Introduction

1.These explanatory notes relate to the Income Tax Act 2007 (c.3) which received Royal Assent on 20 March 2007. They have been prepared by the Tax Law Rewrite project at HMRC in order to assist readers in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of its contents. So if a section or part of a section does not seem to require explanation or comment, none is given.

3.The commentary on each section indicates the main origin or origins of the section. A full statement of the origins of each section is contained in the Act’s Table of Origins.

4.At the end of the commentary, there is supporting material in two annexes:

• Annex 1 contains details of the minor changes in the law made by the Act.

• Annex 2 contains lists of:

  • the extra-statutory concessions to which the Act gives effect;

  • the minor changes made by the Act which involve giving statutory effect to principles derived from case law; and

  • provisions not included in the Act on the grounds of redundancy.

Summary

5.The main purpose of the Income Tax Act 2007 is to rewrite the income tax legislation that has not so far been rewritten so as to make it clearer and easier to use.

6.The Act covers:

• the basic provisions about the charge to income tax, income tax rates, the calculation of income tax liability and personal reliefs;

• various specific reliefs, including relief for losses, the enterprise investment scheme, venture capital trusts, community investment tax relief, interest paid, gift aid and gifts of assets to charities;

• specific rules about settlements and trustees, manufactured payments and repos, accrued income profits, tax avoidance and deduction of tax at source; and

• general income tax definitions.

7.The Act does not generally change the meaning of the law when rewriting it. The minor changes which it does make are within the remit of the Tax Law Rewrite project and the Parliamentary process for the Act. In the main, such minor changes are intended to clarify existing provisions, make them consistent or bring the law into line with established practice.

Background

The Tax Law Rewrite project

8.In December 1995 the Inland Revenue presented a report to Parliament on the scope for simplifying the United Kingdom tax system (The Path to Tax Simplification). The main recommendation was that United Kingdom direct tax legislation should be rewritten in clearer, simpler language.

9.This recommendation was warmly welcomed, both in Parliament and in the tax community. In his November 1996 Budget speech the then Chancellor of the Exchequer (the Rt Hon Kenneth Clarke QC MP) announced that the Inland Revenue would propose detailed arrangements for a major project to rewrite direct tax legislation in plainer language.

10.The project team was given the task of rewriting the United Kingdom’s existing primary direct tax legislation. The aim is that the rewritten legislation should use simpler language and structure than previous tax legislation. The members of the project are drawn from different backgrounds. They include HMRC employees, private sector tax professionals and parliamentary counsel including (as head of the drafting team) a senior member of the Parliamentary Counsel Office.

Steering Committee

11.The work of the project is overseen by a Steering Committee, chaired by the Rt Hon the Lord Newton of Braintree OBE DL (who took over from the Rt Hon the Lord Howe of Aberavon CH QC at the beginning of 2006). The membership of the Steering Committee as at 31 October 2006 was:

The Rt Hon the Lord Newton of Braintree OBE DL (Chairman)

Dr John Avery Jones CBE

Adam Broke

Baroness Cohen of Pimlico

Ian Dewar

Mike Eland CB

The Rt Hon Michael Jack MP

Eric Joyce MP

District Judge Rachel Karp

David Swaine

Professor John Tiley CBE

Consultative Committee

12.The work is also reviewed by a Consultative Committee, representing the accountancy and legal professions and the interests of taxpayers. The membership of the Consultative Committee as at 31 October 2006 was:

Consultation

13.The work produced by the project has been subject to public consultation. This has allowed all interested parties an opportunity to comment on draft clauses.

14.This consultation took the form of a series of papers which publish clauses in draft. There were 30 of these, published between April 2004 and October 2005. A draft Bill was published for consultation in February 2006. And two further papers on provisions in FA 2006 were published in July 2006. All these documents were made available on the Tax Law Rewrite website.

15.In addition to formal consultation, the project presents its papers to the Committees to inform the Committees and seek their views on particular issues. The project has also consulted on an informal basis with specialists in particular subject areas. For example, there have been regular meetings of the VCS (venture capital schemes) rewrite group during the development of the EIS and VCT Parts of the Act. This is a small group of practitioners (who represent a number of professional bodies), policy and technical specialists from HMRC and members of the project.

16.Those who responded to one or more of the papers, or to the draft Bill, include:

Anne Wilson

Anthony Davis

Association of Charitable Foundations

BDO Stoy Hayward LLP

Boodle Hatfield

British Bankers’ Association

Building Societies Association

Chartered Institute of Taxation

Charity Commission

Charity Law Association

Charles King-Farlow

Charles Pocock

Christine Harpin

City of Westminster & Holborn Law Society

Colin Campbell

Confederation of British Industry

David F Williams

Deloitte & Touche LLP

Department for Constitutional Affairs

Department of Finance and Personnel for Northern Ireland

Department for Social Development in Northern Ireland

Ernst & Young LLP

Euroclear

Francis Sandison

Freshfields Bruckhaus Deringer

George Harrison

Helen Billing

Horwath Clark Whitehill LLP

Investment Management Association

Institute of Chartered Accountants in England and Wales

Institute of Chartered Accountants of Scotland

James Kessler QC

John Avery Jones

John Clark

John Jeffrey-Cook

Ken Moody

KPMG LLP

Law Society of England and Wales

London Investment Banking Association

London Society of Chartered Accountants

Lovells

Low Incomes Tax Reform Group

Mark Whitehouse

Mazars LLP

Office of the Legislative Counsel, Northern Ireland

PricewaterhouseCoopers LLP

Sayer Vincent

Society of Trust and Estate Practitioners

Terry Hopes

Wedlake Bell

Wellcome Trust

Note: this list excludes those who asked that their responses be treated in confidence.

