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CLAUSE 63 AND SCHEDULE
15: ENTERPRISE INVESTMENT SCHEME: AMENDMENTS
SUMMARY
1.
This Clause and Schedule make a number of amendments to the Enterprise
Investment Scheme (EIS):
- the time companies have to employ all the money raised through
the scheme is extended from a 12 to a 24 month period, provided
that 80% is employed within the first 12 month period;
- rules withdrawing
investors’ tax reliefs when value is received are relaxed;
- companies
that float on a recognised stock exchange after the share issue
will not now normally cease to qualify;
- special provisions
for repayment supplement and companies in the oil sector are repealed
DETAILS OF CLAUSE
2.
This Clause provides for Schedule 15 to have effect. Part I of the
Schedule amends the rules for EIS income tax relief, Part II amends
the rules for EIS deferral relief and Part III makes consequential changes.
DETAILS OF SCHEDULE
ENTERPRISE INVESTMENT
SCHEME: AMENDMENTS
PART I: INCOME
TAX RELIEF
3.
Paragraph 1 is introductory.
Oil
activities
4.
Paragraph 2 repeals provisions which establish oil exploration as a
“qualifying business activity” for the purposes of the Enterprise Investment
Scheme (EIS) and Paragraphs 3 and 4 make consequential changes. The
two remaining "qualifying business activities" are, broadly,
carrying on, or preparing
to carry on, a qualifying trade, and the carrying on of research and
development from which it is intended that a qualifying trade will be
derived.
5.
Paragraph 5 removes oil extraction from the list of activities which
must not amount to a substantial part of a company’s trade if it is
to be a “qualifying trade” for EIS purposes.
Requirement
as to the money raised
6.
Paragraph 6 amends the existing rules for the employment of the money
raised by an issue of shares. The money must be used for the purposes
of a qualifying business activity, and the changes allow the company
a longer period in which to employ it. The new rules provide that—
- at least 80 per cent of money must be used,
- within 12
months after the issue of the shares if the money is raised for
the purposes of research and development or a qualifying trade which
is being carried on when the shares are issued, or
- within 12
months after the company begins to carry on the qualifying trade
if the money is raised for the purposes of a qualifying trade which
is not carried on when the shares are issued (the trade must commence
within two years after the issue date), and
- all of the
money must have been so employed within 12 months of the end of
the appropriate 12 month period above.
7.
Paragraphs 7 and 8 make consequential amendments to the rules for withdrawing
income tax relief and for the provision of information.
Miscellaneous
8.
Paragraph 9 repeals the EIS-specific rules which determine the time
from which interest supplement on repayments of income tax arising from
a claim to income tax relief is due. The change has effect from 7th
March 2001. Thereafter, the general interest supplement rules will apply.
9.
Paragraphs 10 and 11 make changes which are consequential to the removal
of references to “the designated period” in EIS legislation. In general,
such references are being changed to references to a shorter period,
known as “the
period of restriction”. But in the special rules which determine whether
an individual is “connected” with a company for certain EIS income tax
relief purposes, the length of the period will remain unchanged, although
it will no longer be referred to as “the designated period”.
Unquoted
company requirement
10.
Paragraph 12 provides for the requirement that a qualifying company
must be an unquoted company throughout a specified period to be replaced
by a new requirement. The new requirement, which brings this EIS provision
into line with the Corporate Venturing Scheme (CVS) is that—
- the company must be an unquoted company when the shares are issued,
and
- there must
be no arrangements in existence at that time for it to cease to
be an unquoted company, or to become a wholly-owned subsidiary of
a new holding company if arrangements exist for that holding company
to cease to be an unquoted company.
11.
Paragraph 13 provides that where a company is an “unquoted company”
when it issues any eligible shares, then it will not cease to be treated
as such in relation to those shares on account of the fact that any
of its shares or securities are listed on a stock exchange that is not
recognised at that time if it later becomes recognised. This change
aligns the rules with those for the CVS.
Royalties
and licence fees
12.
Paragraph 14 amends a cross-reference in the rules for qualifying companies
to the special provisions for companies receiving royalties and licence
fees that was not updated in Finance Act 2000 in consequence of other
changes made in that Act. The amendment applies for shares issued
on or after 6th April 2000, and is deemed always to have had effect.
Value
Received by individual etc.
13.
Paragraph 15 makes a number of amendments to the “value-received” rules
in section 300 of the Income and Corporation Taxes Act 1988 (ICTA).
These rules apply where an investor, or any associate of the investor,
receives any value from the company (or any person connected with it)
at any time during a specified period which is defined by reference
to the date
on which
the shares were issued. The effect of these rules is to cause some,
or all, of the investor’s EIS income tax relief to be withdrawn. The
main changes are as follows—
- the length of the specified period is reduced by one year, so
that value received more than one year prior to a share issue
will not cause any relief to be withdrawn in respect of that issue:
the new period is “the period of restriction” (see paragraph
22 below);
- a spreading
rule is introduced in any case where the investor obtains EIS income
tax relief for two or more issues of shares and value is received
at a time falling in more than one of the periods of restriction.
