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 4 — The issuing company
95

183
The issuing company to carry on the qualifying business activity requirement
(1)
The requirement of this section is met in relation to the issuing company if, at
no time in period B, is any of the following—
(a)
the relevant qualifying trade,
(b)
relevant preparation work (if any), and
5
(c)
relevant research and development (if any),

carried on by a person other than the issuing company or a qualifying 90%
subsidiary of that company.
(2)
Subsection (3) has effect for the purpose of determining whether the
requirement of this section is met in relation to the issuing company in a case
10
where relevant preparation work is carried out by that company or a
qualifying 90% subsidiary of that company.
(3)
The carrying on of the relevant qualifying trade by a company other than the
issuing company or a subsidiary of that company is to be ignored if it takes
place at any time in period B before the issuing company or any qualifying 90%
15
subsidiary of that company begins to carry on that trade.
(4)
The requirement of this section is not regarded as failing to be met in relation
to the issuing company if, merely because of any act or event within subsection
(5), the relevant qualifying trade—
(a)
ceases to be carried on in period B by the issuing company or any
20
qualifying 90% subsidiary of that company, and
(b)
is subsequently carried on in that period by a person who is not at any
time in period C connected with the issuing company.
(5)
The following are acts and events within this subsection—
(a)
anything done as a consequence of the issuing company or any other
25
company being in administration or receivership, and
(b)
the issuing company or any other company being wound up, or
dissolved without being wound up.
(6)
Subsection (4) applies only if—
(a)
the entry into administration or receivership, and everything done as a
30
consequence of the company concerned being in administration or
receivership, or
(b)
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.
35
(7)
In this section—
“relevant preparation work” means preparations within section 179(2)(b)
which are the subject of the qualifying business activity mentioned in
section 174,
“the relevant qualifying trade” means the qualifying trade which is the
40
subject of that qualifying business activity,
“relevant research and development” means—
(a)
research and development within section 179(4) which is the
subject of that qualifying business activity, and
(b)
any other preparations for the carrying on of the qualifying
45
trade which is the subject of that activity.

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
96

184
The unquoted status requirement
(1)
At the beginning of period B—
(a)
the issuing company must be an unquoted company,
(b)
there must be no arrangements in existence for the issuing company to
cease to be an unquoted company, and
5
(c)
there must be no arrangements in existence for the issuing company to
become a subsidiary of another company (“the new company”) by
virtue of an exchange of shares, or shares and securities, if—
(i)
section 247 applies in relation to the exchange, and
(ii)
arrangements have been made with a view to the new company
10
ceasing to be an unquoted company.
(2)
In this section “unquoted company” means a company none of whose shares,
stocks, debentures or other securities are marketed to the general public.
(3)
For the purposes of subsection (2), shares, stocks, debentures or other securities
are marketed to the general public if they are—
15
(a)
listed on the Stock Exchange or a stock exchange that is a recognised
stock exchange by virtue of an order made under section 1005,
(b)
listed on a designated exchange in a country outside the United
Kingdom, or
(c)
dealt in outside the United Kingdom by such means as may be
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designated.
(4)
In subsection (3)(b) and (c) “designated” means designated by an order made
by the Commissioners for Her Majesty’s Revenue and Customs for the
purposes of that provision.
(5)
An order made for the purposes of subsection (3)(b) may designate an
25
exchange by name, or by reference to any class or description of exchanges,
including a class or description framed by reference to any authority or
approval given in a country outside the United Kingdom.
(6)
The arrangements referred to in subsection (1)(b) and (c)(ii) do not include
arrangements in consequence of which any shares, stocks, debentures or other
30
securities of the company are at any subsequent time—
(a)
listed on a stock exchange that is a recognised stock exchange by virtue
of an order made under section 1005, or
(b)
listed on an exchange, or dealt in by any means, designated by an order
made for the purposes of subsection (3)(b) or (c),
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if the order was made after the beginning of period B.
185
The control and independence requirement
(1)
The control element of the requirement is that—
(a)
the issuing company must not at any time in period B control (whether
on its own or together with any person connected with it) any company
40
which is not a qualifying subsidiary of the issuing company, and
(b)
no arrangements must be in existence at any time in that period by
virtue of which the issuing company could fail to meet paragraph (a)
(whether during that period or otherwise).
(2)
The independence element of the requirement is that—
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(a)
the issuing company must not at any time in period B—

Income Tax Bill
Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
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(i)
be a 51% subsidiary of another company, or
(ii)
be under the control of another company (or of another
company and any other person connected with that other
company), without being a 51% subsidiary of that other
company, and
5
(b)
no arrangements must be in existence at any time in that period by
virtue of which the issuing company could fail to meet paragraph (a)
(whether during that period or otherwise).
(3)
This section is subject to section 247(4) (exchange of shares).
186
The gross assets requirement
10
(1)
In the case of relevant shares issued by a single company, the value of the
company’s assets—
(a)
must not exceed £7 million immediately before the relevant share issue,
and
(b)
must not exceed £8 million immediately afterwards.
15
(2)
In the case of relevant shares issued by a parent company, the value of the
group assets—
(a)
must not exceed £7 million immediately before the relevant share issue,
and
(b)
must not exceed £8 million immediately afterwards.
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(3)
In this section—
(a)
the relevant share issue is the issue of shares in the company that
includes the relevant shares, and
(b)
the value of the group assets is the sum of the values of the gross assets
of each of the members of the group, ignoring any that consist in rights
25
against, or shares in or securities of, another member of the group.
187
The qualifying subsidiaries requirement
Any subsidiary that the issuing company has at any time in period B must be
a qualifying subsidiary of the company.
188
The property managing subsidiaries requirement
30
(1)
Any property managing subsidiary that the issuing company has at any time
in period B must be a qualifying 90% subsidiary of the company.
(2)
“Property managing subsidiary” means a subsidiary of the company whose
business consists wholly or mainly in the holding or managing of land or any
property deriving its value from land.
35
(3)
In subsection (2) references to property deriving its value from land include—
(a)
any shareholding in a company deriving its value directly or indirectly
from land,
(b)
any partnership interest deriving its value directly or indirectly from
land,
40
(c)
any interest in settled property deriving its value directly or indirectly
from land, and
(d)
any option, consent or embargo affecting the disposition of land.