Income Tax Act 2007

17.The Act:

• applies for income tax, continuing the general approach of previous rewrite Acts of separating income tax and corporation tax legislation;

• contains the basic provisions of income tax, such as the charge to income tax, tax rates, how a person’s income tax liability is calculated, personal reliefs, and general definitions which apply for income tax purposes;

• deals with various specific reliefs, including reliefs for losses, the enterprise investment scheme, venture capital trusts, community investment tax relief, interest paid, gift aid and gifts of assets to charities;

• broadens the picture by filling in the rest of the income tax picture, in particular in relation to settlements and trustees, avoidance and deduction of tax at source; and

• will take the place of ICTA as the main Act about income tax, complemented by ITEPA and ITTOIA (which dealt with the charges to income tax on employment, pension, trading and other income).

18.The Act has 1035 sections and 4 Schedules.

19.The sections are arranged as follows:

Part 1: Overview

Part 2: Basic provisions

Part 3: Personal reliefs

Part 4: Loss relief

Part 5: Enterprise investment scheme

Part 6: Venture capital trusts

Part 7: Community investment tax relief

Part 8: Other reliefs

Part 9: Special rules about settlements and trustees

Part 10: Special rules about charitable trusts etc

Part 11: Manufactured payments and repos

Part 12: Accrued income profits

Part 13: Tax avoidance

Part 14: Income tax liability: miscellaneous rules

Part 15: Deduction of income tax at source

Part 16: Income Tax Acts definitions etc

Part 17: Definitions for purposes of Act and final provisions

20.The Schedules are:

Schedule 1: Minor and consequential amendments

Schedule 2: Transitionals and savings

Schedule 3: Repeals and revocations

Schedule 4: Index of defined expressions

21.Tables of Origins and Destinations have also been prepared. The Table of Destinations shows the destination not only of repealed provisions but of all provisions rewritten in the Act.

Glossary

22.The commentary uses a number of abbreviations. They are listed below.

CAA the Capital Allowances Act 2001

CAA 1990 the Capital Allowances Act 1990 (and similarly CAA 1968)

CRCA the Commissioners for Revenue and Customs Act 2005

ESC extra-statutory concession

HMRC Her Majesty’s Revenue and Customs

FA 1989 Finance Act 1989 (and similarly for other Finance Acts)

F(No 2)A Finance (No. 2) Act

FISMA the Financial Services and Markets Act 2000

ICTA the Income and Corporation Taxes Act 1988

ICTA 1970 the Income and Corporation Taxes Act 1970

IHTA the Inheritance Tax Act 1984

ITEPA the Income Tax (Earnings and Pensions) Act 2003

ITTOIA the Income Tax (Trading and Other Income) Act 2005

MOD manufactured overseas dividend

PAYE Pay As You Earn

R&D research and development

TCGA the Taxation of Chargeable Gains Act 1992

TMA the Taxes Management Act 1970

VAT value added tax

Commentary on Sections

Part 1: Overview

Section 1: Overview of Income Tax Acts

23.This section provides an overview of the location of the main legislation dealing with income tax. It is new.

Section 2: Overview of Act

24.This section provides an overview of the Act. It is new.

Part 2: Basic provisions

Overview

25.This Part contains basic provisions about the charge to income tax.

Chapter 1: Charges to income tax

Overview

26.This Chapter sets out the provisions of the Income Tax Acts where the main charges to income tax are to be found and contains basic rules about the annual nature of income tax.

Section 3: Overview of charges to income tax

27.This section is based on section 1(1) of ICTA.

28.Subsection (1) lists the principal provisions that contain charges to income tax, which are all in ITEPA and ITTOIA.

29.Subsection (2) makes it clear that there are also charges to income tax in other legislation. The main ones are shown, but the list is not exhaustive.

Section 4: Income tax an annual tax

30.This section is based on sections 1(2), 2(2) and 832(1) of ICTA.

31.Section 2(1) of ICTA, which provides for the due proportion of income tax to be charged for every fractional part of one pound, has not been rewritten as it is otiose.

Section 5: Income tax and companies

32.This section provides that income of companies that is liable to corporation tax is not charged to income tax. It is based on sections 6(2) and 11(1) of ICTA.

33.In brief, a company’s income (other than income arising to it in a fiduciary or representative capacity) is within the charge to corporation tax if:

• the company is UK resident; or

• the company is non‑UK resident and:

  (a)

  the income is trading income arising through or from a permanent establishment in the United Kingdom of the company; or

  (b)

  the income arises from property or rights used by, or held by or for, the permanent establishment.

See the commentary on section 835 in relation to the residence of companies.

Chapter 2: Rates at which income tax is charged

Overview

34.This Chapter sets out all the rates of income tax and provides rules about the rates of tax at which income is charged. It is based on sections 1, 1A, 1B and 686(1A) of ICTA.

