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Income Tax Act 2007 (c. 3)

(The document as of February, 2008)

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(b) ending immediately before the termination date relating to the shares.

160 Overview of other Chapters of Part

In this Part--

(a) Chapter 5 provides for the attribution of EIS relief to shares and the making of claims for such relief,

(b) Chapter 6 provides for EIS relief to be withdrawn or reduced in the circumstances mentioned in that Chapter,

(c) Chapter 7 makes provision with respect to the procedure for the withdrawal or reduction of EIS relief, and

(d) Chapter 8 contains supplementary and general provisions.

161 Other tax reliefs relating to EIS

(1) Chapter 6 of Part 4 (losses on disposal of shares) provides for relief against the income of an individual who incurs an allowable loss for capital gains tax purposes on a disposal of shares to which EIS relief is attributable.

(2) Subsection (3) of section 392 (loan to buy interest in close company) provides that subsection (2)(a) of that section does not apply if at any time--

(a) the individual by whom the shares are acquired, or

(b) that individual's spouse or civil partner,

makes a claim for EIS relief in respect of the shares.

(3) Section 150A of TCGA 1992 makes provision about gains or losses on the disposal of shares to which EIS relief is attributable.

(4) Schedule 5B to TCGA 1992 provides relief in respect of the re-investment under EIS of the proceeds of assets disposed of in circumstances where there would otherwise be a chargeable gain.

(5) Schedule 5BA to TCGA 1992 provides for the application of taper relief in cases where EIS relief or relief under Schedule 5B to that Act applies.



Chapter 2 The investor

Introduction

162 Overview of Chapter

The investor is a qualifying investor in relation to the relevant shares if the requirements of this Chapter are met as to--

(a) no connection with the issuing company (see section 163),

(b) no linked loans (see section 164), and

(c) no tax avoidance (see section 165).



The requirements

163 The no connection with the issuing company requirement

(1) The investor must not be connected with the issuing company (whether before or after its incorporation) at any time during the period--

(a) beginning two years before the issue of the shares, and

(b) ending immediately before the termination date relating to the shares.

(2) This is subject to section 169(1).

164 The no linked loans requirement

(1) No linked loan is to be made by any person, at any time in period A, to the investor or an associate of the investor.

(2) In this section "linked loan" means any loan which--

(a) would not have been made, or

(b) would not have been made on the same terms,

if the investor had not subscribed for the relevant shares, or had not been proposing to do so.

(3) References in this section to the making by any person of a loan to the investor or an associate of the investor include references--

(a) to the giving by that person of any credit to the investor or any associate of the investor, and

(b) to the assignment to that person of a debt due from the investor or any associate of the investor.

165 The no tax avoidance requirement

The relevant shares must be subscribed for by the investor 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 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--

(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).

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

(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--

(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 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 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.

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)--

(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.

(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,

(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 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 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 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--

(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

(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.

(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 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 issuing company or a subsidiary of the issuing company, and

(ii) being in receipt of, or entitled to receive, remuneration as such, and

(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,

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--

(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.

(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.

(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 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 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 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 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

(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 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 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 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

(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 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 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 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--

(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,

A is connected with the company under this section.



Chapter 3 General requirements

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Introduction

172 Overview of Chapter

The general requirements are met in respect of the relevant shares if the 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),

(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--

(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 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.

(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 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 shares), and

(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 (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 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 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 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

(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 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

(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--

(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 company, and

(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--

(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--

(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.

(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 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--

(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.

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,

(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 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 attached to making the investment.

(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 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.

(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 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.

(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.

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"

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,

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 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--

(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.

(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 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 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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