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Income Tax Act 2007 (c. 3)

(The document as of February, 2008)

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254 Meaning of "disposal of shares"

(1) In this Part references to a disposal of shares include references to a disposal of an interest or right in or over shares.

(2) An individual is to be treated, for the purposes of this Part, as disposing of any shares which the individual is treated by virtue of section 136 of TCGA 1992 as exchanging for other shares.

255 Meaning of "issue of shares"

(1) In this Part--

(a) references (however expressed) to an issue of shares in any company are to such of the shares in the company as are of the same class and are issued on the same day, and

(b) references (however expressed) to an issue of shares in any company to an individual are to such of the shares in the company as are of the same class and are issued to the individual on the same day.

(2) Subsection (1)(b) has effect subject to sections 201(6), 202(2), 210(2), 219(1) and 228(1).

256 Meaning of "the termination date"

(1) In this Part "the termination date", in relation to any shares issued by a company, means--

(a) the third anniversary of the issue date, or

(b) if--

(i) the money raised by the issue was raised wholly or mainly for the purpose of a qualifying business activity within section 179(2) (the issuing company or a qualifying 90% subsidiary of that company carrying on or preparing to carry on a qualifying trade), and

(ii) neither the issuing company nor any of its qualifying 90% subsidiaries had begun to carry on the trade in question on the issue date,

the third anniversary of the date on which the issuing company or any qualifying 90% subsidiary of that company begins to carry on that trade.

(2) In determining for the purposes of subsection (1) when a qualifying trade is begun to be carried on by a qualifying 90% subsidiary of a company, any carrying on of the trade by it before it became such a subsidiary is to be ignored.

257 Minor definitions etc

(1) In this Part--

  • "arrangements" includes any scheme, agreement or understanding, whether or not legally enforceable,

  • "bonus shares" means shares which are issued otherwise than for payment (whether in cash or otherwise),

  • "director" is read in accordance with section 417(5) of ICTA,

  • "group" means a parent company and its qualifying subsidiaries,

  • "group company", in relation to a group, means the parent company or any of its qualifying subsidiaries,

  • "ordinary shares" means shares forming part of a company's ordinary share capital,

  • "parent company" means a company that has one or more qualifying subsidiaries and "single company" means a company that does not,

  • "period A", "period B" and "period C" have the meaning given by section 159, and

  • "research and development" has the meaning given by section 1006.

(2) Section 993 (connected persons) does not apply for the purposes of Chapter 2 (other than section 168(4)).

(3) Section 995 (control) does not apply for the purposes of the following provisions--

  • section 185(1)(a),

  • section 199(3)(a) and (b)(ii),

  • section 232(3),

  • section 233(2), and

  • section 243(4),

and in those provisions "control" is to be read in accordance with section 416(2) to (6) of ICTA.

(4) In this Part--

(a) references in any provision to the reduction of any EIS relief attributable to any shares include a reference--

(i) to the reduction of the relief to nil, and

(ii) if no relief has yet been obtained, to the reduction of the amount which apart from that provision would be the EIS relief, and

(b) references to the withdrawal of EIS relief in respect of any shares are--

(i) to the withdrawal of the EIS relief attributable to those shares, or

(ii) if no relief has yet been obtained, to ceasing to be eligible for EIS relief in respect of those shares.

(5) For the purposes of this Part shares in a company are not treated as being of the same class unless they would be so treated if dealt in on the Stock Exchange.

(6) For the purposes of this Part the market value at any time of any asset is the price which it might reasonably be expected to fetch on a sale at that time in the open market free from any interest or right which exists by way of security in or over it.

(7) In this Part--

(a) references to EIS relief obtained by an individual in respect of any shares include references to EIS relief obtained by the individual in respect of those shares at any time after the individual has disposed of them, and

(b) references to the withdrawal or reduction of EIS relief obtained by an individual in respect of any shares include references to the withdrawal or reduction of EIS relief obtained by the individual in respect of those shares at any such time.

(8) In the case of requirements that cannot be met until a future date, references in this Part to requirements being met for the time being are to nothing having occurred to prevent their being met.