35.Two main principles are at work:

• first, the rate of tax depends on the type of income concerned; and

• second, income may be subject to progressively higher rates of tax depending on the overall amount of income of the person concerned.

36.The second principle applies only to individuals (subject to a special rule about the first £1,000 of trustees’ trust rate income in Chapter 6 of Part 9 of this Act).

Section 6: The starting rate, basic rate and higher rate

37.This section sets out the main rates at which income tax is charged. It is based on section 1(2) of ICTA.

38.With some exceptions, notably savings and dividend income (see sections 12 and 13), any income of an individual is taxed at either the starting rate, the basic rate or the higher rate, depending on the level of the individual’s income.

39.Subsection (2) specifies that the main rates are determined each year by Parliament.

40.Other rates at which income tax is charged do not have to be specified by Parliament annually and are instead set out in the sections signposted by subsection (3).

Section 7: The savings rate

41.This section sets out the savings rate of income tax. It is based on section 1A(1B) of ICTA.

42.The “savings rate” is a new name for what is called “the lower rate” in the source legislation.

Section 8: The dividend ordinary rate and dividend upper rate

43.This section sets out these two rates of income tax that apply to dividend income. It is based on section 1B(2) of ICTA.

Section 9: The trust rate and dividend trust rate

44.This section sets out the two rates of income tax that apply, in particular, to accumulation or discretionary income of trustees. It is based on section 686(1A) of ICTA.

45.The “trust rate” is a new name for what is called “the rate applicable to trusts” in the source legislation.

Section 10: Income charged at the starting, basic and higher rates: individuals

46.This section sets out that the three main rates of income tax charged on the income of individuals are charged in three slices. It is based on section 1(2) of ICTA.

47.The first slice (subsection (1)) is income up to the starting rate limit – the starting rate band. The second slice (subsection (2)) is income between the starting rate limit and basic rate limit – the basic rate band. The third slice (subsection (3)) is income above the basic rate limit – the higher rate band.

48.Subsection (4) is a signpost to provisions that apply different rates of tax to certain types of income falling within each band. Income has to be placed in order so that the rates which would otherwise apply can be established. The rules on how this is to be done are in section 16.

Section 11: Income charged at the basic rate: other persons

49.This section charges tax at the basic rate on income of persons other than individuals. It is based on section 1(2) of ICTA.

50.Of the three main rates, only the basic rate applies. But other rates apply to specific sorts of income. In particular, savings income is charged at the savings rate and dividend income at the dividend ordinary rate. And income of discretionary and accumulation settlements is charged at the trust rates. There is a signpost to these exceptions in subsection (2).

Section 12: Income charged at the savings rate

51.This section charges savings income at the savings rate to the extent that it would otherwise fall within the basic rate band. It is based on section 1A(1) of ICTA.

52.There are a number of exceptions that provide that certain savings income is charged differently, usually at the trust rate. These are signposted in subsection (2).

Section 13: Income charged at the dividend ordinary and dividend upper rates: individuals

53.This section applies either the dividend ordinary rate or the dividend upper rate to dividend income of individuals. It is based on sections 1A(1), (1AA), (1A) and (4) and 1B(1) of ICTA.

54.To the extent that the dividend income (other than dividend income charged on the remittance basis) would otherwise fall within the starting rate or basic rate bands, subsection (1) provides that the dividend ordinary rate applies instead.

55.To the extent that the dividend income would otherwise fall within the higher rate band, subsection (2) provides that the dividend upper rate applies instead.

56.Subsection (3) provides that subsections (1) and (2) are subject to any provisions to the contrary.

57.“Dividend income” includes income chargeable under Chapter 5 or 6 of Part 4 of ITTOIA (see the definition in section 19). See Change 1 in Annex 1.

Section 14: Income charged at the dividend ordinary rate: other persons

58.This section applies the dividend ordinary rate to dividend income of persons other than individuals. It is based on section 1A(1), (1A) and (4) of ICTA.

59.Subsection (1) applies the dividend ordinary rate in place of the basic rate to dividend income (other than dividend income charged on the remittance basis). A number of provisions which override this rule (typically to provide that one of the trust rates applies instead), are signposted by subsection (2).

Section 15: Income charged at the trust rate and the dividend trust rate

60.This section provides a signpost to Chapters 3 to 6 of Part 9, which are about the circumstances in which income tax is charged at the trust rate and the dividend trust rate. It is new.

Section 16: Savings and dividend income to be treated as highest part of total income

61.This section provides the ordering rules that determine at what rate a particular type of income would be charged but for the sections imposing the savings rate or the dividend rates. It is based on section 1A(5) of ICTA.

62.Subsection (2) says that the rules apply for all other income tax purposes as well, except in the cases mentioned.

63.Subsections (3) to (5) contain the ordering rules. In essence, dividend income is the top part of income, savings income the middle part, and other income the lowest part.

64.Subsection (6) is a signpost to section 1012 which deals with the relationship between the rules in this section and other rules requiring particular income to be treated as the highest part.

65.Subsection (7) ensures that dividend income charged on the remittance basis does not count as dividend income for the purposes of this section.

