This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 15: Share loss relief: identification of which shares are disposed of: clause 76

This change legislates the practice that, if the identification rule in section 576(1) of ICTA identifies that some but not all of the qualifying shares in the mixed holding are disposed of, the rule is also applied to determine which of those shares are disposed of.

This change is the same as that made in section 148(2) of ITA for the purposes of relief against income tax. See Change 28 in Annex 1 to the explanatory notes on ITA.

It is stated explicitly in clause 76(2)(b) that the rule as amended by Change 14 so applies.

The effect in principle of this change will depend on whether the rule as amended results in different shares being identified as disposed of by the taxpayer from those identified under the rule in the source legislation. Identification of different shares may in principle result in the amount of share loss relief available on the disposal in question being less, more or the same and may also affect the relief available on a subsequent disposal. But in practice the qualifying shares disposed of and the proportion of the loss attributable to those shares is determined on a just and reasonable basis. This will normally give the same result as the rewritten legislation (see paragraph 47150 of HMRC’s Venture Capital Schemes Manual).

This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 16: Share loss relief: identification of shares disposed of out of a mixed holding: clause 76

This change expands and clarifies the rules for identifying the shares disposed of, in cases where the company disposes of some only of the shares in a mixed holding. As to what constitutes a mixed holding, see Change 14.

Section 576(1) of ICTA sets out a general rule that, where shares are disposed of out of a mixed holding, the shares disposed of are to be identified on a last in first out (LIFO) basis.

This rule is modified by section 576(1C) of ICTA in the case of a mixed holding which includes shares to which investment relief within the meaning given by Schedule 15 to FA 2000 (corporate venturing scheme) is attributable.

Shares forming a section 104 holding or a 1982 holding are regarded for the purposes of corporation tax on chargeable gains as indistinguishable parts of a single asset. Thus, the consideration given for the shares in the holding is spread evenly across the shares and there is no need for the purposes of corporation tax on chargeable gains to identify the specific shares disposed of.

The LIFO identification rule is, however, necessary for the purposes of section 573 of ICTA to identify whether, on the disposal of some only of the shares out of such a holding consisting partly of shares that are not capable of being qualifying shares, the shares disposed of are qualifying shares.

Shares of the same class held by the company in the same capacity will normally constitute a section 104 holding or a 1982 holding (see sections 104 and 109 of TCGA). Section 107 of TCGA, however, provides special rules for identifying shares where there are acquisitions and disposals within a ten day period. Where some but not all of the shares acquired within a ten day period are disposed of within that period, section 107 of TCGA identifies the shares disposed of on a first in first out (FIFO) basis.

Section 105 of TCGA contains rules in relation to shares acquired on the same day. In practice, if some but not all of the shares of the same class acquired on the same day are shares that are not capable of being qualifying shares and if some only of the shares acquired on that day are disposed of, the question whether and to what extent the shares disposed of are qualifying shares is determined for the purposes of section 573 of ICTA on a just and reasonable basis; normally pro rata to the number of shares acquired on that day.

In rewriting the rule in section 576(1) of ICTA, the approach taken in clause 76 is to ensure that the identification rules for share loss relief are wholly consistent with the identification rules for corporation tax on chargeable gains, so that:

• so far as the rules in sections 105 and 107 of TCGA serve conclusively to identify whether and to what extent the shares disposed of out of a mixed holding are qualifying shares, those rules are explicitly applied (see subsections (3)(a)(i) and (4));

• so far as shares acquired on different days are included in a section 104 holding, the LIFO rule in section 576(1) of ICTA is applied separately to the shares in the section 104 holding (see subsections (3)(a)(ii) and (5)); and

• so far as shares acquired on different days are included in a 1982 holding, the LIFO rule in section 576(1) of ICTA is applied separately to the shares in the 1982 holding (see subsections (3)(a)(ii) and (5)).

In a case where the mixed holding includes shares to which investment relief is attributable, subsections (3)(a), (4) and (5) are displaced by subsections (3)(b) and (6).

