Finance Bill

House of Commons

Session 2006 - 07
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Finance Bill

Finance Bill
Schedule 16 — Venture capital schemes etc
Part 4 — Meaning of “qualifying 90% subsidiary”
209

Transitional provision
14    (1)
This paragraph applies if—
(a)
shares in or securities of a company (“the company”) were issued
before 6th April 2007,
(b)
immediately before that date—
5
(i)
the right to exploit an intangible asset (“the asset”) was vested
in the company or a subsidiary of it (in either case, whether
alone or jointly with others), and
(ii)
the asset was a relevant intangible asset,
(c)
at any time on or after that date, an activity carried on by the
10
company or a subsidiary of it would be an excluded activity by
reason only of the receipt of royalties or licence fees attributable to
the exploitation of the asset, and
(d)
the activity would not be an excluded activity if the amendments
made by this Part of this Schedule had not been made.
15
      (2)
The activity is to be treated, in relation to those shares or securities, as not
being an excluded activity at that time.
      (3)
In sub-paragraphs (1) and (2), references to an excluded activity are to be
read—
(a)
for the purposes of Chapter 3 of Part 7 of ICTA (including any
20
provision of that Chapter as applied by any other provision), as
references to—
(i)
an activity within section 293(3B)(a) of ICTA, or
(ii)
an activity within subsection (2) of section 297 of ICTA which
causes a trade to fail to comply with that section,
25
(b)
for the purposes of Schedule 15 to FA 2000, as references to an
excluded activity other than the receiving of royalties or licence fees
within paragraph 29 of that Schedule in circumstances where the
requirements of sub-paragraph (2) of that paragraph are met.
Part 4
30
Meaning of “qualifying 90% subsidiary”
Corporate venturing scheme
15    (1)
Schedule 15 to FA 2000 is amended as follows.
      (2)
In paragraph 23 (trading activities requirement), omit sub-paragraphs (10)
and (11).
35
      (3)
After that paragraph insert—
“Meaning of “qualifying 90% subsidiary”
23A   (1)
For the purposes of this Schedule, a company (“the subsidiary”) is
a qualifying 90% subsidiary of the issuing company if the
following conditions are met—
40
(a)
the issuing company possesses not less than 90% of the
issued share capital of, and not less than 90% of the voting
power in, the subsidiary;

Finance Bill
Schedule 16 — Venture capital schemes etc
Part 4 — Meaning of “qualifying 90% subsidiary”
210

(b)
the issuing company would—
(i)
in the event of a winding up of the subsidiary, or
(ii)
in any other circumstances,

be beneficially entitled to receive not less than 90% of the
assets of the subsidiary which would then be available for
5
distribution to the shareholders of the subsidiary;
(c)
the issuing company is beneficially entitled to not less than
90% of any profits of the subsidiary which are available for
distribution to the shareholders of the subsidiary;
(d)
no person other than the issuing company has control of
10
the subsidiary within the meaning of section 840 of the
Taxes Act 1988;
(e)
no arrangements are in existence by virtue of which any of
the conditions in paragraphs (a) to (d) would cease to be
met.
15
      (2)
Paragraph 21(3) and (4) (effect of receivership etc) apply in
relation to the conditions in sub-paragraph (1) as they apply in
relation to the conditions in paragraph 21(2).
      (3)
If—
(a)
arrangements are in existence for the disposal by the
20
issuing company of all its interest in the subsidiary, and
(b)
the disposal is to be for commercial reasons and is not to be
part of a scheme or arrangement the main purpose of
which, or one of the main purposes of which, is the
avoidance of tax,
25