Section 17: Repayment: tax paid at basic rate instead of starting or savings rate

66.This section allows a repayment claim outside Self Assessment if a person has suffered tax at the basic rate on income received and the person is only liable at the starting rate or the savings rate on that income. It is based on sections 1(6A) and 1A(6A) of ICTA.

Section 18: Meaning of “savings income”

67.This section defines “savings income”. It is based on section 1A(1AA), (2), (3) and (4) of ICTA.

68.The definition includes income on which personal representatives are liable under section 466 of ITTOIA (gains from contracts for life insurance etc), removing an anomaly in the source legislation. See Change 2 in Annex 1.

Section 19: Meaning of “dividend income”

69.This section defines “dividend income”. It is based on section 1A(1AA), (2), (3) and (8) and section 1B(1) and (3) of ICTA.

Section 20: The starting rate limit and the basic rate limit

70.This section sets out the starting rate limit and the basic rate limit. It is based on section 1(2) to (3) of ICTA.

71.The figures used in this Act are those for 2006-07. They will be updated for 2007-08 by means of an indexation order.

Section 21: Indexation of the starting rate limit and the basic rate limit

72.This section provides for indexation of the starting rate and basic rate limits. It is based on section 1(4) to (6) of ICTA.

73.Subsections (2) and (3) set out in step form how to compute the limit for a given year by reference to the limit for the previous year and the percentage rise in the retail prices index. The words “unless Parliament otherwise determines” in section 1(4) have been omitted as it is always open to a Finance Act to disapply this provision, so no express provision to this effect is needed.

74.Subsection (4) is an administrative provision to reflect the fact that it is usually only known at the time of the Chancellor’s Budget speech whether statutory indexation will apply. This leaves insufficient time before the start of the tax year for employers to update their payroll systems. This rule gives employers until the first pay-day after 17 May to make the necessary changes.

75.Subsection (5) obliges the Treasury to specify the indexed amounts in a statutory instrument which must be made in the tax year before the tax year to which they are to apply.

Chapter 3: Calculation of income tax liability

Overview

76.This Chapter deals with the calculation of a person’s income tax liability for a tax year.

77.The calculation sets out how the rules about the rates at which income is charged, and provisions about reliefs, allowances, tax reductions etc, are applied to the components of a person’s total income to arrive at the person’s income tax liability.

78.The calculation does not deal with amounts of tax suffered (eg under PAYE or by way of deduction of tax at source) as these are set off against a person’s liability rather than deducted in arriving at it. See section 59B(1) of TMA.

79.Nor does it deal with relief given by discharge or repayment, as here too the relief can operate only once the amount of a person’s liability has been determined. Examples of such reliefs include paragraph 6 of Schedule 14 to ICTA (life insurance relief for non-residents) and section 416 of CAA (mineral extraction allowance - expenditure on restoration within 3 years of ceasing to trade).

Section 22: Overview of Chapter

80.This section provides an overview of the Chapter. It is new.

81.The persons liable to income tax include individuals, trustees, personal representatives, non-UK resident companies, and companies acting in a fiduciary or representative capacity.

82.But where non-UK resident companies carry on a trade in the United Kingdom through a permanent establishment, they are liable to corporation tax instead of income tax on their chargeable profits. See the commentary on section 5.

Section 23: The calculation of income tax liability

83.This section sets out the steps to be taken in calculating a taxpayer’s liability to income tax for a tax year. It is based on many provisions in the source legislation, in particular section 835 of ICTA.

84.Step 1 brings together all the amounts of income on which a taxpayer is charged to income tax for the tax year. The sum of these amounts is called “total income”, and each of the amounts is a “component” of total income.

85.In the source legislation there were some contexts in which “total income” was used in a different sense (eg in section 1 of ICTA, where it meant what is defined in Step 2 as “net income”). But in this Act it is used consistently to denote this first stage result. And the consequential amendments to other legislation in Schedule 1 ensure that it will always be used in this sense elsewhere.

86.Step 2 deals with those reliefs (other than personal allowances) which are given by deduction from income.

87.Most of the reliefs listed in section 24 may be deducted from any type of income. But some may only be deducted from certain components of total income. See section 25(3).

88.Step 2, combined with the provisions about the reliefs themselves and the rules in section 25 about the way in which deductions are made, ensures that the reliefs are allowed in the proper way to arrive at “net income”.

89.It is important that this is done by reference to the components of total income, to pave the way for Step 4.

90.Step 3 deals with the deduction of the personal allowance and blind person’s allowance from the components of net income. This step only affects individuals. The rule that these deductions come last is based on section 835(5) of ICTA.

91.Again, it is important that this is done by reference to the components of total income, to pave the way for Step 4.

92.Step 4 applies the rates of tax specified in Chapter 2 (and, where the taxpayer is a trustee, the relevant Chapters of Part 9 of this Act) to the amounts of the components remaining after Step 3.

93.Step 5 adds together the amounts of tax on each component.

94.Step 6 then deducts any tax reductions. These are listed in section 26. Further rules about how these tax reductions are made are in sections 27 to 29.

95.Step 7 then adds on certain other amounts of income tax for which a taxpayer may be liable, as listed in section 30.

Section 24: Reliefs deductible at Step 2

96.This section lists all the reliefs that may be deducted from components of total income at Step 2 of the calculation. It is based on many provisions in the source legislation.

