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 3 — General requirements
91

(2)
The arrangements referred to in subsection (1)(a) do not include any
arrangements with a view to such an exchange of shares, or shares and
securities, as is mentioned in section 247(1).
(3)
The arrangements referred to in subsection (1)(b) and (c) do not include any
arrangements applicable only on the winding up of a company except in a case
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where—
(a)
the issuing arrangements include arrangements for the company to be
wound up, or
(b)
the arrangements are applicable on the winding up of the company
otherwise than for genuine commercial reasons.
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(4)
The arrangements referred to in subsection (1)(d) do not include any
arrangements which are confined to the provision—
(a)
for the issuing company itself, or
(b)
if the issuing company is a parent company that meets the trading
requirement in section 181(2)(b), for the issuing company itself, for the
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issuing company itself and one or more of its subsidiaries or for one or
more of its subsidiaries,

of any such protection against the risks arising in the course of carrying on its
business as might reasonably be expected to be provided in normal
commercial circumstances.
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(5)
In this section “the issuing arrangements” means—
(a)
the arrangements under which the shares are issued to the individual,
and
(b)
any arrangements made before the issue of the shares to the individual
in relation to or in connection with that issue.
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178
The no tax avoidance requirement
The relevant shares must be issued for genuine commercial reasons, and not as
part of a scheme or arrangement the main purpose or one of the main purposes
of which is the avoidance of tax.
Meaning of "qualifying business activity"
30
179
Meaning of “qualifying business activity”
(1)
In this Part “qualifying business activity”, in relation to the issuing company,
means—
(a)
activity A, or
(b)
activity B,
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if it is carried on by the company or a qualifying 90% subsidiary of the
company.

This is subject to subsections (3) and (5).
(2)
Activity A is—
(a)
the carrying on of a qualifying trade which, on the date the relevant
40
shares are issued, the company or a qualifying 90% subsidiary of the
company is carrying on, or
(b)
the activity of preparing to carry on (or preparing to carry on and then
carrying on) a qualifying trade—

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
92

(i)
which, on that date, is intended to be carried on wholly or
mainly in the United Kingdom by the company or such a
subsidiary, and
(ii)
which is begun to be carried on by the company or such a
subsidiary within two years after that date.
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(3)
But activity A is a qualifying business activity only if, at any time in period B
when the qualifying trade is so carried on, the qualifying trade is carried on
wholly or mainly in the United Kingdom.
(4)
Activity B is the carrying on of research and development—
(a)
which, on the date the relevant shares are issued, the company or a
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qualifying 90% subsidiary of the company is carrying on, or which the
company or such a subsidiary begins to carry on immediately
afterwards, and
(b)
from which, on that date, it is intended—
(i)
that a qualifying trade which the company or such a subsidiary
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will carry on wholly or mainly in the United Kingdom will be
derived, or
(ii)
that a qualifying trade which the company or such a subsidiary
is carrying on, or will carry on, wholly or mainly in the United
Kingdom will benefit.
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(5)
But activity B is a qualifying business activity only if, at any time in period B
when—
(a)
the research and development is carried on, or
(b)
the qualifying trade which is derived, or which benefits or is intended
to benefit, from the research and development is carried on,
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the research and development or, as the case may be, the qualifying trade is
carried on wholly or mainly in the United Kingdom.
(6)
In determining—
(a)
for the purposes of subsection (2)(b) when a qualifying trade is begun
to be carried on by a qualifying 90% subsidiary of the company, or
30
(b)
for the purposes of subsection (4)(a) when research and development is
begun to be carried on by such a subsidiary,

any carrying on of the trade or, as the case may be, the research and
development by it before it became such a subsidiary is ignored.
(7)
References in subsection (2)(b)(i) or (4)(b) to a qualifying 90% subsidiary of the
35
company include references to any existing or future company which will be
such a subsidiary at any future time.
Chapter 4
The issuing company
Introduction
40
180
Overview of Chapter
The issuing company is a qualifying company in relation to the relevant shares
if the requirements of this Chapter are met as to—
(a)
trading (see section 181),