In some cases those rules do not conclusively determine whether and to what extent the shares disposed of are qualifying shares. They may, for example, identify that some only of shares of the same class acquired on the same day are disposed of. In that case it will be necessary to determine whether any of the shares disposed of are shares that are not capable of being qualifying shares. Subsection (7) legislates existing practice by providing an explicit rule that the determination is to be made on a just and reasonable basis.

This change will only have any effect on taxpayers in the rare circumstances of the disposal at a loss of qualifying shares being some only of a number of shares acquired at separate times not earlier than nine days before the date of the disposal. The change will apply a FIFO rule rather than a LIFO rule. The effect may be adverse or favourable depending on whether the shares identified as disposed of are or are not qualifying shares and, if qualifying shares were subscribed for at different times, the respective amounts subscribed for the qualifying shares. In all other circumstances, it will have no effect for taxpayers.

This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.

Change 17: Share loss relief: shares to which section 127 of TCGA applies: clause 77

This change makes explicit the time at which, among others, corresponding bonus shares are treated as issued for the purposes of clause 76. It is, in part, consequential on the inclusion of clause 73(3) (see Change 12) which treats corresponding bonus shares as subscribed for by the company.

This change is the same as that made in section 149(2) of ITA for the purposes of relief against income tax. See Change 31 in Annex 1 to the explanatory notes on ITA.

The time at which such shares are treated as issued to or acquired by the company claiming relief needs to be ascertained for a number of purposes. See clause 89 and Change 20.

The time at which corresponding bonus shares are treated as issued to or acquired by the company claiming relief also needs to be ascertained for the purpose of determining which shares are disposed of in accordance with the identification rules in section 576(1) and (1C) of ICTA, rewritten in clause 76.

Clause 77(1) has been included for this purpose. A different approach from that in clause 89(2) has been adopted. Clause 76 applies where the holding includes shares to which investment relief within the meaning given by Schedule 15 to FA 2000 (corporate venturing scheme) is attributable. In cases where it so applies, clause 76 applies the rules in paragraph 93 of Schedule 15 to FA 2000. For consistency, clause 77(1) follows the wording in paragraph 93(7) of that Schedule.

Clause 77(1) and paragraph 93(7) of Schedule 15 to FA 2000 do not apply only to issues of corresponding bonus shares. They also apply to allotments of shares for payment, for example by way of rights, which meet the requirements of section 126(2)(a) of TCGA and to which section 127 of that Act applies.

This ensures that, if investment relief is not attributable to the shares in the existing holding or the new shares, new shares issued by way of rights within section 126(2)(a) of TCGA are treated for the purposes of clause 76 as acquired at the same time as the shares in the existing holding.

But if investment relief is attributable to the shares in the existing holding or to new shares allotted for payment, clause 77(1) does not apply to the allotment. This is because paragraph 81 of Schedule 15 to FA 2000 provides that, if there is such an allotment for payment and investment relief is attributable either to the shares in the existing holding or to the allotted shares, section 127 of that Act does not apply.

In addition to making the necessary provision consequent on the explicit treatment of corresponding bonus shares as being subscribed for, this change has the effect, for the purposes of clause 76, of treating rights issue shares as issued earlier than the date on which they are actually issued, except as described in the preceding paragraph.

If the rights issue shares form part of a mixed holding and some only of the shares in the mixed holding are disposed of, the effect of this change is to prevent the taxpayer from claiming a greater amount of relief or from obtaining relief earlier than would be the case under generally accepted practice (see paragraphs 47400 and 48350 of HMRC’s Venture Capital Schemes Manual), by advancing an argument that the rights issue shares are to be identified as being among the shares disposed of by reference to the actual date of their issue.

This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 18: Share loss relief: nominees and bare trustees: clause 77

This change makes clear that, if shares of the same class are held as to some directly by the company and as to the others by a nominee or bare trustee for it, all the shares are included in a single holding of the company for the purposes of clause 76.

This change is the same as that made in section 149(3) of ITA for the purposes of relief against income tax. See Change 32 in Annex 1 to the explanatory notes on ITA.

