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1. Clause 62 and Schedule 15 introduce a new tax incentive to encourage companies to invest in the same types of small higher-risk trading companies as those on which the Enterprise Investment (EIS) and Venture Capital Trust (VCT) Schemes are focussed, and to form wider corporate venturing relationships with those companies. The Clause and Schedule provide for an investing company to obtain investment relief - a reduction in corporation tax - at 20 per cent on amounts subscribed for full-risk ordinary shares held for at least 3 years. If any chargeable gains arise on disposals of those shares, the tax on those gains can be deferred if they are reinvested in another shareholding under the Scheme. If any allowable losses are incurred on such disposals, relief for the losses (net of investment relief) can be obtained against income if they are not deducted from chargeable gains. Schedule 16 makes some consequential changes to the EIS and to VCTs. The tax reliefs provided for by the Scheme are available in respect of shares issued on or after 1 April 2000 and before 1st April 2010.

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DETAILS OF THE CLAUSE

 

2. Clause 62 provides for Schedule 15, which makes provision for the Corporate Venturing Scheme (CVS) and Schedule 16, which makes consequential amendments, to have effect. The consequential amendments to the loss relief provisions in relation to claims under sections 573 and 574 of the Income and Corporation Taxes Act 1988 (ICTA) provided for by paragraph 3 of Schedule 16 have effect for disposals made on or after 1 April 2000 and 6 April 2000 respectively. Subject to that, Schedules 15 and 16 apply in relation to shares issued on or after 1 April 2000 but before 1 April 2010.

 

DETAILS OF SCHEDULE 15

THE CORPORATE VENTURING SCHEME

Part I: Investment Relief: Introduction

 

3. Part I sets out the reliefs available to companies investing under the Scheme, the general eligibility requirements for these reliefs and explains what is meant by "the qualification period" in relation to shares in a company in which an investment is made.

4. Paragraph 1 sets out the reliefs provided for in the Schedule. These are relief against corporation tax (investment relief) (Parts I to VI), relief against income of companies for losses incurred on the disposal of shares to which investment relief is attributable (Part VII) and the postponement of certain chargeable gains which are reinvested in shares to which investment relief is attributable (Part VIII).

5. Paragraph 2 provides for a company to be eligible for investment relief on the amount subscribed by it for shares in the issuing company if the relevant shares are issued to it, it meets the conditions set out in Part II in relation to the shares, the issuing company meets the conditions set out in Part III in relation to the shares and the general requirements of Part IV are met in relation to the shares.

6. Paragraph 3 defines "the qualification period" in relation to the relevant shares as the period beginning with the issue of the shares and ending immediately before the third anniversary of the issue date or, where the money raised is used in a qualifying trade which is not being carried on at the issue date, immediately before the third anniversary of "the trading date" (the date when the company or subsidiary begins to carry on the qualifying trade or the latest of such dates where there is more than one such qualifying trade).

Part II: The Investing Company

7. Part II sets out the conditions which the investing company must meet if it is to qualify for investment relief under the CVS. Broadly, these are that the investing company must carry on a non-financial trade or be a member of a non-financial trading group. It must not control the issuing company and must not own or be entitled to acquire more than 30 per cent of its ordinary share capital.

8. Paragraph 4 lists the various requirements which are set out in later paragraphs of this Part.

9. Paragraph 5 provides that the investing company must not have a material interest in the issuing company (in which the investment is made) at any time in the qualification period relating to the relevant shares.

10. Paragraph 6 provides that the investment company must not subscribe for the relevant shares as part of any reciprocal arrangements under which another person subscribes for shares in another company in which the investing company or any other party to the arrangements has a material interest. But arrangements for the issuing company to subscribe for shares in its own subsidiary are disregarded.

11. Paragraph 7 defines "material interest". A person has a material interest in a company if on its own, or with any connected person, it possesses, directly or indirectly, or is entitled to acquire, more than 30 per cent of the ordinary share capital of either the company or any 51 per cent subsidiary, or of the voting power in the company or any 51 per cent subsidiary. For this purpose, a person is treated as entitled to acquire anything which he is entitled to acquire at a future date or to which he acquires entitlement at a future date and any rights or powers of an associate are attributed to him. "Ordinary share capital" includes all the issued share capital of the company, other than relevant preference shares (see paragraphs 13 and 14 of this Note), and all loan capital of the company that carries any right to convert into, or to acquire shares which would form part of the ordinary share capital on issue. The paragraph sets out what is meant by "loan capital" for this purpose.