97.The section is arranged to highlight those reliefs which apply only to individuals, and to avoid duplication of references to particular reliefs.

98.This section, and others in the Chapter, contains lists of provisions some of which are in this Act and some which are elsewhere. Such lists are arranged by reference to the order that the provisions appear in this Act and by reference to the date on which other legislation was enacted.

99.The entries in the lists are not each given their own sub-paragraph reference. This will reduce the scope for confusion should any amendments need to be made to the lists in future Finance Acts.

100.One of the reliefs deducted at this step is for annual payments and patent royalties under Chapter 4 of Part 8. See Change 81 in Annex 1 and the overview commentary on Chapter 4 of Part 8.

101.The opportunity has been taken to clarify the way in which reliefs under sections 446 and 454 of ITTOIA work. See the amendments made to those sections in Schedule 1.

102.The list of reliefs does not include section 811 of ICTA. That section allows a reduction of a component of income for foreign tax suffered on that income where no credit is available. It has been excluded on the basis that the relief reduces the amount of income from the source (and where appropriate can create or augment a trading loss) before it enters into the calculation in section 23.

103.For the same reason, the list does not include relief under section 798C of ICTA which was introduced by FA 2005.

104.For the rules about what (if anything) may be done with any excess relief over the amount of income from which it can be deducted it is necessary to refer to the particular provisions dealing with the relief concerned. But see also the provisions of section 25.

Section 25: Reliefs and allowances deductible at Steps 2 and 3: supplementary

105.This section contains rules about the way deductions are made against components of income. It is based on section 835(3), (4) and (5) of ICTA.

106.The main rule, in subsection (2) is that deductions are allowed in the way that results in the greatest reduction of income tax liability.

107.This rule means that where a deduction may be set against more than one component of income or there are two or more deductions available, they are allowed in the way that produces the least income tax liability. The order in which deductions that are allowable against a particular component of income are made under Step 2 cannot affect the liability for the tax year concerned. If there is sufficient income then all deductions are allowed in full. If there is insufficient income then unrelieved income is nil. But the order in which they are made can affect the amount of relief that is available to carry forward or back (in the case of reliefs where that is a possibility).

108.Subsection (3) is a signpost to provisions that modify the rule in subsection (2), in particular in the case of reliefs given only against certain types of income.

109.Subsections (4) and (5) ensure that a deduction is only given to the extent that there is income to absorb the deduction, taking into account deductions already made.

110.Some, but not all, of the source provisions contain the rule that income cannot be reduced below nil, but even where not explicitly mentioned, it has always been the accepted practice that a deduction can only be made from income to the extent that there is income to absorb the deduction. The position is now explicit for all income deductions.

111.A similar point arises in connection with deductions that operate as tax reductions. See the commentary on section 29.

Section 26: Tax reductions

112.This section lists the tax reductions that are allowed in terms of tax at Step 6 of the calculation in section 23. It is based on many provisions in the source legislation.

113.The approach adopted to the layout of this section is in line with that adopted in relation to section 24.

114.One of the tax reductions is for relief under section 539 of ITTOIA. See Change 3 in Annex 1.

Section 27: Order of deducting tax reductions: individuals

115.This section provides rules about the order in which tax reductions are to be given for individuals. It is based on many provisions in the source legislation.

116.In the source legislation, many of the provisions dealing with tax reductions contain rules which specify how that reduction interacts with other tax reductions. These rules, so far as they relate to individuals, are brought together in subsections (4) to (6).

117.But those rules are not comprehensive. As well as bringing the existing rules together into one place, the section introduces a new rule in subsections (2) and (3) providing that, subject to the following subsections, the reductions are allowed in the way that gives the greatest reduction in liability for the year. See Change 4 in Annex 1.

118.Subsections (4) and (5) list those provisions where rules setting out some priority are contained in the source legislation. Subject to the point mentioned in the next paragraph, the provisions are listed in the order in which the source rules require the reliefs to be allowed. If any other reduction (except double taxation relief) is due then it may be allowed at whatever stage (before or after any of the provisions in subsection (5)) gives the maximum reduction.

119.It is clear from section 256 of ICTA that reductions under Chapter 1 of Part 7 of ICTA are given after all other reductions (except double taxation relief), but no order of priority between the two reductions within that Chapter is given. Since the reduction for married couples and civil partners is transferable whereas the reduction under section 273 of ICTA is not, it will always be beneficial if any reduction under section 273 of ICTA comes first. Subsection (5) reflects this. See Change 4 in Annex 1.

Section 28: Order of deducting tax reductions: other persons

120.This section provides rules about the order in which tax reductions are to be given for persons other than individuals. It is based on sections 790(3) and 796(1) of ICTA and sections 26 and 27(1) of FA 2005.

121.There are fewer tax reductions available than for individuals, so the rules are less complex. Subsection (2) corresponds to section 27(2) in providing a new rule that the reductions are allowed in the way that gives the greatest reduction in liability. See Change 4 in Annex 1 and the commentary on section 27.

122.Subsection (5) is a special rule concerning the tax reduction given to certain trustees under section 26 of FA 2005.

Section 29: Tax reductions: supplementary

123.This section contains additional rules about the giving of tax reductions. It is based on a number of provisions in the source legislation.