Part 6 Venture capital trusts

Chapter 1 Introduction

258 Overview of Part

In this Part--

(a) Chapter 2 provides for VCT income tax relief ("VCT relief"), that is, entitlement to tax reductions in respect of amounts subscribed by individuals for shares issued to them by venture capital trusts,

(b) Chapter 3 provides for VCT approvals,

(c) Chapter 4 makes provision as to the meaning of "qualifying holding" for the purposes of Chapter 3,

(d) Chapter 5 confers power for regulations to make provision in relation to the winding up and merger of venture capital trusts, and

(e) Chapter 6 makes supplementary and general provision.

259 Venture capital trusts and VCT approvals

(1) In this Part "venture capital trust" means a company which--

(a) is not a close company, and

(b) is for the time being approved for the purposes of this Part by the Commissioners for Her Majesty's Revenue and Customs (see Chapter 3),

and "VCT" means a venture capital trust.

(2) In this Part "VCT approval" means an approval of a company for the purposes of this Part.

260 Other tax reliefs relating to VCTs

(1) Chapter 5 of Part 6 of ITTOIA 2005 (venture capital trust dividends) provides that, if conditions are met, no liability to income tax arises in respect of dividends paid in respect of shares in a VCT.

(2) Section 100 of TCGA 1992 (exemption for venture capital trusts etc) provides that gains accruing to a VCT are not to be chargeable gains.

(3) Section 151A of TCGA 1992 (venture capital trusts: reliefs) provides that a gain or loss accruing to an individual on a qualifying disposal of any ordinary shares in a company which--

(a) was a VCT at the time when the individual acquired the shares, and

(b) is still a VCT at the time of the disposal,

is not to be a chargeable gain or, as the case may be, an allowable loss.

(4) Schedule 5C to TCGA 1992 (venture capital trusts: deferred charge on re-investment, but only in relation to shares issued before 6 April 2004) provides that, if conditions are met, an individual's unused qualifying expenditure on shares in a VCT may be set against what would otherwise be chargeable gains.



Chapter 2 VCT relief

Entitlement to relief

261 Eligibility for relief

(1) An individual ("A") is eligible for VCT relief for a tax year if--

(a) a VCT issues eligible shares to A in that year,

(b) the VCT issues the shares for raising money, and

(c) A subscribes for the shares on A's own behalf.

(2) The amount in respect of which A is eligible for VCT relief for the tax year by reference to any shares is the amount subscribed by A for the shares.

(3) A is eligible for VCT relief by reference to any shares only if--

(a) the shares are both subscribed for and issued--

(i) for genuine commercial reasons, and

(ii) not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax, and

(b) A is at least 18 years old when the shares are issued.

(4) A is not eligible for VCT relief by reference to any shares if they are treated as issued to A by virtue of section 195(8) of FA 2003 (tax treatment of disposal by company of its own shares).

See section 271(4) for provision requiring the giving of notices about the effect of this subsection.

262 Entitlement to claim relief

(1) An individual ("A") who is eligible for VCT relief by reference to shares issued in a tax year is entitled to claim VCT relief for that year.

(2) A is entitled to claim VCT relief in respect of the amount on which A is eligible for VCT relief by reference to all or some of the shares.

This is subject to subsection (3).

(3) A is not entitled to claim VCT relief for any tax year on an amount of more than £200,000.

263 Form and amount of relief

(1) An individual who--

(a) is entitled to claim VCT relief for a tax year, and

(b) claims such relief for the year on any amount,

is entitled to a tax reduction for the year.

(2) The tax reduction is equal to 30% of the amount in respect of which the claim is made.

(3) The tax reduction is given effect at Step 6 of the calculation in section 23.

264 No entitlement to relief if there is a linked loan

(1) An individual is not entitled to VCT relief by reference to any shares ("the relevant shares") if a linked loan is made by any person, at any time in the relevant period, to the individual or an associate of the individual.

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

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

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

(3) In this section--

  • "linked loan" means a loan which--

    (a)

    would not have been made, or

    (b)

    would not have been made on the same terms,

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

  • "the relevant period", in relation to VCT relief in respect of any shares in a company which is a VCT, means the period--

    (a)

    beginning with--

    (i)

    the incorporation of the company, or

    (ii)

    if later, the date two years before the issue of the shares, and

    (b)

    ending immediately before the fifth anniversary of that issue.