12. Paragraph 8 provides that an investing company does not qualify for investment relief if at any time during the qualification period for the relevant shares it controls the issuing company. "Control" is defined in terms of section 416(2) to (6) of ICTA except that-

 

1. The holding and managing of property used by a single company in one or more of its non-financial trades, and for a group company, various intra-group activities, are disregarded for this purpose. Also disregarded, for both single and group companies, is the holding of shares which qualify for investment relief under the corporate venturing scheme unless holding them amounts to a substantial part of the company’s business. The paragraph also defines "incidental purposes".

2. Paragraph 11 defines a "non-financial trade" as one conducted on a commercial basis and with a view to the realisation of profits which does not consist wholly or to a substantial extent of any of the financial activities listed in this paragraph.

3. Paragraph 12 defines a "non-financial trading group". Any group can qualify unless the business of the group companies taken together consist wholly or as to a substantial part of trades other than non-financial trades or of businesses that are not trades. For this purpose various intra-group activities, together with the holding of shares which qualify for relief under the CVS are disregarded.

4. Paragraph 13 provides that the relevant shares must be a "chargeable asset" of the investing company in order to secure that any gain accruing on a disposal of the shares would be a chargeable gain for the purposes of corporation tax on chargeable gains).

5. Paragraph 14 provides that the investing company must subscribe for the relevant shares for commercial reasons and not with tax avoidance in view.

Part III — The Issuing Company

 

6. Part III sets out the requirements which must be met by a company in which an investment is made (the "issuing company"), for the investment to qualify for investment relief. The rules are similar to those applying for the Enterprise Investment Scheme (EIS) and the Venture Capital Trust (VCT) scheme.

 

7. Paragraph 15 provides that an "issuing company" must meet the requirements set out in the rest of this Part.

8. Paragraph 16 requires that, when the relevant shares are issued, the issuing company must be an "unquoted" company. The meaning of "unquoted" for this purpose is the same as that for the EIS and the VCT scheme. At the time the shares are issued there must be no arrangements in existence for any of the issuing company’s shares or securities to become listed on a recognised or designated stock exchange. If any arrangements for a future exchange of shares or securities falling within paragraph 83 of this Schedule such that the issuing company would become the subsidiary of another company have been made at the issue date, then there must not, at that date, exist any arrangements with a view to any of that other company’s shares or securities to be so listed. The paragraph also provides that if a company meets the unquoted requirement when the shares are issued, but any of its shares or securities are listed on a stock exchange which is not then recognised or designated, it will not cease to meet the requirement because of any subsequent change in the status of that exchange.

9. Paragraph 17 requires that, during the qualification period relating to the relevant shares, the issuing company is neither a 51 per cent subsidiary nor controlled by either another company or another company and persons connected with the other company. Further, there must be no arrangements (other than arrangements within paragraph 83 of the Schedule) which could result in the company becoming a 51 per cent subsidiary of another company or otherwise being controlled. "Control" has the meaning given in section 840 ICTA for this purpose.

10. Paragraph 18 requires that, throughout the qualification period relating to the relevant shares, one or more "independent individuals" together should own at least 20 per cent of the company’s ordinary share capital. An "independent individual" is an individual who is not, throughout the qualification period, a director or employee of the investing company or of a company connected with the investing company, and is not a relative of such a director or employee. The paragraph provides that, where an independent individual holding part of the share capital of an issuing company dies, the shares will continue to be treated as owned by an independent individual while they form part of that individual’s estate.

11. Paragraph 19 requires that throughout the qualification period neither the issuing company, nor any of its qualifying subsidiaries, is to be a member of a partnership, or a party to a joint venture, of the types set out in the paragraph.

12. The type of partnership in question is one-

 

1. The paragraph also provides the rules for calculating the amount of relief to be withdrawn where, in the case of one of the four types of permitted disposal, the investing company has obtained an amount of investment relief which is less than 20 per cent of the amount subscribed for the relevant shares. Rules are also provided to cater for any case where the amount of relief was reduced before it was obtained — perhaps on account of a prior receipt of value.

