Income Tax Act 2007

Chapter 3U.K.General requirements

IntroductionU.K.

172Overview of ChapterU.K.

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),

[F1(aa)the maximum amount raised annually through risk capital schemes (see section 173A),]

[F2(ab)the spending of money raised by SEIS investments (see section 173B),]

(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)[F3, and

(g)no disqualifying arrangements (see section 178A)].

The requirementsU.K.

173The shares requirementU.K.

(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—

[F4(a)any present or future preferential right to dividends that is within subsection (2A),

(aa)any present or future preferential right to a company's assets on its winding up,] or

(b)any present or future right to be redeemed.

[F5(2A)A preferential right to dividends carried by a share in a company is within this subsection if—

(a)the amount of any dividends payable pursuant to the right, or the date or dates on which they are payable, depend to any extent on a decision of the company, the holder of the share or any other person, or

(b)the amount of any dividends that become payable at any time pursuant to the right includes any amount that became payable at any earlier time pursuant to the right, but has not been paid.]

(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.

[F6173AThe maximum amount raised annually through risk capital schemes requirementU.K.

(1)The total amount of relevant investments made in the issuing company in the year ending with the date the relevant shares are issued must not exceed £2 million.

(2)In subsection (1), the reference to relevant investments made in the issuing company includes relevant investments made in any company that is, or has at any time in the year mentioned there been, a subsidiary of the issuing company (whether or not it was such a subsidiary when the investment was made).

(3)A “relevant investment” is made in a company if—

(a) an investment (of any kind) in the company is made by a VCT , or

(b)the company issues shares (money having been subscribed for them), and (at any time) the company provides—

(i)a compliance statement under section 205, or

[F7(ia)a compliance statement under section 257ED (seed enterprise investment scheme)]

F8(ii). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

in respect of the shares[F9, or

(c)any other investment is made in the company which is aid received by it pursuant to a measure approved by the European Commission as compatible with Article 107 of the Treaty on the Functioning of the European Union in accordance with the principles laid down in the Community Guidelines on Risk Capital Investments in Small and Medium-sized Enterprises (as those guidelines may be amended or replaced from time to time).]

(4)An investment within subsection (3)(b) is regarded as made when the shares are issued.]

[F10173BThe spending of money raised by SEIS investment requirementU.K.

(1)The requirement of this section is that, if an SEIS investment has been made in the issuing company, at least 70% of the money raised by the investment has been spent as mentioned in section 257CC (seed enterprise investment scheme: spending of the money raised requirement) before the relevant shares are issued.

(2)An “SEIS investment” is made in a company if the company issues shares (money having been subscribed for them), and (at any time) the company provides a compliance statement under section 257ED (seed enterprise investment scheme).]

174The purpose of the issue requirementU.K.

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.

175The use of the money raised requirementU.K.

[F11(1)The requirement of this section is that all of the money raised by the issue of the relevant shares (other than any of them which are bonus shares) is, no later than the time mentioned in subsection (3), employed wholly for the purpose of the qualifying business activity for which it was raised.]

[F12(1A)Employing money on the acquisition of shares or stock in a company does not of itself amount to employing the money for the purposes of a qualifying business activity.]

(2)The [F13requirement in subsection (1) does] 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 [F14subsection (1)] is—

(a)the end of the period of [F15two years] 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 [F15two years] 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.

176The minimum period requirementU.K.

(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.

177The no pre-arranged exits requirementU.K.

(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.

178The no tax avoidance requirementU.K.

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.

[F16178AThe no disqualifying arrangements requirementU.K.

(1)The relevant shares must not be issued, nor any money raised by the issue employed, in consequence or anticipation of, or otherwise in connection with, disqualifying arrangements.

(2)Arrangements are “disqualifying arrangements” if—

(a)the main purpose, or one of the main purposes, of the arrangements is to secure—

(i)that a qualifying business activity is or will be carried on by the issuing company or a qualifying 90% subsidiary of that company, and

(ii)that one or more persons (whether or not including any party to the arrangements) may obtain relevant tax relief in respect of shares issued by the issuing company which raise money for the purposes of that activity or that such shares may comprise part of the qualifying holdings of a VCT,

(b)that activity is the relevant qualifying business activity, and

(c)one or both of conditions A and B are met.

(3)Condition A is that, as a (direct or indirect) result of the money raised by the issue of the relevant shares being employed as required by section 175, an amount representing the whole or the majority of the amount raised is, in the course of the arrangements, paid to or for the benefit of a relevant person or relevant persons.

(4)Condition B is that, in the absence of the arrangements, it would have been reasonable to expect that the whole or greater part of the component activities of the relevant qualifying business activity would have been carried on as part of another business by a relevant person or relevant persons.

(5)For the purposes of this section it is immaterial whether the issuing company is a party to the arrangements.

(6)In this section—

• “component activities” means—

  (a)

  if the relevant qualifying business activity is activity A (see section 179(2)), the carrying on of a qualifying trade or preparing to carry on such a trade, which constitutes that activity, and

  (b)

  if the relevant qualifying business activity is activity B (see section 179(4)), the carrying on of research and development which constitutes that activity;

• “qualifying holdings”, in relation to the issuing company, is to be construed in accordance with section 286 (VCTs: qualifying holdings);

• “relevant person” means a person who is a party to the arrangements or a person connected with such a party;

• “relevant qualifying business activity” means the activity for the purposes of which the issue of the relevant shares raised money;

• “relevant tax relief”, in respect of shares, means one or more of the following—

  (a)

  EIS relief in respect of the shares;

  (b)

  SEIS relief under Part 5A in respect of the shares;

  (c)

  relief under Chapter 6 of Part 4 (losses on disposal of shares) in respect of the shares;

  (d)

  relief under section 150A or 150E of TCGA 1992 (enterprise investment scheme) in respect of the shares;

  (e)

  relief under Schedule 5B to that Act (enterprise investment scheme: reinvestment) in consequence of which deferral relief is attributable to the shares (see paragraph 19(2) of that Schedule);

  (f)

  relief under Schedule 5BB to that Act (seed enterprise investment scheme: re-investment) in consequence of which SEIS re-investment relief is attributable to the shares (see paragraph 4 of that Schedule).]

Meaning of “qualifying business activity”U.K.

179Meaning of “qualifying business activity”U.K.

(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.

F17. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(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 F18... 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.

F19(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(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 F20... will be derived, or

(ii)that a qualifying trade which the company or such a subsidiary is carrying on, or will carry on, F21... will benefit.

F22(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6)In determining—

(a)for the purposes of subsection (2)(b) when a qualifying trade is begun to be carried on by a qualifying 90% subsidiary of the company, or

(b)for the purposes of subsection (4)(a) when research and development is begun to be carried on by such a subsidiary,

any carrying on of the trade or, as the case may be, the research and development by it before it became such a subsidiary is ignored.

(7)References in subsection (2)(b)(i) or (4)(b) to a qualifying 90% subsidiary of the company include references to any existing or future company which will be such a subsidiary at any future time.