124.Subsections (2) and (3) ensure that a reduction is only given to the extent that there is tax to absorb the reduction, taking into account reductions already made. Many of the source provisions contain the rule that the tax cannot be reduced below nil (see for example section 256(2) of ICTA). And top-slicing relief under section 535 of ITTOIA cannot give a greater tax reduction than the tax increase resulting from including the gain concerned within total income. The position is now explicit for all tax reductions. See the commentary on section 25.

125.Subsection (4) ensures that the rules in this section limiting the amount of a tax reduction by reference to the amount of tax against which it is set will not affect the calculation under section 796 of ICTA of the limit on income tax credit relief for double taxation. It also ensures that those rules will not affect the operation of any other provisions limiting the amount of a tax reduction.

126.Subsection (5) ensures that any reference in this Chapter to double taxation relief under section 788 of ICTA brings in relief allowed in accordance with arrangements made under that section.

Section 30: Additional tax

127.This section lists provisions under which amounts of tax are added to the tax liability at Step 7 of the calculation. It is based on a number of provisions in the source legislation.

Section 31: Total income: supplementary

128.This section provides supplementary rules, in particular about the tax year in which income received under deduction of tax or with a tax credit is to be taken into account. It is based on section 835(6) and (7) of ICTA.

Section 32: Liability not dealt with in the calculation

129.This section lists income tax liabilities not dealt with in the calculation. It is new.

130.These liabilities arise in connection with:

• the recovery of excessive relief (eg the withdrawal or reduction of EIS relief or the recovery of excess credit for overseas tax) where the taxpayer’s self-assessment for the tax year is final;

• deduction of tax at source (eg Chapters 15 to 17 of Part 15 and the reverse charge provisions), where the liability is not in respect of the person’s own liability; and

• stand-alone charges (eg Chapter 1 of Part 13, or in relation to the administration of pension schemes).

Part 3: Personal reliefs

Overview

131.This Part contains rules relating to personal reliefs for individuals. It is based on Chapter 1 of Part 7 of ICTA.

132.The reliefs dealt with in this Part fall into two distinct categories. First, there are two reliefs that operate as a deduction from net income. They are the personal allowance and blind person’s allowance. The rules for those reliefs are in Chapter 2.

133.Second, there is one relief which operates by way of a reduction in terms of tax. That is the tax reduction for certain married couples and civil partners. The rules for that relief are in Chapter 3.

134.Chapter 4 contains general provisions, in particular relating to residence and indexation of allowances.

135.The reliefs under Chapters 2 and 3 are available only to individuals meeting the residence etc requirements of section 56, which is based on section 278 of ICTA. Individuals who, under the source legislation, could claim these reliefs only by virtue of meeting the condition in section 278(2)(a) are catered for by corresponding provisions in ICTA, as amended by this Act, rather than by this Part. This is because if the condition concerned (which, in particular, operates by reference to whether the individual is a Commonwealth citizen) were included in this Act it would not have been possible to certify that the Act was compatible with the Human Rights Act 1998.

136.In addition, to limit the extent to which the provisions of this Act depend on reliefs given by virtue of an individual meeting the condition in section 278(2)(a) of ICTA, transfers of blind person’s allowance and married couple’s allowance will no longer be available unless the two individuals concerned make their claims to relief under the same set of provisions. This rule is subject to a transitional provision providing that it will not apply to those entitled to such allowances immediately before the Act comes into force until the start of the 2009-10 tax year. See Part 4 of Schedule 2 and Change 7 in Annex 1.

137.The figures used for allowances and income thresholds throughout this Part are those for 2006-07. An indexation order will be made before 6 April 2007 setting the figures for 2007-08 (unless those figures are then changed by FA 2007). Although that order will expressly apply only to ICTA, the continuity of the law provisions in Schedule 1 to this Act will ensure that the figures here are also updated.

Chapter 1: Introduction

Section 33: Overview of Part

138.This section explains where to find the rules relating to each relief that is dealt with in this Part. It is new.

Chapter 2: Personal allowance and blind person’s allowance

Overview

139.This Chapter makes provision for the personal allowance and the blind person’s allowance. It is based on sections 256(1), 257, 265 and 278 of ICTA.

140.The residence requirement for each allowance has been built into sections 35 to 39 with no special provision for claims by non-UK residents to be made to the Commissioners for Her Majesty’s Revenue and Customs. Claims for allowances are made to officers of Revenue and Customs, and no appeals are reserved to the Special Commissioners. This is achieved by not specifying to whom claims are to be made. See Change 5 in Annex 1.

Section 34: Allowances under Chapter

141.This section introduces the Chapter and explains where to find the rules relating to those allowances given by deduction from income. It is new.

Section 35: Personal allowance for those aged under 65

142.This section sets out the conditions for an individual aged under 65 to be entitled to a personal allowance. It is based on sections 256(1), 257 and 278 of ICTA.

143.Section 256 of ICTA makes it clear that a claim is required. Although in practice this personal allowance is often given automatically for years for which a valid claim would still be possible (a practice which will continue), it is necessary to retain the formal claims procedure in order to provide a mechanism to resolve disputed claims. For claims generally, see Change 5 in Annex 1 and the overview commentary on this Chapter.