2. Paragraph 47, which is subject to paragraphs 51, 52, and 54 of the Schedule, provides for the withdrawal of investment relief where the investing company receives any value (other than insignificant value) during the period of restriction (defined at paragraph 48 of the Schedule). The amount of investment relief withdrawn is 20 per cent of the value received, up to the full amount of the relief attributable to the relevant shares.

3. The paragraph sets out what is meant by "insignificant value" for this purpose, and provides that in determining whether value received by an investing company is insignificant, account is to be taken of any value received earlier in the period of restriction and of certain arrangements providing for value to be received. This paragraph also provides that any disposal of shares which has led to the withdrawal of the investment relief attributable to those shares is not to be treated as giving rise to the receipt of value and that investment relief can be withdrawn only once in respect of each receipt of value.

4. Paragraph 48 defines "the period of restriction" for the purposes of the Schedule as the period beginning one year before the shares are issued and ending at the end of the qualification period relating to the shares.

5. Paragraph 49 sets out the circumstances in which the investing company receives value from the issuing company for the purposes of paragraphs 47 and 51 of the Schedule. The aim is to cover all of the ways in which the issuing company might seek to return to the investing company some or all of the value that it has received for its shares. Examples of the circumstances included are the repayment of the issuing company’s share capital belonging to the investing company and the disposal of an asset to the investing company for less than market value.

6. Paragraph 50 establishes, for the purposes of paragraph 47 of the Schedule, the amount of the value received in each of the circumstances covered by paragraph 49 of the Schedule.

7. Paragraph 51 provides the rules to determine by how much the relief should be reduced in the case where two or more issues of shares in the issuing company have been made to the investing company and value is received at a time which falls within the periods of restriction relating to two or more of those issues. The effect is to apportion the reduction in relief between the share issues in question.

8. Paragraph 52 sets out how to compute the amount by which the investment relief given should be reduced under paragraph 47 of the Schedule in a case where the amount of investment relief obtained by the investing company is less than 20 per cent of the amount it subscribed (unless this is the result of the issue of bonus shares). The effect is to make a proportionate reduction in the amount of value treated as received for the purposes of paragraph 47 of the Schedule.

9. Paragraph 53 extends references to the investing company or to the issuing company in paragraphs 47, 49 and 50 of the Schedule to include any person connected with the company concerned at any time in the period of restriction relating to the relevant shares.

10. Paragraph 54 applies where investment relief attributable to the relevant shares would, apart from effect of the paragraph, be withdrawn by virtue of paragraph 47 of the Schedule, and where the person who received the value which triggered the withdrawal under this paragraph supplies the person who provided that value with replacement value of an equal or greater amount by way of a "qualifying receipt". For this purpose, a "qualifying receipt" includes a payment which would not be treated as a receipt of value under paragraph 49 of the Schedule, and the reversal of transactions involving debt release and transfers of assets at under or over value. Where the provision of replacement value means that there has been no net receipt of value by the investing company the effect of the paragraph is that there is no reduction or withdrawal of the investment relief that would otherwise have been made.

11. Paragraph 55 supplements paragraph 54 of the Schedule by providing for the receipt of replacement value to be disregarded where it has already been used to prevent any reduction or withdrawal of relief. It also provides for the receipt of replacement value received by the original supplier to be disregarded where it occurs before the start of the period of restriction, or there was an unreasonable delay between the receipt of value and receipt of replacement value or, in the event of appeal by the investing company against the withdrawal or reduction of relief, where receipt occurs more than 60 days after the determination of the amount of relief to be withdrawn. None of the rules in this paragraph, or paragraph 54 of the Schedule, require replacement value to be received after the original value.

12. The paragraph also deals with the situation where the event giving rise to the receipt of replacement value is, or includes, a subscription for shares by the investing company or any person who at any time in the period of restriction is connected with the investing company. In these circumstances the person subscribing for the shares will not be eligible for investment relief, or income tax relief or deferral relief under the EIS, on those shares.

