
15
section 179(2) applies, the end of the period of 12 months beginning
with—
(i)
the issue of the shares, or
(ii)
if later, the time when the company or a qualifying 90%
subsidiary of the company begins to carry on the qualifying
20
trade.
(4)
In determining for the purposes of subsection (3)(b) when a qualifying trade is
begun to be carried on by a qualifying 90% subsidiary of a company, any
carrying on by it of the trade before it became such a subsidiary is ignored.
176
The minimum period requirement
25
(1)
The issue of shares which includes the relevant shares must meet—
(a)
the requirement of subsection (2) in a case where the money raised by
an issue of shares is raised wholly for the purpose of a qualifying
business activity falling within section 179(2),
(b)
the requirement of subsection (3) in a case where the money raised by
30
an issue of shares is raised wholly or partly for the purpose of a
qualifying business activity falling within section 179(4).
(2)
The requirement is that—
(a)
the trade concerned must have been carried on for a period of at least 4
months ending at or after the time of the issue, and
35
(b)
throughout that period—
(i)
the trade must have been carried on by the issuing company or
a qualifying 90% subsidiary of that company, and
(ii)
the trade must not have been carried on by any other person.
(3)
The requirement is that—
40
(a)
the research and development concerned must have been carried on for
a period of at least 4 months ending at or after the time of the issue, and
(b)
throughout that period—
(i)
the research and development must have been carried on by the
issuing company or a qualifying 90% subsidiary of that
45
company, and

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Chapter 3 — General requirements
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(ii)
the research and development must not have been carried on by
any other person.
(4)
If—
(a)
merely because of the issuing company or any other company being
wound up, or dissolved without winding up—
5
(i)
the trade is carried on as mentioned in subsection (2), or
(ii)
the research and development is carried on as mentioned in
subsection (3),

for a period shorter than 4 months, and
(b)
the winding up or dissolution—
10
(i)
is for genuine commercial reasons, and
(ii)
is not part of a scheme or arrangement the main purpose or one
of the main purposes of which is the avoidance of tax,

subsection (2) or, as the case may be, (3) has effect as if it referred to that shorter
period.
15
(5)
If—
(a)
merely because of anything done as a result of the issuing company or
any other company being in administration or receivership—
(i)
the trade is carried on as mentioned in subsection (2), or
(ii)
the research and development is carried on as mentioned in
20
subsection (3),

for a period shorter than 4 months, and
(b)
the entry into administration or receivership, and everything done as a
result of the company concerned being in administration or
receivership—
25
(i)
is for genuine commercial reasons, and
(ii)
is not part of a scheme or arrangement the main purpose or one
of the main purposes of which is the avoidance of tax,

subsection (2) or, as the case may be, (3) has effect as if it referred to that shorter
period.
30
177
The no pre-arranged exits requirement
(1)
The issuing arrangements for the relevant shares must not include—
(a)
arrangements with a view to the subsequent repurchase, exchange or
other disposal of those shares or of other shares in or securities of the
issuing company,
35
(b)
arrangements for or with a view to the cessation of any trade which is
being or is to be or may be carried on by the issuing company or a
person connected with that company,
(c)
arrangements for the disposal of, or of a substantial amount (in terms
of value) of, the assets of the issuing company or of a person connected
40
with that company, or
(d)
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 persons investing in shares
in the issuing company against what would otherwise be the risks
45
attached to making the investment.