Section 36: Personal allowance for those aged 65 to 74

144.This section provides a higher level of allowance for individuals aged 65 to 74. It is based on sections 256(1), 257 and 278 of ICTA.

145.Subsection (2) is the rule that the allowance is reduced if the individual’s adjusted net income exceeds a threshold. But the allowance cannot be reduced below the amount of the personal allowance in section 35.

Section 37: Personal allowance for those aged 75 and over

146.This section provides a higher level of allowance for individuals aged 75 and over. It is based on sections 256(1), 257 and 278 of ICTA.

147.As in section 36, subsection (2) rewrites the rule that provides for the reduction of the allowance if the claimant’s income exceeds a threshold. But the allowance cannot be reduced below the amount of the personal allowance in section 35.

Section 38: Blind person’s allowance

148.This section deals with the conditions for blind person’s allowance. It is based on sections 256(1), 265 and 278 of ICTA.

149.As with the personal allowances, the residence requirement has been built into subsection (1). In fact, due to the particular conditions of the relief set out in the following subsections, it is very rare for a non-resident to be entitled to the allowance.

150.Section 265(1) of ICTA requires the claimant to be a “registered blind person”. This term is defined in section 265(7) in two legs.

151.The first leg refers to registers compiled under section 29 of the National Assistance Act 1948. That Act never applied to Northern Ireland and was repealed in relation to Scotland by the Social Work (Scotland) Act 1968 (section 95(2) and Part 1 of Schedule 9). It follows that any registers maintained by local authorities in Scotland or Northern Ireland or by Societies for the Blind on their behalf are not registers under section 29. So subsection (2) makes it clear that this condition can only apply to registers kept by local authorities in England and Wales.

152.The second leg of the definition in section 265(7), which applies only to Scotland and Northern Ireland, refers to persons who are blind within the meaning of section 64(1) of the National Assistance Act 1948. This definition, which is that the individual is unable to do any work for which eyesight is essential, is the same as that underpinning entitlement to registration by local authorities in England and Wales, and is set out in subsection (3).

153.Subsection (4) legislates ESC A86. This treats a claimant as satisfying the registration condition in the year prior to formal registration where evidence of blindness on which registration is based had been obtained in that prior year. See Change 6 in Annex 1.

Section 39: Transfer of part of blind person’s allowance to a spouse or civil partner

154.This section allows the transfer of any excess allowance due to a blind person to his or her spouse or civil partner if the blind person’s income is insufficient to absorb the allowance fully. It is based on sections 256(1), 265 and 278 of ICTA.

155.It is implicit in section 265 of ICTA that a spouse or civil partner receiving all or part of an allowance under this provision must be an individual entitled to claim allowances in their own right. Subsection (1) makes this explicit by incorporating the residence requirement for the receiving spouse or civil partner.

156.Subsection (2) specifies that it is only the excess allowance that can be transferred, that the transferor must make an election (see section 40), and makes it clearer that in order to be entitled to the allowance the transferee must claim it.

157.Subsection (3) provides rules for determining the amount by which the allowance exceeds income for the purposes of this section. It takes the amount of net income as the starting point. The appropriate personal allowance is then deducted.

158.Section 265(3)(c) of ICTA has not been rewritten as it is obsolete.

Section 40: Election for transfer of allowance under section 39

159.This section sets out rules about elections under section 39. It is based on section 265(5) and (6) of ICTA.

160.There is no need to specify that the election must be in the form specified by the Commissioners for Her Majesty’s Revenue and Customs since paragraph 2(3) of Schedule 1A to TMA achieves that result.

161.Subsection (2) provides that if an individual has made an election for the transfer of his or her excess blind person’s allowance in a tax year then this is also treated as an election for the transfer of any excess tax reduction for married couples and civil partners.

Section 41: Allowances in year of death

162.This section addresses the position if an individual dies in the tax year for which an allowance may be due. It is based on section 257(4) of ICTA.

163.Subsection (1) is new, but states what is implicit in the current legislation. The amount of the allowance for any tax year is not reduced on account of death, so that the full amount is due, even if death occurs on 6 April.

164.Subsections (2) and (3) provide that the age-related personal allowances are given for a tax year on the basis that an individual will reach 65 or 75 in that year and are not affected if death occurs before the relevant birthday.

Chapter 3: Tax reductions for married couples and civil partners

Overview

165.This Chapter provides for a tax reduction where a party to a marriage or civil partnership was born before 6 April 1935. It is based on sections 257A, 257AB, 257BA, 257BB and 278 of ICTA, as amended by the Tax and Civil Partnership Regulations 2005 (SI 2005/3229).

166.The residence requirement has been built into sections 45 to 49 with no special provision for claims by non-UK residents to be made to the Commissioners for Her Majesty’s Revenue and Customs. Claims to allowances are made to officers of Revenue and Customs, and no appeals are reserved to the Special Commissioners. This is achieved by not specifying to whom claims are to be made. See Change 5 in Annex 1.

167.A tax reduction is only due if the parties live together. The meaning of living together is in section 1011.

Section 42: Tax reductions under Chapter

168.This section explains where to find the rules about the relief for married couples and civil partners given as a reduction in terms of tax. It is new.