13. Paragraph 56 provides for the withdrawal of investment relief where, at any time in the period of restriction relating to the relevant shares, the issuing company or any subsidiary makes a "repayment" of any of its share capital other than that belonging to the investing company or to certain other members. The members in question are any members in respect of whom the repayment causes the reduction or withdrawal of either investment relief or EIS income tax relief, or revives a chargeable gain he has deferred under the EIS. For the purposes of this provision, a "repayment" takes the form of a repayment, redemption or repurchase of share capital belonging to the recipient, or a payment to that person for giving up rights on the cancellation of that share capital.

14. Where no other shareholder has CVS investment relief, then if the amount of relief exceeds 20 per cent of the amount received by the member, the investment relief is reduced, otherwise it is withdrawn. Where there is more than one investing company, or where the investing company did not obtain investment relief equal to 20 per cent of the amount subscribed, rules are provided specifying how the appropriate fraction of that amount is to be used in calculating the amount of the reduction or withdrawal is to be computed.

15. Paragraph 57 provides for repayments etc of share capital within the scope of paragraph 56 of the Schedule to be disregarded if a de minimis provision is satisfied.

16. Paragraph 58 provides a rule to prevent a repayment of share capital from causing relief to be reduced or withdrawn more than once. It also provides rules for reducing the amount by which relief is reduced where investment relief is attributable to relevant shares held by the investing company, the issuing company has made one or more other issues of shares which include shares to which investment relief is attributable ("designated shares") and the repayment falls within the period of restriction relating to the relevant shares and one or more of the equivalent periods relating to any of the designated shares. The paragraph also provides that investment relief is not to be reduced or withdrawn where a company redeems, within 12 months, share capital of nominal value which it issues for the purposes of complying with section 117 of the Companies Act 1985 and the equivalent legislation applying to Northern Ireland.

17. Paragraph 59 provides for investment relief to be withdrawn if a put or call option is granted in relation to the relevant shares at any time during the qualification period.

18. Paragraph 60 provides that where investment relief is to be withdrawn or reduced, this shall be done by making an assessment to corporation tax under Case VI of Schedule D for the accounting period for which relief was obtained. Before relief can be withdrawn on the grounds that the issuing company requirements, or the general requirements of Part IV of the Schedule have not been met, or that value has been received, either the issuing company must have given notice to the Inland Revenue of a failure to meet the requirements, or the Inland Revenue must have given notice to the issuing company that it believes investment relief is not due or is excessive. In the case of value received, the Inland Revenue must also have given notice to the investing company that relief is not due or is excessive.

19. Paragraph 61 provides for a right of appeal against a notice by the Inland Revenue under paragraph 60 of the Schedule.

20. Paragraph 62 provides that an assessment reducing or withdrawing relief or a notice under paragraph 60 that investment relief obtained is not due cannot be made more than 6 years after the end of the accounting period in which the time limit for using the money raised falls (see note on paragraph 36 ) or the event which causes investment relief to be reduced or withdrawn occurs, whichever is the later. This period is extended to 21 years where fraud or negligence is involved.

21. Paragraph 63 provides due and payable dates for the purpose of charging interest where investment relief has been reduced or withdrawn by assessment under paragraph 60 of the Schedule. Where there is an event such that any of the requirements of paragraphs 5 to 10, or Part III, of the Schedule are not met, or an event within paragraphs 46, 47, 56 or 59 of the Schedule, and the relevant event occurs after the latest date on which the tax assessed would otherwise became due and payable, then the assessed tax is treated for this purpose as becoming due and payable on the date of the event giving rise to the reduction or withdrawal.

22. Paragraph 64 requires an investing company which has obtained investment relief to give notice to the Inland Revenue, with particulars, if it ceases to be a qualifying investment company or investment relief falls to be withdrawn because value has been received by the investing company or put or call options have been granted. If the notice is about a receipt of value within paragraph 49 of the Schedule and the investing company is aware of replacement value having been received, or being about to be received, from the original recipient by the original supplier details should be provided. Any notice must be given within 60 days after the event or where the event is the receipt of value by a person connected with the company, within 60 days after the company comes to know of that event. In the case of receipt of value before the issue of the shares any notice must be given within 60 days after the issue of the shares or, if value is received by a person connected with the company, within 60 days of the company coming to know about it.