The effect of the rule is to apportion the value between the issues
in proportion to the amounts subscribed by the investor for the
shares in question; and
- receipts of
insignificant value (see paragraph 16 below) will not cause EIS
income tax relief to be withdrawn unless there have been a number
of such receipts in the period of restriction in question and a
receipt of their aggregate value would not be a receipt of insignificant
value.
14.
Paragraph 16 inserts a new section 300A ICTA. Its effect, broadly,
is to provide for the value-received rules in section 300 not to apply
in any case where a full restitution of the value is made. The rules
are based closely on the corresponding provisions for the CVS, and the
main features are as follows—
- in all cases,
the person who receives the value in question must restore value
of an equal or greater amount to the person from whom it was received;
- restitution
may be made in specie, in cash, or through any combination
of both;
- certain payments
are excluded – for example, payments in discharge of an ordinary
trade debt, as rent for a property occupied by the payee or an associate,
or as interest on money lent to the payee or an associate;
- restitution
can be made before the value was received but must be made after
the start of the period of restriction. Where restitution is made
after the receipt of value, it must be made as soon as is reasonably
practicable in the circumstances; and
- where
restitution takes the form of a subscription for shares, the subscription
cannot qualify for EIS income tax relief or deferral relief
15.
Paragraph 17 provides for an interpretation provision which applies
to the value-received rules in section 300 ICTA to apply to section
300A as well.
16.
Paragraph 18 inserts a new section 301A ICTA which explains what it
meant by a “receipt of insignificant value” for the purposes of the
value-received rules in section 300. A receipt of any amount not exceeding
£1,000 is treated as being such a receipt. This is to reduce the compliance
burden of the value-received rules. If the amount of value received
exceeds £1,000 then it is treated as a receipt of insignificant value
only if the amount in question is insignificant by comparison with the
amount the investor subscribed for the shares. These provisions are,
however, subject to an anti-avoidance rule. Its effect is that no receipt
of value is treated as being a receipt of insignificant value if, at
any time in the period of twelve months ending when the shares are issued,
arrangements exist for value to be received at any time in the period
of restriction.
Repayment of share capital
17.
Paragraph 19 makes a number of amendments to the rules in section 303
ICTA which provide for an investor’s EIS income tax relief to be withdrawn
or reduced in certain circumstances where another member of the company
receives value during a specified period which is defined by reference
to the date on which the shares were issued. The main changes are—
- the length of the specified period is reduced by one year, so
that value received more than one year prior to a share issue will
not cause any relief to be withdrawn in respect of that issue: the
new period is “the period of restriction” (see paragraph 22 below);
- several provisions
are repealed so that the only remaining circumstances in which another
member can receive value for the purposes of section 303 arise where—
- there is a
repayment, redemption, or repurchase of any of the company’s (or
a subsidiary’s) share capital which belong to him, or
- a
payment is made to him for giving up his right to any of the company’s
(or a subsidiary’s) share capital on its cancellation or extinguishment.
18.
Paragraph 20 introduces a new section 303AA ICTA which provides for
repayments etc. of share capital to be disregarded for the purposes
of the rules in section 303 in certain cases. These cases arise where
the amount received by the member (or, if greater, the market value
of the shares to which the repayment etc. relates) is insignificant
in relation to the market value of the remaining issued share capital.
This is, however, subject to an anti-avoidance rule. Its effect is
that no repayment etc. is treated as being insignificant if, at any
time in the period of twelve months ending when the shares are issued,
arrangements exist for a repayment etc. to be made at any time in the
period of restriction.
19.
Paragraph 21 makes a number of minor or consequential amendments to
section 303A ICTA, which restricts the application of section 303 in
cases where CVS investment relief is withdrawn or reduced on account
of a repayment etc. of another member’s share capital.
Claims
20.
Paragraph 22 makes a minor drafting change to the rules applying to
claims for EIS income tax relief which has effect in relation to shares
issued on or after 6th April 2001.
Information
21.
Paragraph 23 makes some changes to the information provisions which
are consequential on the changes made to the value-received provisions
in sections 300 and 303 ICTA (see paragraphs 13 to 18 above). These
amendments have effect in relation to events occurring on or after 7th
March 2001.
Interpretation
22.
Paragraph 24 amends the interpretation provisions which apply for EIS
income tax relief to include a definition of “the period of restriction”
being the period beginning one year before the shares in question are
issued and ending immediately before the termination date (generally
the third anniversary of the issue date or of the commencement of trade
if later) relating to the shares.
