EXPLANATORY NOTE

This clause amends one of the conditions that a company must satisfy if its shares are to qualify for relief under the Enterprise Investment Scheme (EIS). The amendment secures that, where an investment is made in a parent company, but the money is used by one of its subsidiaries, relief is available to investors only if at least 90 per cent of the subsidiary company is owned by the parent. This change takes effect for shares issued on or after 6 April 1999 and aligns the EIS rules with those for Venture Capital Trusts. It restores the EIS position to what it was before changes relaxing the rules for other subsidiaries were introduced in the Finance Act 1998.

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Subsection (1) amends one of the conditions that must be satisfied by a company if an individual is to be eligible for tax relief under the EIS. The amendment applies in the case where it is a subsidiary company, rather than the company that issued the shares, that uses the money raised from the investors. In such a case, the subsidiary must exist primarily for the purpose of carrying on a qualifying trade, or would do so if intra-group investment and property holding activities were disregarded.

The effect of the amendment is that the subsidiary must be a "90 per cent subsidiary" of the company which issued the shares, or another of its subsidiaries. A company is a "90 per cent subsidiary" of another company if at least 90 per cent of it is owned by, and at least 90 per cent of its voting power is vested in, that other company. This achieves the result that was intended when the ownership requirement for other subsidiaries was reduced from 90 per cent to 75 per cent by changes made in the 1998 Finance Act.

Subsection (2) provides that these amendments have effect in relation to shares issued on or after 6 April 1999.

The EIS is designed to help small unquoted higher-risk trading companies to raise start-up and expansion finance. It allows a qualifying company to raise funds by issuing full-risk ordinary shares directly to individual investors previously unconnected with the company. Under the EIS individuals who invest in qualifying companies may obtain various income tax and capital gains tax reliefs, in particular the current rules provide for:

income tax relief (at 20%) on the amount invested in eligible shares up to an annual limit of £150,000

relief from capital gains tax on disposal of shares for which income tax relief has been obtained, provided they are held for at least five years and the income tax relief is not fully withdrawn;

relief for any allowable losses on shares against either taxable income or chargeable gains; and

deferral of capital gains tax on a chargeable gain from the disposal of an asset where the gain is invested in eligible shares .

Deferral relief is also available for individual investors connected with the qualifying company, including entrepreneur owner/directors, and for trustees of certain trusts. The company in which the investment is made has to be the parent company of a trading group, or exist primarily for the purpose of carrying on a qualifying trade.

Until changes were made by Finance Act 1998, any subsidiary of an EIS company had to be a "90 per cent subsidiary" of the company or another of its subsidiaries. The purpose of these changes was to relax this requirement so that only those subsidiaries which used funds raised through the scheme have to satisfy the 90 per cent requirement: other subsidiaries are now subject to a 75 per cent requirement.