the subsidiary is not to be regarded as having ceased on that
account to be a qualifying 90% subsidiary of the issuing company.
      (4)
For the purposes of this Schedule, a company (“company A”)
which is a subsidiary of a company that is not the issuing company
(“company B”) is a qualifying 90% subsidiary of the issuing
30
company if—
(a)
company A would be a qualifying 90% subsidiary of
company B (if company B were the issuing company), and
company B is a qualifying 100% subsidiary of the issuing
company; or
35
(b)
company A is a qualifying 100% subsidiary of company B,
and company B is a qualifying 90% subsidiary of the
issuing company.
      (5)
For the purposes of sub-paragraph (4), no account is to be taken of
any control the issuing company may have of company A.
40
      (6)
For those purposes, a company (“company X”) is a qualifying
100% subsidiary of another company (“company Y”) at any time
when the conditions in sub-paragraph (1) would be met if—
(a)
company X were the subsidiary;
(b)
company Y were the issuing company; and
45
(c)
in sub-paragraph (1) for “not less than 90%” in each place
there were substituted “100%”.”

Finance Bill
Schedule 16 — Venture capital schemes etc
Part 4 — Meaning of “qualifying 90% subsidiary”
211

      (4)
In paragraph 103 (index of defined expressions), in the entry relating to the
definition of “qualifying 90% subsidiary”, for “paragraph 23(10) and (11)”
substitute “paragraph 23A”.
Enterprise investment scheme etc
16    (1)
In Chapter 3 of Part 7 of ICTA—
5
(a)
in section 289 (eligibility for relief), for subsections (9) to (13)
substitute—
“(9)
Section 190 of ITA 2007 (meaning of “qualifying 90%
subsidiary”) applies for the purposes of this Chapter.”;
(b)
in section 312(1) (interpretation of Chapter), in the definition of
10
“qualifying 90% subsidiary”, omit “to (13)”.
      (2)
In section 190 of ITA 2007 (EIS: meaning of “qualifying 90% subsidiary”),
after subsection (1) insert—
“(1A)
For the purposes of this Part, a company (“company A”) which is a
subsidiary of another company (“company B”) is a qualifying 90%
15
subsidiary of a third company (“company C”) if—
(a)
company A is a qualifying 90% subsidiary of company B, and
company B is a qualifying 100% subsidiary of company C, or
(b)
company A is a qualifying 100% subsidiary of company B,
and company B is a qualifying 90% subsidiary of company C.
20
(1B)
For the purposes of subsection (1A), no account is to be taken of any
control company C may have of company A.
(1C)
For those purposes, a company (“company X”) is a qualifying 100%
subsidiary of another company (“company Y”) at any time when the
conditions in subsection (1)(a) to (e) would be met if—
25
(a)
company X were the subsidiary,
(b)
company Y were the relevant company, and
(c)
in subsection (1) for “at least 90%” in each place there were
substituted “100%”.”
Venture capital trusts
30
17
In section 301 of ITA 2007, after subsection (1) insert—
“(1A)
For the purposes of this Chapter, a company (“company A”) which
is a subsidiary of a company that is not the relevant company
(“company B”) is a qualifying 90% subsidiary of the relevant
company if—
35
(a)
company A would be a qualifying 90% subsidiary of
company B (if company B were the relevant company), and
company B is a qualifying 100% subsidiary of the relevant
company, or
(b)
company A is a qualifying 100% subsidiary of company B,
40
and company B is a qualifying 90% subsidiary of the relevant
company.
(1B)
For the purposes of subsection (1A), no account is to be taken of any
control the relevant company may have of company A.

Finance Bill
Schedule 16 — Venture capital schemes etc
Part 5 — Other amendments
212