23. Paragraph 65 applies where the issuing company has provided the Inland Revenue with a compliance statement and an event occurs as a result of which the issuing company does not meet the requirements of the Scheme, or the general requirements of Part IV shares are not met, or value has been received. In these circumstances, the issuing company, and any connected person with knowledge of the event(s) must give notice to the Inland Revenue, with particulars. As in paragraph 64 of the Schedule if replacement value has been or is about to be received the notice must include details. Notice must be given within 60 days of the event or where the event is the failure of the company to meet the requirement of paragraph 18 of the Schedule (the "individual-owners requirement") or a receipt of value from a person connected with the company, within 60 days of the company coming to know of it. Any notice given by a person connected with the company must be given within 60 days of coming to know of the event except that in the case where a receipt of value occurred and the person came to know of it before the issue of the shares, when the notice must be given within 60 days of the issue.

24. Paragraph 66 applies where the Inland Revenue have reason to believe that a company or other person has not given a notice required under paragraphs 64 or 65 of the Schedule, or has given or received value which, but for being of insignificant value, would have triggered the reduction or withdrawal of relief. In these circumstances, the Inland Revenue may, by notice, require a person to provide such information about the event which should have triggered a notice under paragraphs 64 or 65 , or about value being given or received as may be reasonably required for the purposes of the Schedule.

Part VII: Relief for Losses on Disposals of Shares

25. Part VII sets out rules providing for a company which incurs an allowable loss for corporation tax purposes (see paragraph 94 of the Schedule) on disposing of shares to which investment relief is attributable to set the loss off against its income. This relief is referred to as "loss relief" in the Schedule, and the rules governing it are similar to those which apply for the existing relief which investment companies can obtain in certain circumstances where they dispose of shares in unquoted trading companies at a loss.

26. Paragraph 67 sets out the eligibility conditions for loss relief. In particular, the investment relief attributable to the shares must not be withdrawn in full on account of the disposal, and the shares must have been held continuously by the investing company since they were issued. The relief is available for disposals by way of a bargain at arm’s length for full consideration, as well as for disposals occurring where the shares have been cancelled or a claim has been made that their value has become negligible. In addition, the relief is available where the shares are treated as being the subject of a part disposal because a capital distribution has been made during the course of a winding up.

 

27. Paragraphs 68 and 69 provide that where an investing company is eligible for loss relief, it can make a claim for the loss to be set off against income of the accounting period in which the loss arises, and, if the loss is not wholly relieved in this way, of accounting periods ending in the preceding twelve months. Where part only of an accounting period falls within this twelve month period, a proportionate part of the income of that period can be set against the loss. The claim must be made within two years after the end of the accounting period in which the loss arises, and loss relief for earlier losses is given in priority to those arising later.

28. Paragraph 70 provides that where loss relief is claimed, it must be given before any other deductions from, or set-offs against, the investing company’s profits of any description, and before any deduction for amounts treated as reducing those profits. In addition, it prevents any other relief being given for the loss in question.

29. Paragraph 71 prevents loss relief being obtained in circumstances where the disposal is made as part of a company reconstruction or amalgamation which is effected not for genuine commercial reasons but with a view to tax avoidance. It also modifies the effect of the value-shifting rules provided by the Taxation of Chargeable Gains Act 1992 (TCGA) in relation to loss relief. This to secure that where a loss has been increased because the value of the shares has been reduced in circumstances where the investing company, or another person, receives any benefit (and not just a tax-free benefit), the amount of loss relief available is correspondingly reduced.

30. Paragraph 72 provides for the Inland Revenue to make any necessary corporation tax adjustments where loss relief is obtained, and where it is claimed but not obtained or not obtained in full.

Part VIII: Deferral Relief

31. Part VIII sets out the rules providing for a company which realises a chargeable gain for corporation tax purposes on disposing of shares to which investment relief is attributable to defer paying tax on the gain if it makes a qualifying investment. It does not matter if the investment relief is withdrawn in full on account of the disposal, but the shares must have been held continuously by the investing company since they were issued. This relief is referred to as "deferral relief" in the Schedule, and the rules governing it are similar to those which apply for EIS deferral relief.