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
93

(b)
the issuing company to carry on the qualifying business activity (see
section 183),
(c)
unquoted status (see section 184),
(d)
control and independence (see section 185),
(e)
gross assets (see section 186),
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(f)
qualifying subsidiaries (see section 187), and
(g)
property managing subsidiaries (see section 188).
The requirements
181
The trading requirement
(1)
The issuing company must meet the trading requirement throughout period B.
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(2)
The trading requirement is that—
(a)
the company, ignoring any incidental purposes, exists wholly for the
purpose of carrying on one or more qualifying trades, or
(b)
the company is a parent company and the business of the group does
not consist wholly or as to a substantial part in the carrying on of non-
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qualifying activities.
(3)
If the company intends that one or more other companies should become its
qualifying subsidiaries with a view to their carrying on one or more qualifying
trades—
(a)
the company is treated as a parent company for the purposes of
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subsection (2)(b), and
(b)
the reference in subsection (2)(b) to the group includes the company
and any existing or future company that will be its qualifying
subsidiary after the intention in question is carried into effect.

This subsection does not apply at any time after the abandonment of that
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intention.
(4)
For the purpose of subsection (2)(b) the business of the group means what
would be the business of the group if the activities of the group companies
taken together were regarded as one business.
(5)
For the purpose of determining the business of a group, activities are ignored
30
so far as they are activities carried on by a mainly trading subsidiary otherwise
than for its main purpose.
(6)
For the purposes of determining the business of a group, activities of a group
company are ignored so far as they consist in—
(a)
the holding of shares in or securities of a qualifying subsidiary of the
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parent company,
(b)
the making of loans to another group company,
(c)
the holding and managing of property used by a group company for
the purpose of one or more qualifying trades carried on by a group
company, or
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(d)
the holding and managing of property used by a group company for
the purpose of research and development from which it is intended—
(i)
that a qualifying trade to be carried on by a group company will
be derived, or

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
94

(ii)
that a qualifying trade carried on or to be carried on by a group
company will benefit.
(7)
Any reference in subsection (6)(d)(i) or (ii) to a group company includes a
reference to any existing or future company which will be a group company at
any future time.
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(8)
In this section—
“incidental purposes” means purposes having no significant effect (other
than in relation to incidental matters) on the extent of the activities of
the company in question,
“mainly trading subsidiary” means a qualifying subsidiary which, apart
10
from incidental purposes, exists wholly for the purpose of carrying on
one or more qualifying trades, and any reference to the main purpose
of such a subsidiary is to be read accordingly, and
“non-qualifying activities” means—
(a)
excluded activities, and
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(b)
activities (other than research and development) carried on
otherwise than in the course of a trade.
(9)
This section is supplemented by section 189 (meaning of “qualifying trade”)
and sections 192 to 199 (excluded activities).
182
Ceasing to meet trading requirement because of administration or
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receivership
(1)
A company is not regarded as ceasing to meet the trading requirement merely
because of anything done in consequence of the company or any of its
subsidiaries being in administration or receivership.

This has effect subject to subsections (2) and (3).
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(2)
Subsection (1) applies only if—
(a)
the entry into administration or receivership, and
(b)
everything done as a result of the company concerned being in
administration or receivership,

is for genuine commercial reasons, and is not part of a scheme or arrangement
30
the main purpose or one of the main purposes of which is the avoidance of tax.
(3)
A company ceases to meet the trading requirement if before the end of period
B—
(a)
a resolution is passed, or an order is made, for the winding up of the
company or any of its subsidiaries (or, in the case of a winding up
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otherwise than under the Insolvency Act 1986 (c. 45) or the Insolvency
(Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)), any other act is
done for the like purpose), or
(b)
the company or any of its subsidiaries is dissolved without winding up.

This is subject to subsection (4).
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(4)
Subsection (3) does not apply if the winding up or dissolution 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.