(1C)
For those purposes, a company (“company X”) is a qualifying 100%
subsidiary of another company (“company Y”) at any time when the
conditions in subsection (1)(a) to (e) would be met if—
(a)
company X were the subsidiary,
(b)
company Y were the relevant company, and
5
(c)
in subsection (1) for “at least 90%” in each place there were
substituted “100%”.”
Commencement
18
This Part of this Schedule is deemed to have come into force on 6th April
2007.
10
Part 5
Other amendments
EIS: approved investment funds
19    (1)
In Part 5 of ITA 2007 (enterprise investment scheme), in section 251(1)(c)
(approved investment fund as nominee), for “6” substitute “12”.
15
      (2)
The amendment made by this paragraph has effect in relation to approved
funds which closed or close on or after 7 October 2006.
VCTs: disposal of holding
20    (1)
Chapter 3 of Part 6 of ITA 2007 (VCT approvals) is amended as follows.
      (2)
In section 274(3) (requirements for the giving of approval), at the end of
20
paragraph (d) insert “, and
(e)
the 70% qualifying holdings condition by section 280A”.
      (3)
After section 280 insert—
“280A
The 70% qualifying holdings condition: disposal of holding
(1)
This section applies if—
25
(a)
a company which is a VCT disposes of shares or securities
(“the holding”),
(b)
the consideration for the disposal does not consist wholly of
new qualifying holdings, and
(c)
the holding was comprised in the company’s qualifying
30
holdings throughout the 6 months ending immediately
before the disposal.
(2)
For the purpose of determining whether the 70% qualifying holdings
condition is, has been or will be met—
(a)
the company is to be treated as if it continued to hold the
35
holding for the period of 6 months beginning with the
disposal (but see subsection (4)), and
(b)
the value of the company’s investments in that period is to be
treated as reduced by the amount of any monetary
consideration for the disposal.
40

Finance Bill
Schedule 16 — Venture capital schemes etc
Part 5 — Other amendments
213

(3)
The value of the holding in the period mentioned in subsection (2)(a)
is to be treated as equal to its value (determined in accordance with
this Chapter) immediately before the disposal.
(4)
If the consideration for the disposal includes new qualifying
holdings, subsection (2)(a) has effect as if the reference to the holding
5
were to the appropriate proportion of the holding (the value of
which is that proportion of the value of the holding, determined in
accordance with subsection (3)).
(5)
The appropriate proportion is—

where—
10
TC is the market value (at the time of the disposal) of the total
consideration for the disposal, and
NQH is the market value (at that time) of the new qualifying
holdings.
(6)
If at any time the value of the company’s investments would by
15
virtue of subsection (2)(b) be reduced to an amount less than the
value of its qualifying holdings, the value of its investments at that
time is to be treated as equal to the value of its qualifying holdings.
(7)
“New qualifying holdings” means shares or securities which (on
transfer to the company) are comprised in the company’s qualifying
20
holdings.
(8)
If (and to the extent that) the holding was acquired with money the
use of which is at any time ignored by virtue of section 280(2),
subsections (2) to (6) do not apply in relation to that time.
(9)
Nothing in this section applies in relation to disposals between
25
companies that are merging (within the meaning of section 323).”
      (4)
This paragraph is deemed to have come into force on 6th April 2007.
      (5)
The amendments made by this paragraph have effect in relation to disposals
made on or after that date.
VCTs: power to make regulations as to breaches of conditions
30
21    (1)
In section 284 of ITA 2007 (power to make regulations as to procedure), in
the existing provision (which becomes subsection (1))—
(a)
after paragraph (a) insert—
“(aa)
for and in connection with the making by a company
of an application to the Commissioners for Her
35
Majesty’s Revenue and Customs (“the
Commissioners”) for relief in respect of a breach
(including a future breach) of the conditions for its
VCT approval to continue in force,”,
(b)
in paragraph (c), for the words from “that the conditions” to the end
40
substitute—
“(i)
that the conditions for its VCT approval to
continue in force are no longer met, or

Finance Bill
Schedule 17 — Real Estate Investment Trusts
214

(ii)
that it is likely that those conditions will cease
to be met,”, and
(c)
in paragraph (d) omit “for Her Majesty’s Revenue and Customs”.
      (2)
After subsection (1) insert—
“(2)
In subsection (1)(aa), the reference to relief in respect of a breach of
5
the conditions mentioned there is to a determination by the
Commissioners that they will not exercise their power to withdraw
the company’s VCT approval by reason of the breach for such period
as they may determine (and subject to such conditions as they may
determine).
10
(3)
The provision that may be made by virtue of subsection (1)(aa)
includes—
(a)
provision as to the procedure to be followed in relation to
applications and determinations,
(b)
provision as to the grounds on which applications may be
15
made or determined, and
(c)
provision conferring a discretion to be exercised by the
Commissioners.”
Schedule 17
Section 51