A company which has subscribed for shares may subsequently wish to transfer the shares into the name of a nominee or bare trustee. On a disposal of the shares on behalf of the company by the nominee or bare trustee, the allowable loss for the purposes of corporation tax on chargeable gains and the entitlement to relief under section 573 of ICTA is that of the company not that of the nominee or bare trustee.

The effect of this change is to to prevent the taxpayer from claiming a greater amount of relief or obtaining relief earlier than has hitherto been the case in practice, by advancing an argument that, where a company has beneficial holdings of shares one of which is held directly and the other of which is held through a nominee or bare trustee, the provisions of clause 76 should be applied separately.

This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 19: Share loss relief: resolution of conflicting provisions: clauses 74 and 87 and Schedule 2 (disposals of new shares, and relief after an exchange of shares for shares in another company)

This change makes clear that the provisions of clause 74 do not apply to an exchange of shares to which clause 87 applies. It resolves an apparent conflict between section 304A of ICTA, rewritten by ITA as sections 576J and 576K of ICTA, and section 575(2) of ICTA, rewritten in clause 74, which arises from the way in which section 575(2) of that Act achieves its purpose.

This change is the same as that made in sections 136(2) and 145(3) of ITA for the purposes of relief against income tax. See Change 24 in Annex 1 to the explanatory notes on ITA.

Section 575(2) of ICTA is an anti-avoidance provision. Its purpose is to prevent a person from obtaining share loss relief in respect of shares that are not capable of being qualifying shares in a company (“Oldco”) by swapping them for shares in another company (“Newco”) that are capable of being qualifying shares, except to the extent that the person gives additional consideration for the shares in Newco. For example, the shares in Oldco may not be capable of being qualifying shares because they were purchased from another shareholder. This provision has existed since the introduction of share loss relief in 1980.

Section 304A of ICTA was first applied for the purposes of share loss relief as part of the changes to the meaning of “qualifying trading company” made by FA 1998. It deals with the continuity of the requirements to be met by Newco following an exchange of qualifying shares in Oldco for qualifying shares in Newco without change of ownership.

Section 575(2) of ICTA applies to the issue of ordinary shares (“new shares”) by Newco in an exchange or scheme of reconstruction within section 135 or 136 of TCGA relating to shares (“old shares”) in Oldco. The new shares are in these circumstances “issued in consideration of .. money’s worth”, that is the transfer or cancellation of the old shares. Accordingly, if Newco is a qualifying trading company in relation to the disposal of the new shares, the new shares disposed of will be qualifying shares (see section 573(6) of ICTA rewritten in clause 73(2)). This is the case whether or not the old shares are capable of being qualifying shares.

Section 575(2)(a) of ICTA operates to prevent share loss relief being obtained on the disposal of the new shares where the old shares were not themselves capable of being qualifying shares by requiring the following assumptions to be made:

• first, that section 127 of TCGA does not apply to the exchange or scheme of reconstruction, so that there is a disposal of the old shares for the purposes of corporation tax on chargeable gains; and

• second, that on that assumed disposal an allowable loss would have been incurred for those purposes.

Section 575(2)(a) of ICTA then requires that share loss relief would have been obtainable on the assumed disposal on the basis that it was a disposal by way of a bargain made at arm’s length. This is a consequence of the express reference in section 575(2)(a) of ICTA to the allowable loss being incurred “in disposing of [the old shares] as mentioned in subsection (1)(a) above”. Section 575(1) of ICTA sets out the categories of disposal in respect of which a claim for share loss relief may be made, including in paragraph (a) a disposal “by way of a bargain made at arm’s length for full consideration”. This requirement is rewritten in clause 68(2)(a). See the commentary on clause 68 and Change 11 in Annex 1.

Unless, on the assumptions described, share loss relief would have been obtained on the assumed disposal of the old shares, share loss relief may not be obtained on the disposal of the new shares, except to that extent that any “new consideration” has been given for the new shares (see section 575(2)(b) of ICTA rewritten in clause 74(4) and (5)).