PART II: POSTPONEMENT OF CHARGEABLE GAIN ON REINVESTMENT
23.
Paragraph 25 is introductory.
Requirement
as to the money raised
24.
Paragraph 26 changes the EIS deferral relief rules for the employment
of money raised by an issue of shares. The new rules are the same as
those for EIS income tax relief described in paragraph 6 above.
25.
Paragraphs 27 and 28 make consequential amendments to the rules which
apply where the conditions for the employment of money are not met,
and for the provision of information in such circumstances.
Designated
period
26.
Paragraph 29 makes a drafting change to the rules which determine when
a chargeable gain which has been deferred under the EIS is revived.
The amendment, which is consequential on the removal of references to
“the designated period” in EIS legislation, has no material effect.
Value
received by investor
27.
Paragraph 30 makes a number of amendments to the “value-received” rules
in paragraph 13 of Schedule 5B to the Taxation of Chargeable Gains Act
1992 (TCGA). These rules apply where an investor, or any associate
of the investor, receives any value from the company (or any person
connected with it) at any time during a specified period which is defined
by reference to the date on which the shares were issued. The effect
of the rules is to trigger a “chargeable event” which causes any chargeable
gain which has been deferred on account of the subscription for the
shares to be revived. The main changes are as follows—
- the length of the specified period is reduced by one year, so
that value received more than one year prior to a share issue will
not cause any gain deferred in respect of that issue to be revived:
the new period is “the period of restriction” (see paragraph 38
below);
- the provision
which treats the receipt of payments or assets made in a winding
up or in connection with the dissolution of a company as value received
for EIS deferral relief purposes is repealed.
- An
investor is usually treated as disposing of an interest in his shares
for capital gains tax purposes on receipt of a capital distribution,
and hence, for the purposes of EIS deferral relief a chargeable
event will arise on account of the deemed disposal in such cases;
- receipts of
insignificant value (see paragraph 30 below) will not cause any
relevant deferred gains to be revived unless there have been a number
of such receipts in the period of restriction in question and a
receipt of their aggregate value would not be a receipt of insignificant
value.
28.
Unlike the corresponding provisions for EIS income tax relief (see paragraph
13 above), there is no spreading rule where value is received at a time
which falls within the periods of restriction for two or more issues
of shares in respect of which the investor has obtained deferral relief.
This is because there is nothing in the deferral relief rules to correspond
to the EIS income tax relief rule which determines the amount of relief
withdrawn by reference to the amount of value received.
29.
Paragraph 31 inserts three new paragraphs – paragraphs 13A , 13B, and
13C – after paragraph 13 of Schedule 5B TCGA.
30.
The new paragraph 13A of Schedule 5B contains rules which determine
the amount of any value received: these are the same as the corresponding
rules for EIS income tax relief. It also contains rules corresponding
to the EIS income tax relief provisions for “receipts of insignificant
value” (see paragraph 16 above). These rules are identical except in
respect of the test which determines whether there is a receipt of insignificant
value where the amount received exceeds £1,000. For deferral relief
purposes, the amount received is compared with the total amount of any
gains deferred in respect of the subscription for the shares rather
than with the amount the investor subscribed for them.
31.
The new paragraphs 13B and 13C of Schedule 5B provide, broadly, for
the value-received rules in paragraph 13 of Schedule 5B not to apply
in any case where a full restitution of value is made. The rules correspond
to those which apply for EIS income tax relief (see paragraph 14 above).
Value received by persons other than the investor
32.
Paragraph 32 makes a number of amendments to the rules in paragraph
14 of Schedule 5B TCGA. These rules apply where another member of the
company receives value during a specified period which is defined
by reference to the date on which the shares were issued. Value is
received where—
- there is a repayment, redemption, or repurchase of any of the
company’s (or a subsidiary’s) share capital which belong to the
member, or
- a payment
is made to the member for giving up his right to any of the company’s
(or a subsidiary’s) share capital on its cancellation or extinguishment.
33.
The effect of the rules in paragraph 14 of Schedule 5B is to trigger
a “chargeable event” which causes any chargeable gain which has been
deferred on account of the investor’s subscription for the shares to
be revived. The main change made to that paragraph is that the length
of the specified period is reduced by one year, so that value received
more than one year prior to a share issue will not trigger a chargeable
event in respect of that issue: the new period is “the period of restriction”
(see paragraph 38 below).
Certain receipts to be disregarded
34.
Paragraph 33 inserts a new paragraph – paragraph 14AA – after paragraph
14 of Schedule 5B TCGA. This provides for repayments etc. of share
capital to be disregarded for the purposes of the rules in paragraph
14 of Schedule 5B in certain cases. The provisions are the same as
the corresponding rules for income tax relief (see paragraph 18 above).35.