Real Estate Investment Trusts
20
1
Part 4 of FA 2006 (REITs) is amended as follows.
2
In section 106 (conditions for company)—
(a)
in subsection (1), for “1 to 3” substitute “1 and 2”, and
(b)
after subsection (8) insert—
“(9)
For the purpose of Condition 6 a loan shall not be treated as
25
dependent on the results of the company’s business by
reason only that the terms of the loan provide—
(a)
for the interest to be reduced in the event of the results
improving, or
(b)
for the interest to be increased in the event of the
30
results deteriorating.”
3
In section 107 (conditions for tax-exempt business)—
(a)
in subsections (1)(a) and (2)(a), for “1 to 3” substitute “1 and 2”,
(b)
in subsections (1)(b) and (2)(b), for “Condition 4” substitute
“Condition 3”,
35
(c)
omit subsection (5),
(d)
in subsection (6), for “1 to 3” substitute “1 and 2”,
(e)
omit subsections (7) and (7A), and
(f)
in subsections (8) and (9), for “Condition 4” substitute “Condition 3”.
4
In section 108(2) (profit condition), for paragraph (b) substitute—
40
“(b)
“profits” means profits before deduction of tax, calculated in
accordance with international accounting standards and
excluding—

Finance Bill
Schedule 17 — Real Estate Investment Trusts
215

(i)
realised and unrealised gains and losses on the
disposal of property,
(ii)
changes in the fair value of hedging derivative
contracts (within the meaning of section 120(4)), and
(iii)
items which are outside the ordinary course of the
5
company’s business (irrespective of their treatment in
the company’s accounts), having regard to that
company’s past transactions.”
5
In section 109 (notice), after subsection (2) insert—
“(3)
Subsection (4) applies where a company—
10
(a)
does not expect to satisfy Condition 4 of section 106 on the
first day of an accounting period, by reason only that its
shares have not been listed and dealt with on a recognised
stock exchange within the preceding 12 months, but
(b)
reasonably expects to satisfy that Condition throughout the
15
rest of the accounting period in reliance on section 415(1)(b)
of ICTA.
(4)
Where this subsection applies—
(a)
subsection (2)(c) does not apply, but
(b)
the notice under subsection (1) must be accompanied by a
20
statement by the company containing the assertions specified
in subsection (5).
(5)
Those assertions are—
(a)
that Conditions 1, 2, 5 and 6 of section 106 are reasonably
expected to be satisfied in respect of the company throughout
25
the specified accounting period,
(b)
that Condition 3 of section 106 is reasonably expected to be
satisfied in respect of the company for at least a part of the
first day of the specified accounting period, and throughout
the remainder of that period, and
30
(c)
that Condition 4 of section 106 is reasonably expected to be
satisfied in respect of the company throughout all of the
specified accounting period apart from the first day.”
6
In section 115 (profit: financing cost ratio)—
(a)
in the formula in subsection (2), omit “+ Financing Costs”, and
35
(b)
in paragraph (a) of that subsection, after “allowances” insert “, of
losses from a previous accounting period and of amounts taken into
account under section 120(3)”.
7
In section 116 (minor or inadvertent breach)—
(a)
in subsection (3), after paragraph (c) insert—
40
“(ca)
make provision under paragraph (c) either by
specifying a sum that arises in relation to a company
or by providing for a sum to be treated as arising in
relation to a company;” and
(b)
after that subsection insert—
45
“(3A)
The regulations may make provision about, or by reference
to, anything done by or in relation to a company or any sum
arising or treated as arising—