Section 304A of ICTA is one of the provisions applied by section 576(4A) of that Act with modifications for the purposes of defining a qualifying trading company by reference to the requirements of section 293 of ICTA. Section 304A of ICTA has been rewritten by ITA with the required modifications, in sections 145 and 146 of ITA for the purposes of relief against income tax and in sections 576J and 576K of ICTA for the purposes of relief against income subject to corporation tax. See the commentary on sections 145 and 146 of, and Schedule 1 to, ITA in the explanatory notes on that Act.

Section 304A of ICTA relates to an exchange of securities within section 135 of TCGA affecting old shares which are qualifying shares. The type of exchange to which section 304A of ICTA applies is one which involves no change of ultimate ownership. It typically occurs when a new holding company is placed above a previously loss making company as one of the steps in obviating difficulties arising under company law in relation to distributable profits.

The effect of section 304A of ICTA as modified and applied by section 576(4A) of that Act is that, if the exchange meets the requirements of section 304A(1) of ICTA, the new shares are capable of being qualifying shares and the requirements for Newco to be a qualifying trading company are to be applied as if Oldco and Newco were one and the same company. In particular, the unquoted status requirement in section 293(1A) of ICTA (rewritten in section 143 of ITA and section 576H of ICTA) and the gross assets requirement in section 293(6A) of ICTA (rewritten in section 142 of ITA and section 576G of ICTA) are to be met only at the time of issue of the old shares by Oldco.

But if the assumptions required by section 575(2)(a) of ICTA are to be applied to an exchange falling within section 304A(1) of that Act, the requirement that the assumed disposal arises by way of a bargain made at arm’s length is unlikely to be capable of being met. This would prevent a claim for share loss relief on the disposal of the shares in Newco and render nugatory the application of section 304A of ICTA for the purposes of share loss relief.

Change 24 in Annex 1 to the explanatory notes on ITA resolves that apparent conflict, for the purposes of relief against income tax, by providing in section 145(3)(a) of ITA that nothing in section 136(2) of that Act applies to an exchange falling within section 145(1) and cross-referring to that provision in section 136(2) of that Act.

But it was not within the scope of ITA, an income tax rewrite Bill, to make the equivalent changes in sections 575(2) and 576J of ICTA for the purposes of relief under section 573 of that Act against income subject to corporation tax. It is within the scope of a corporation tax rewrite Bill to make them and this change accordingly does so.

The effect of this change is to ensure that, in relation to shares in Newco issued on or after 1 April 2010, the legislation no longer contains an apparent conflict between provisions. The conflict is apparent in the sense that it arises in principle but has no effect in practice.

This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 20: Share loss relief: time of issue of corresponding bonus shares: clause 89, Schedule 1 (paragraph 57A of Schedule 2 to ITA) and Schedule 2 (application of Part 5 of Schedule 2 in relation to corresponding bonus shares)

This change inserts an explicit provision in clause 89 determining the time at which corresponding bonus shares are treated as issued to a company. It is consequential on the inclusion of clause 73(3) which treats corresponding bonus shares as subscribed for by the company (see Change 12).

This change is the same as that made in section 150(3) of ITA for the purposes of relief against income tax. See Change 34 in Annex 1 to the explanatory notes on ITA.

The time at which such shares are treated as issued to the company claiming relief needs to be ascertained for the purposes of determining:

• the beginning of the period during which the qualifying trading company must carry on its business wholly or mainly in the United Kingdom (clause 78(5)(a));

• the times at which the gross assets requirement is to be met (clause 84(1)(a) and (2)(a));

• the time at which the unquoted status requirement is to be met (clause 85(1)); and

• if clause 87 applies, the time at which the new shares are to be treated as having been issued for the purposes of clause 88(2)(b).

A provision corresponding to clause 89(2) has been included in Part 5 of Schedule 2 with appropriate adaptation where the matter in question is whether, in relation to the application of transitional provisions, corresponding bonus shares are treated as having been issued before, rather than on, a particular date. A consequential amendment has been made by Schedule 1 adding in Part 6 of Schedule 2 to ITA a provision mirroring that in Part 5 of Schedule 2 to this Bill.

This change is a necessary direct consequence of the inclusion, to the advantage of taxpayers, of the explicit treatment of corresponding bonus shares as being subscribed for.