32. Paragraph 73 sets out the eligibility conditions for deferral relief. As mentioned above, a chargeable gain arising on the disposal of shares to which investment relief is attributable can be deferred if certain requirements are met. In addition, a chargeable gain which has been deferred under the CVS on account of a further investment in shares, but which is revived on the occurrence of a chargeable event in relation to those shares (see paragraph 79 of the Schedule), can be deferred again if another qualifying investment is made.

33. Paragraph 74 explains what constitutes a "qualifying investment". In essence, it is an investment in shares for which the investing company obtains investment relief. Where the gain to be deferred arose on the disposal of shares in, say, company A, or is a previously deferred gain revived on the occurrence of a chargeable event in relation to shares in company A, the new investment must not be in company A. Nor must it be in any company belonging to the same group as company A either when the gain arises or when the new investment is made. Shares will constitute a qualifying investment only if they are issued in the period of four years beginning one year before "the accrual time" (the time at which the gain arises). If the shares are issued before the accrual time, they must have been held continuously by the investing company since they were issued until then, and must still have investment relief attributable to them.

34. Paragraph 75 defines "the qualifying shares", an expression used in some of the deferral relief provisions. They are the shares comprised in the qualifying investment together with any "corresponding bonus shares" (defined in sub-paragraph (3)) issued to the investing company in respect of them. Where the issuing company’s shares are exchanged in circumstances to which paragraph 83 of the Schedule applies, the shares exchanged for the qualifying shares are treated as being the qualifying shares in their stead.

35. Paragraph 76 explains how a gain is deferred where the eligibility conditions are met. The principle is that the amount subscribed by the investing company for the qualifying shares is available to be set against one or more eligible gains. The investing company makes a claim which specifies, in respect of each gain, how much of the amount subscribed is to be set against an equal amount of the gain. The same amount of expenditure cannot be set off more than once — nor can the same amount of a gain be matched more than once with amounts subscribed for qualifying shares. Where a gain has had an amount of expenditure set against it, an equal amount of the gain is treated as not having arisen when it did. This amount is, in effect, put into suspense until a chargeable event occurs in relation to the shares. When such an event occurs, a gain equal to part or all of the amount is revived (see paragraph 79 of the Schedule).

36. Paragraph 77 explains the meaning of references in the Schedule to deferral relief being attributable to shares.

37. Paragraph 78 provides that a chargeable event occurs in relation to any of the qualifying shares if they are disposed of by the investing company, or if anything (other than a disposal of the shares) occurs which causes any of the investment relief attributable to them to be withdrawn. Where the qualifying investment was made before "the accrual time" (see note on paragraph 74), nothing happening before that time which causes the investment relief attributable to them to be reduced will cause a chargeable event to occur.

38. Paragraph 79 applies where a chargeable event occurs for the first time in relation to any shares. It provides for a chargeable gain to accrue to the investing company at the time of the event. The amount of this revived gain is equal to the amount of the deferred gain which is attributed to the shares on a pro rata basis. For example, suppose that £100,000 is subscribed by the investing company for 200,000 shares for which it obtains investment relief, and £40,000 of this expenditure is set against a gain of £40,000 and £20,000 is set against a gain of £20,000. The gains of £40,000 and £20,000 are each attributed to all the shares. If the company disposes of 50,000 of the shares at a time when no investment relief attributable to them has been withdrawn, the disposal will cause chargeable gains of £10,000 and £5,000 to be revived.

 

Part IX: Company restructuring

39. Part IX contains a number of provisions which apply where there is a "reorganisation" (within the meaning of section 126 TCGA) of the issuing company’s share capital, or where the company is party to a scheme of reconstruction or amalgamation (such as a take-over or corporate merger) which entails the shares or securities of another company being issued in exchange for, or in respect of, its own shares or securities.

40. Paragraph 80 applies in certain circumstances where there is a reorganisation of the issuing company’s share capital. Where the investing company holds shares of the same class in the issuing company which it has acquired in the same capacity at different times or in different ways, it is possible that the shares may fall into two or more of the following categories–

 

1. Paragraph 98 defines an issue of shares as all those shares of the same class as are issued on the same day, and an issue of shares to a person as all the shares issued to that person in one capacity on the same day.