265 No entitlement to relief which would have been lost if it had already been obtained

An individual is not entitled to VCT relief by reference to any shares if circumstances have arisen which would have resulted in the withdrawal or reduction of the relief, if that relief had already been obtained.



Loss of relief

266 Loss of relief if shares disposed of within 5 years

(1) This section applies, subject to section 267 (spouses or civil partners), if an individual--

(a) obtains VCT relief in respect of eligible shares in a VCT, and

(b) makes a disposal of those shares within 5 years of their issue to the individual.

(2) In the case of a disposal that is made otherwise than by way of a bargain made at arm's length, any VCT relief obtained by reference to the shares which are disposed of is to be withdrawn.

(3) In the case of a disposal that is made by way of a bargain made at arm's length, any VCT relief obtained by reference to the shares disposed of must--

(a) if it is greater than A, be reduced by A, and

(b) in any other case, be withdrawn.

(4) A is 30% of the amount or value of the consideration which the individual receives for the shares.

(5) The rules in subsections (6) and (7) are for determining which eligible shares of any class are treated as disposed of for the purposes of--

(a) this section, and

(b) section 267,

if a person disposes of some but not all of the eligible shares of that class which the person holds in a company.

(6) Shares acquired on an earlier day are treated as disposed of before shares acquired on a later day.

(7) Shares acquired on the same day are treated as disposed of in the following order--

(a) shares by reference to which VCT relief has not been obtained, and

(b) shares by reference to which VCT relief has been obtained.

267 Transfers of shares between spouses or civil partners

(1) Section 266 does not apply in the case of any disposal of shares made by an individual to the individual's spouse or civil partner, if it is made at a time when they are living together.

(2) Subsection (3) applies if any eligible shares which--

(a) have been issued to any individual ("the transferor"), and

(b) are shares by reference to which any VCT relief has been obtained,

are transferred to the transferor's spouse or civil partner ("the transferee") by a disposal such as is mentioned in subsection (1).

(3) If this subsection applies, section 266 and subsection (2) have effect, in relation to any subsequent disposal or other event, as if--

(a) the transferee were the person who had subscribed for the shares,

(b) the shares had been issued to the transferee at the time when they were issued to the transferor,

(c) there had been, in relation to the transferred shares, such a reduction by way of VCT relief in the transferee's liability to income tax as is equal to the actual reduction in respect of those shares of the transferor's liability, and

(d) that deemed reduction were (despite the transfer) to be treated for the purposes of section 266 as an amount of VCT relief obtained by reference to the shares transferred.

(4) Any assessment for withdrawing or reducing VCT relief because of a disposal or other event falling within subsection (3) is to be made on the transferee.

268 Loss of relief if VCT approval withdrawn

(1) This section applies if--

(a) the approval of any company as a VCT is withdrawn, and

(b) the withdrawal of the approval is not one to which section 281(3) (VCT approval treated as never having been given) applies.

(2) Any person who, at the time when the withdrawal takes effect, is holding any shares issued by the company by reference to which VCT relief has been obtained is treated for the purposes of section 266 as having disposed of those shares--

(a) immediately before that time, and

(b) otherwise than by way of a bargain made at arm's length.

269 Loss of relief which is subsequently found not to have been due

Any VCT relief obtained which is subsequently found not to have been due is to be withdrawn.

270 Assessment on withdrawal or reduction of relief

(1) An assessment for withdrawing or reducing VCT relief under any of sections 266 to 269 must be made for the tax year for which the relief was obtained.

(2) No assessment for withdrawing or reducing VCT relief obtained by reference to shares issued to any individual may be made because of any event occurring after the individual's death.



Supplementary

271 Provision of information

(1) If an event occurs that results in any VCT relief falling to be withdrawn or reduced, the individual by whom the relief was obtained must, within 60 days of coming to know of the event, give notice to an officer of Revenue and Customs containing particulars of the event.

(2) If an officer of Revenue and Customs has reason to believe that a person has not given a notice which the person is required to give under subsection (1), the officer may by notice require the person to provide the officer, within such time as may be specified in the notice, with such information relating to the event as the officer may reasonably require for the purposes of the provisions of this Chapter.

(3) The period specified in a notice under subsection (2) must be at least 60 days.