This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 21: Share loss relief: investment company: omission of reference to savings bank and bank for savings: clause 90, Schedule 1 (section 151 of ITA) and Part 5 of Schedule 2 (interpretation of Chapter 5 of Part 4)

This change results in certain savings banks and banks for savings no longer falling within the definition of “investment company” for the purposes of share loss relief in Chapter 5 of Part 4 of this Bill and Chapter 6 of Part 4 of ITA.

Section 576L(1) of ICTA and section 151(1) of ITA apply the definition of investment company in section 130 of ICTA, with modification, for the purposes of share loss relief under section 573 of ICTA and Chapter 6 of Part 4 of ITA.

The definition of “investment company” in section 130 of ICTA, which applies for the purposes of Part 4 of ICTA, is as follows:

“investment company”, means any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom, but includes any savings bank or other bank for savings except any which, for the purposes of the Trustee Savings Bank Act 1985 is a successor or a further successor to a trustee savings bank

The principal use of the term in Part 4 of ICTA was for the purposes of section 75 of ICTA (expenses of management: investment companies). FA 2004 repealed that section in relation to accounting periods beginning on or after 1 April 2004 and replaced it with the current provisions in sections 75 to 75B of ICTA (rewritten in Part 16 of CTA 2009). The current provisions apply to “companies with investment business” as defined in section 130 of ICTA (rewritten in section 1218(1) of CTA 2009) That definition was inserted in section 130 of ICTA by FA 2004 and is as follows:

“company with investment business” means any company whose business consists wholly or partly in the making of investments.

The notes on clauses to the Finance Bill 2004 state in relation to that definition that:

the reference to savings banks has now been removed on the grounds that it is obsolete.

The definition of “investment company” was retained in section 130 of ICTA for the reasons given in the notes on clauses to Finance Bill 2004:

26.     The current definition of an “investment company” has not been repealed. The definition of an “investment company” will remain relevant for the purposes of:

•     section 573 ICTA (where it helps identify the companies entitled to relief against income in respect of losses on unquoted shares in trading companies); and

•     the transitional rules in Clause 43.

This change replaces the cross-reference to and modification of the definition of “investment company” in section 576L(1) of ICTA and section 151(1) of ITA by a stand alone definition in clause 90(1) of this Bill and section 151(1) of ITA in the following terms:

“investment company” means a company—

(a)     whose business consists wholly or mainly in the making of investments, and

(b)     which derives the principal part of its income from the making of investments,

but does not include the holding company of a trading group.

This wording omits reference to “any savings bank or other bank for savings except any which, for the purposes of the Trustee Savings Bank Act 1985 is a successor or a further successor to a trustee savings bank”. The omission will apply, for corporation tax purposes, only in relation to the disposal on or after 1 April 2010 of shares issued on or after that date and, for income tax purposes, only in relation to the disposal on or after 6 April 2010 of shares issued on or after that date. See Part 5 of Schedule 2 (interpretation of Chapter) which preserves the effect of the source legislation in relation to shares issued before the relevant date. The omission has two effects.

First, no such savings bank or bank for savings will be eligible for share loss relief under clause 68 of this Bill on such a disposal as it will no longer meet the requirement that the investor is an investment company.

This is potentially adverse to taxpayers in principle and in practice, but no such bank is known to carry on business in the United Kingdom which includes the making of investments in shares in companies capable of being qualifying trading companies.

Second, the requirements in clause 78(2)(b) and (3)(b) of this Bill and section 134(2)(b) and (3)(b) of ITA, that to be a qualifying trading company the company must not be an investment company at the times mentioned, will be capable of being met by a company that is such a savings bank or bank for savings in relation to a disposal to which the new definition applies.

This is potentially favourable to taxpayers in principle but will have no effect in practice, as it is also a requirement of clause 78(2)(b) and (3)(b) of this Bill and section 134(2)(b) and (3)(b) of ITA that the company is not at those times a trading company (as defined in clause 90(1) of this Bill and section 151(1) of ITA). Such a bank will be a trading company within that definition, notwithstanding that it may be a mutual trader and the profits of its trade are not within the charge to tax on trade profits.