2. Paragraph 99 defines an "associate" of a person as any relative or business partner of that person, the trustee(s) of any settlement of which that person or a relative was the settlor and, where that person has an interest in any shares or obligations of a company which are subject to a trust or part of an estate of a deceased person, the trustee(s) or personal representatives of that trust or estate or, if the person is a company, any other company with an interest in those shares or obligations. "Relative", "settlor" and "settlement" are also defined.

3. Paragraph 100 defines "the Board" and "the Inland Revenue" as the Commissioners of Inland Revenue and any officer of the Board.

4. Paragraph 101 provides for the Treasury to amend by order the non-financial activities requirement and the trading activities requirement set out in paragraphs 10 to 12 and 23 to 33 of the Schedule and to substitute different monetary limits for the gross assets requirement in paragraph 22 of the Schedule.

5. Paragraph 102 provides minor definitions of a number of terms used in the Schedule.

6. Paragraph 103 provides an index of defined expressions used in the Schedule.

 

DETAILS OF SCHEDULE 16

 

7. Paragraph 1 amends the penalties provisions in section 98 of the Taxes Management Act 1970 to allow penalties to be applied for failure to provide information required by paragraphs 64, 65 and 66 of Schedule 15.

 

8. Paragraph 2 amends the provision in the EIS legislation concerned with the withdrawal of relief on a receipt of value (s.303 ICTA). It ensures that relief is not withdrawn where the value is received by another member of the company and investment relief is withdrawn because of the disposal of shares or repayment etc of share capital or securities.

9. The paragraph also inserts a new EIS provision - s.303A. The effect of the new section is to prevent reduction or withdrawal of EIS income tax relief in cases where CVS investment relief on the full amount of the "repayment" (as defined by new s.303A(2)) has been withdrawn, or where the amount on which relief has not been withdrawn ("the relevant amount") does not exceed £1000. This de minimis provision is subject to there being no "repayment arrangements" in existence during the period between one year before the issue of the shares and the end of the issue date. Where the relevant amount exceeds £1000, or the de minimis provision does not apply, the relevant amount is treated, for the purposes of s.303, as the amount of the repayment. New s.303A also provides that where, the de minimis provision in paragraph 57 of Schedule 15 applies to prevent investment relief being reduced or withdrawn as a consequence of a repayment etc., then the repayments will also be disregarded for EIS purposes. "Repayment", "the relevant amount", "repayment arrangements" and "investment relief" are all defined.

10. Paragraph 3 amends the existing provisions which enable individuals and investment companies to offset losses they incur on the disposal of shares in unquoted trading companies against their income provided certain qualifying conditions are met. Most of the changes are consequential on the introduction of CVS loss relief (see Part VII of Schedule 14), but sub-paragraph (3) introduces a change which makes an existing Inland Revenue Extra-Statutory Concession, ESC 46, redundant. This change widens the scope of qualifying disposals to include disposals falling within section 24(1) TCGA, which provides for an asset to be treated as being disposed of on the occasion of its entire loss, destruction, dissipation or extinction. Such disposals are also qualifying disposals for the purposes of CVS loss relief.

11. Paragraph 4 makes some changes to the EIS deferral relief provisions in Schedule 5B to the TCGA. The amendments made to paragraph 14 of Schedule 5B by sub-paragraph (2) prevent an EIS shareholder’s deferral relief being put in jeopardy in certain circumstances where a receipt of value or a disposal of shares by a CVS shareholder in the same company causes any of that CVS investor’s investment relief to be withdrawn. The new paragraph 14A of Schedule 5B, which is introduced by sub-paragraph (3), corresponds to the new EIS income tax relief provision in section 303A ICTA (introduced by paragraph 2 of this Schedule). It applies where any CVS shareholders in a company have their investment relief withdrawn or reduced on account of a "repayment" (as defined in sub-paragraph (2) of paragraph 14A) being received by another member of the company, and where a de minimis condition is satisfied. The effect of paragraph 14A is to prevent any account being taken of the repayment for EIS deferral relief purposes in such circumstances, so that the repayment will not cause any EIS investors’ deferred gains to be revived.

12. Paragraph 5 amends the rules in the Corporation Tax Self Assessment legislation to provide-

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