Paragraph 34 makes a number of minor or consequential amendments to
paragraph 14A of Schedule 5B TCGA, which restricts the application of
paragraph 14 of Schedule 5B in cases where CVS investment relief is
withdrawn or reduced on account of a repayment etc. of another member’s
share capital.
Information
36.
Paragraph 35 makes some changes to the information provisions in paragraph
16 of Schedule 5B TCGA which are consequential on the changes made to
the EIS deferral relief value-received provisions (see paragraphs 27
to 34 above). The change made by sub-paragraph (1) is consequential
on the removal of references to “the designated period” in EIS legislation
and has no material effect. These amendments have effect in relation
to events occurring on or after 7th March 2001.
Trustees:
anti-avoidance
37.
Paragraph 36 amends paragraph 18 of Schedule 5B TCGA, which makes anti-avoidance
provision in certain cases where trustees of settlements subscribe for
shares in a qualifying EIS company. The amendments are consequential
on the introduction of the new paragraphs 13A to 13C of Schedule 5B
(see paragraph 29 to 31 above), and cater for circumstances in which
there is a receipt of insignificant value or a receipt of value for
which restitution is made.
Interpretation
38.
Paragraph 37 amends the interpretation provisions in paragraph 19 of
Schedule 5B TCGA. It inserts the definition of “the period of restriction”
and an associated expression – “termination date”. It also makes an
amendment to the definition of “qualifying company” which is consequential
on the change made to the “unquoted company requirement” for the provisions
for EIS income tax relief (see paragraph 10 above).
PART III: MISCELLANEOUS AND GENERAL
Loss relief
39.
Paragraph 38 amends the rules for loss relief on investments in qualifying
companies in consequence of the relaxation of the “unquoted company
requirement” for EIS income tax relief (see paragraph 10 above). The
rules which determine the sorts of companies which can be qualifying
companies for loss relief purposes were broadly aligned with the corresponding
rules for the EIS in 1998. The main amendments maintain that alignment
by providing for a company not to lose its qualifying status for loss
relief purposes if it ceases to be an unquoted company provided that,
as for the EIS—
- it was an unquoted company at the time the investment was made,
and
- no arrangements
existed at that time for it to cease to be unquoted or to become
a wholly owned subsidiary of a holding company in circumstances
where arrangements existed for the holding company to cease to be
an unquoted company.
40.
This takes effect for shares issued on or after 7th March 2001. It
also takes effect for shares issued after 5th April 1998 but before
7th March 2001
where
the company in question ceases to be an unquoted company on or after
7th March 2001.
41.
The other amendment is consequential on changes made in the Finance
Act 2000 to the EIS income tax relief provisions which apply where a
company is wound up. It provides that, during the winding up, the company
must not cease to be a trading company. This applies in relation to
shares issued on or after 6th April 2001.
Penalties
42.
Paragraph 39 amends the penalty provisions in section 98 of the Taxes
Management Act 1970 in consequence of the changes made to the EIS income
tax relief information provisions (see paragraph 21 above).
Commencement
43.
Paragraph 40 makes the commencement provisions for those paragraphs
in Schedule 15 which do not have special commencement rules. All the
provisions in question have effect in relation to shares issued on or
after 7th March 2001. As far as shares issued before that date are
concerned, the provisions which amend the value-received rules apply
in relation to value-received on or after 7th March 2001 or, as the
case may be, repayments etc of share capital made on or after 7th March
2001. The other provisions apply where EIS income tax relief or deferral
relief was attributable to the shares immediately before 7th March 2001.
BACKGROUND NOTE
The
Enterprise Investment Scheme (EIS)
44.
The EIS is designed to help small higher-risk, unquoted trading companies
raise start-up and expansion finance by issuing full-risk ordinary shares.
Individuals who are previously unconnected with companies in which they
invest may obtain various income tax and capital gains tax reliefs:
- income tax relief (at 20 per cent) on the amount invested (on
investments of up to £150,000 per tax year) and relief from capital
gains tax on disposal of the shares, provided that shares are held
for a specified minimum period;
- relief for
most allowable losses on the disposal of shares (net of any income
tax relief remaining after the disposal) against income if they
are not set off against chargeable gains; and
- deferral
of capital gains tax on a chargeable gain from the disposal of any
asset where the gain is reinvested in the shares.45.
Deferral relief can also be obtained by individuals who have a prior
connection with the company, and by the trustees of certain trusts.
Loss
relief
46.
This relief, which was introduced in the early 1980s, provides for investment
companies and individuals to set capital losses arising on most disposals
of ordinary shares in qualifying trading companies against income (if
they are not set off against capital gains). The shares must be subscribed
for, and the companies in which investments are made must satisfy qualifying
conditions. For shares issued on or after 6th April 1998 these conditions
have been broadly comparable to those which apply for companies in which
investments are made through the EIS.
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