(4) If a company which is a VCT issues to any individual eligible shares to which section 261(4) applies, it must--

(a) at the time of the issue of those shares, give the individual a notice stating that the individual is not eligible for VCT relief by reference to those shares, and

(b) not later than 3 months after the issue of those shares, give a copy of that notice to an officer of Revenue and Customs.

(5) No obligation as to secrecy imposed by statute or otherwise prevents an officer of Revenue and Customs from disclosing to a VCT that VCT relief has been obtained by reference to a particular number or proportion of its shares.

272 Regulations as to procedure etc

(1) This section applies to VCT relief and relief for which the following provide--

(a) section 151A of TCGA 1992 (VCTs: reliefs),

(b) Schedule 5C to TCGA 1992 (VCTs: deferred charge on re-investment),

(c) Chapter 5 of Part 6 of ITTOIA 2005 (VCT dividends), and

(d) regulations under Chapter 5 of this Part.

(2) The Treasury may by regulations make such provision as they consider appropriate for--

(a) giving effect to relief to which this section applies, and

(b) preventing such relief from being given unless a claim is made in accordance with the regulations and such other requirements as may be imposed by the regulations have been met.

(3) Regulations under this section may make provision as to the manner in which, and the persons by whom, relief to which this section applies is to be claimed.

273 Interpretation of Chapter

(1) In this Chapter "eligible shares", in relation to a company which is a VCT, means ordinary shares in the VCT which, throughout the period of 5 years beginning on the date on which they are issued, carry--

(a) no present or future preferential right to dividends or to a company's assets on its winding up, and

(b) no present or future right to be redeemed.

(2) In this Chapter references to a disposal of shares include references to a disposal of an interest or right in or over shares.



Chapter 3 VCT approvals

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Giving of approval

274 Requirements for the giving of approval

(1) Subject to section 275, the Commissioners for Her Majesty's Revenue and Customs must not approve a company for the purposes of this Part unless it is shown to their satisfaction that the conditions mentioned in subsection (2)--

(a) are met in relation to the most recent complete accounting period of the company, and

(b) will be met in relation to the accounting period of the company which is current when the application for approval is made.

(2) The conditions applied by subsection (1) (which are also applied by section 275(1) and other provisions of this Chapter) are set out in column 2 of the following table together with, in column 1 of the table, the descriptions by which they are referred to.

In each of those conditions "the relevant period" means the accounting period that is relevant for the purposes of the particular provision by which the condition is applied.

Description Condition
The listing conditionThe shares making up the company's ordinary share capital (or, if there are such shares of more than one class, those of each class) have been or will be listed throughout the relevant period in the Official List of the Stock Exchange
The nature of income conditionThe company's income in the relevant period has been or will be derived wholly or mainly from shares or securities
The income retention conditionThe company has not retained or will not retain an amount which is greater than 15% of the income it derived or will derive in the relevant period from shares or securities
The 15% holding limit conditionNo holding in any company, other than a VCT or a company that would qualify as a VCT but for the listing condition, has represented or will represent at any time during the relevant period more than 15% by value of the company's investments
The 70% qualifying holdings conditionAt least 70% by value of the company's investments has been or will be represented throughout the relevant period by shares or securities included in qualifying holdings of the company
The 30% eligible shares conditionAt least 30% by value of the company's qualifying holdings has been or will be represented throughout the relevant period by holdings of eligible shares

(3) The conditions mentioned in subsection (2) are supplemented as follows--

(a) the nature of income condition and the income retention condition by section 276,

(b) the 15% holding limit condition by section 277,

(c) the 15% holding limit condition, the 70% qualifying holdings condition and the 30% eligible shares condition by sections 278 and 279, and

(d) the 70% qualifying holdings condition and the 30% eligible shares condition by section 280.

275 Alternative requirements for the giving of approval

(1) This section applies if one or more of the conditions mentioned in section 274(2) are not met with respect to a company in relation to its most recent complete accounting period.

(2) The Commissioners for Her Majesty's Revenue and Customs may still approve the company for the purposes of this Part if they are satisfied that the condition or conditions in question--

(a) will be met in relation to the period mentioned in subsection (3), and

(b) will continue to be met in relation to accounting periods following that period.