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Part 5 — Enterprise investment scheme
Chapter 4 — The issuing company
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Definitions
189
Meaning of “qualifying trade”
(1)
For the purposes of this Part, 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 at any time in period B consist wholly or as to a substantial
part in the carrying on of excluded activities.
(2)
References in this section and sections 192 to 198 to a trade are to be read
without regard to the definition of “trade” in section 989.
190
Meaning of “qualifying 90% subsidiary”
10
(1)
For the purposes of this Part, a company (“the subsidiary”) is a qualifying 90%
subsidiary of another company (“the relevant company”) if the following
conditions are met—
(a)
the relevant company possesses at least 90% of the issued share capital
of, and at least 90% of the voting power in, the subsidiary,
15
(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
subsidiary which would then be available for distribution to equity
20
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,
(d)
no person other than the relevant company has control of the
25
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 191 (conditions not regarded as ceasing to
be met because of winding up, dissolution, administration, receivership or
30
arrangements for disposal not having tax avoidance as main purpose) apply in
relation to the conditions in 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
35
another subsidiary”.
(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,
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are to be 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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Income Tax Bill
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Chapter 4 — The issuing company
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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 subsidiary
are available for distribution to its equity holders.
191
Meaning of “qualifying subsidiary”
(1)
For the purposes of this Part, a company (“the subsidiary”) is a qualifying
5
subsidiary of another company (“the relevant company”) if the following
conditions are met.
(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
10
subsidiaries, has control of the subsidiary, and
(c)
no arrangements are in existence by virtue of which either of the
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, or dissolved without winding up, if the winding
15
up or dissolution—
(a)
is for genuine commercial reasons, and
(b)
is not part of a scheme or arrangement the main purpose or one of the
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
20
consequence of the subsidiary or any other company being in administration
or receivership, if—
(a)
the entry into administration or receivership, and
(b)
everything done as a consequence of the company concerned being in
administration or receivership,
25

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
existence for the disposal by the relevant company or (as the case may be) by
another subsidiary of all its interest in the subsidiary, if the disposal—
30
(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
the main purposes of which is the avoidance of tax.
Excluded activities
192
Meaning of “excluded activities”
35
(1)
The following are excluded activities for the purposes of sections 181 and 189—
(a)
dealing in land, in commodities or futures or in shares, securities or
other financial instruments,
(b)
dealing in goods otherwise than in the course of an ordinary trade of
wholesale or retail distribution,
40
(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),
(e)
receiving royalties or licence fees,

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(f)
providing legal or accountancy services,
(g)
property development,
(h)
farming or market gardening,
(i)
holding, managing or occupying woodlands, any other forestry
activities or timber production,
5
(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,
and
10
(l)
any activities which are excluded activities under section 199
(provision of services or facilities for another business).
(2)
Subsection (1) is supplemented by the following provisions—
(a)
section 193 (wholesale and retail distribution),
(b)
section 194 (leasing of ships),
15
(c)
section 195 (receipt of royalties and licence fees),
(d)
section 196 (property development),
(e)
section 197 (hotels and comparable establishments), and
(f)
section 198 (nursing homes and residential care homes).
193
Excluded activities: wholesale and retail distribution
20
(1)
This section supplements section 192(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
(b)
subsections (5) and (6) are for determining whether a trade of wholesale
25
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
members of the general public for their use or consumption.
30
(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.
(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—
35
(i)
in dealing in goods of a kind which are collected or held as an
investment, or
(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
40
significantly longer than the period for which the trader would
reasonably be expected to hold them while trying to dispose of them at
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
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extent to which it has the following features—

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(a)
the goods are bought by the trader in quantities larger than those in
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,
5
in addition to any remuneration paid to any person connected with it,
(d)
there are purchases from or sales 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
10
the kind in question,
(g)
the trade is carried on otherwise than at a place or places commonly
used for wholesale or retail trade,
(h)
the trader does not take physical possession of the goods.
(7)
In subsection (6)—
15
(a)
the features in paragraphs (a) to (c) are regarded as indications that the
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.
194
Excluded activities: leasing of ships
20
(1)
This section supplements section 192(1)(d) so far as it relates to the leasing of
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
25
consisting in the carrying on of excluded activities within section 192(1)(d) as
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,
30
(b)
every ship beneficially owned by the company is registered in the
United Kingdom,
(c)
throughout period B 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
35
letting on charter by the company.
(5)
The conditions referred to in subsection (4)(d) are—
(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
40
charterer,
(b)
no provision for the grant of a new letting to end more than 12 months
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,
45
(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,