(3) The period is--

(a) in relation to the listing condition, the nature of income condition, the income retention condition and the 15% holding limit condition, the accounting period of the company which is current when the application for approval is made, or its next accounting period,

(b) in relation to the 70% qualifying holdings condition and the 30% eligible shares condition, an accounting period of the company beginning no more than 3 years after the time when the approval is given or, if earlier, when the approval takes effect.

276 Conditions relating to income

(1) Subsections (2) and (3) apply in determining for the purposes of the nature of income condition and the income retention condition--

(a) the amount of a company's income, or

(b) the amount of income which a company derives from shares or securities.

(2) The amounts to be brought into account under Chapter 2 of Part 4 of FA 1996 in respect of the company's loan relationships are to be determined without reference to any debtor relationship of the company.

(3) The excess of any relevant credits over any relevant debits is to be treated as income which the company derives from shares or securities.

In this subsection "relevant credits" and "relevant debits" are credits and debits brought into account by virtue of paragraph 14(3) of Schedule 26 to FA 2002 as if they were non-trading credits or non-trading debits.

(4) The income retention condition does not apply as regards an accounting period if the amount which the company would be required to distribute in order to meet that condition is less than--

(a) £10,000, or

(b) if the period is shorter than 12 months, a proportionately reduced amount.

(5) The income retention condition does not apply as regards an accounting period if--

(a) the company is required to retain income in respect of the period by virtue of a restriction imposed by law, and

(b) the amount of income which the company is so required to retain in respect of the period exceeds an amount equal to 15% of the income the company derives from shares or securities.

(6) Subsection (5) does not apply if--

(a) the amount of income the company retains in respect of the accounting period exceeds the amount of income it is required, by virtue of a restriction imposed by law, to retain in respect of the period, and

(b) the sum of the excess and any amount of income the company distributes in respect of the period is at least--

(i) £10,000, or

(ii) if the period is shorter than 12 months, a proportionately reduced amount.

277 The 15% holding limit condition

(1) If the 15% holding limit condition was met when a holding in a company was acquired or last added to, the condition is treated as continuing to be met until an addition is next made to it.

(2) "Holding in a company" means the shares or securities (whether of one class or more than one class) held in any one company.

(3) An addition is made to a holding in a company whenever the company whose holding it is--

(a) acquires further shares or securities in the company, but

(b) does not do so by being allotted shares or securities without becoming liable to give any consideration.

(4) For the purposes of this section--

(a) holdings in companies which--

(i) are members of a group, whether or not including the company whose holdings they are ("company A"), and

(ii) are not excluded from the 15% holding limit condition,

are to be treated as holdings in a single company, and

(b) if company A is a member of a group, money owed to it by another member of the group is to be treated--

(i) as a security of the latter held by company A, and

(ii) accordingly as, or as part of, the holding of company A in the company owing the money.

For the purposes of this subsection "group" means a company and all companies which are its 51% subsidiaries.

(5) Subsection (6) applies if, in connection with a scheme of reconstruction--

(a) a company issues shares or securities,

(b) the shares or securities are issued to persons holding shares or securities in a second company in respect of and in proportion to (or as nearly as may be in proportion to) their holdings in the second company, and

(c) those persons do not become liable to give any consideration for the shares or securities.

In this subsection "scheme of reconstruction" has the same meaning as in section 136 of TCGA 1992.

(6) For the purposes of this section--

(a) a holding of the shares or securities in the second company, and

(b) a corresponding holding of the shares or securities issued by the company,

are to be regarded as the same holding.

278 Conditions relating to value of investments: general

(1) This section and section 279 apply for the purposes of the 15% holding limit condition, the 70% qualifying holdings condition and the 30% eligible shares condition ("the relevant conditions").

(2) The value of a holding of investments of any description is to be taken, unless subsection (3) applies, to be its value when acquired.

(3) If, in the case of a holding of investments of any description--

(a) the holding is added to by a further holding of investments of that description, or

(b) any payment is made in discharge, in whole or in part, of any obligation attached to the holding that (by discharging the whole or any part of the obligation) increases the value of the holding,

the value of the holding is to be taken to be its value immediately after the most recent addition or payment.

(4) For the purposes of this section an addition is made to a holding of investments of any description whenever the company whose holding it is--

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