169.These reliefs are often known as married couple’s allowances (the term referring to the amounts by reference to which the tax reductions are calculated).

170.Relief is available only if one spouse or civil partner was born before 6 April 1935.

171.The general rule in section 256(2)(b) of ICTA that prevents the tax reduction exceeding the liability is reflected in section 29.

Section 43: Meaning of “the minimum amount”

172.This section specifies the minimum amount of the allowance by reference to which relief is given. It is based on sections 257A(5A) and 257AB(5) of ICTA.

173.The tax reduction for married couples and civil partners is a percentage of a specified amount known as the “married couple’s allowance” (see sections 45(3) and 46(3)). The allowance depends on the ages of the couple and the level of the claimant’s income. But that amount cannot be reduced below a certain level which is given a new label “the minimum amount”.

Section 44: Election for new rules to apply

174.This section defines, and provides rules about, elections for the rules introduced by the Tax and Civil Partnership Regulations 2005 to apply. It is based on section 257AB(8) of ICTA.

175.The new rules concern marriages taking place and civil partnerships formed on or after 5 December 2005. Existing marriages are not affected. But the husband and wife of an existing marriage may jointly elect for the new rules to apply. The main effect of an election is that the spouse with the higher income, rather than the husband, is the individual entitled to make the primary claim to relief.

Section 45: Marriages before 5 December 2005

176.This section applies if a marriage took place before 5 December 2005 unless an election for the new rules is in force. It is based on sections 256 and 257A of ICTA.

177.Subsection (1) provides that the husband may claim the relief and that if the conditions in subsection (2) are met he is entitled to a tax reduction. The amount of the tax reduction is 10% of the amount specified in subsection (3).

178.Subsection (4) provides that the allowance is reduced if the husband’s adjusted net income exceeds a threshold. The calculation of adjusted net income for this purpose is similar to, but slightly more complicated than, that under section 36(2) because it takes into account the fact that he will have already suffered a reduction in his personal allowance if he is aged 65 or over.

Section 46: Marriages and civil partnerships on or after 5 December 2005

179.This section applies if a marriage takes place or a civil partnership is formed on or after 5 December 2005, or if a married couple elect for the new rules to apply. It is based on sections 256 and 257AB of ICTA.

180.Where a same-sex couple registered their relationship in an overseas jurisdiction listed in Schedule 20 to the Civil Partnership Act 2004 before 5 December 2005 they are treated under that Act as having formed a civil partnership on 5 December 2005. According, in those circumstances a claim may be made under this section.

181.Subsection (1) provides that on a valid claim a tax reduction is due to the individual who makes the claim. As is made clear in subsection (2), that individual is the spouse or civil partner with the higher income.

182.Subsection (2) sets out the conditions for the relief under this section. The “higher income” test operates by reference to net income. If, exceptionally, both parties have the same income, then they jointly nominate either party as the claimant.

183.Subsection (4) provides that the allowance is reduced if the claimant’s adjusted net income exceeds a threshold. The calculation of adjusted net income for this purpose is similar to, but slightly more complicated than, that under section 36(2) because it takes into account the fact that the individual will have already suffered a reduction in the personal allowance if the individual is aged 65 or over.

Section 47: Election by individual to transfer relief under section 45 or 46

184.This section allows an individual to claim a transfer of part of the relief available to that individual’s spouse or civil partner. It is based on section 257BA(1) of ICTA.

185.The tax reduction is claimed by and given to the husband under section 45, or to the party with the higher income under section 46.

186.The transfer that can be made (from this primary claimant) to the wife or to the lower income party (as appropriate) is of a tax reduction calculated by reference to one half of the “the minimum amount” in section 43.

187.Subsection (1) provides that the recipient is entitled to a tax reduction of 10% of one half of the minimum amount provided the primary claimant is entitled to a tax reduction, and the conditions in subsection (2) are met.

188.The procedure for making an election is set out in section 50. In addition to the election, which remains in force until withdrawn, the spouse or civil partner must claim the tax reduction for a particular tax year.

189.Subsections (3) and (4) ensure that if a spouse or civil partner does receive a tax reduction under this section then the primary claimant’s tax reduction (calculated after any reduction attributable to income exceeding the threshold or due to marriage or entry into civil partnership in the year) is correspondingly reduced.

Section 48: Joint election to transfer relief under section 45 or 46

190.This section allows spouses or civil partners to make a joint claim for the transfer between them of the part of the relief attributable to the whole of the minimum amount. It is based on section 257BA(2) of ICTA.

Section 49: Election for partial transfer back of relief

191.This section provides that if a joint election has been made under section 48, then the primary claimant may unilaterally elect to transfer back the tax reduction attributable to one half of the minimum amount. It is based on section 257BA(3) of ICTA.

192.This is in addition to that individual benefiting from any tax reduction attributable to the allowance in excess of the minimum that remained with that individual in the first place. The election remains in force until withdrawn and the procedure is set out in section 50. The individual also has to make a claim for each tax year for which a transfer back is wanted.

Section 50: Procedure for making and withdrawing elections under sections 47 to 49

193.This section details the procedure for making elections for the transfer of relief to a spouse or civil partner and for the re-transfer of relief back and for the withdrawal of those elections. It is based on section 257BA(4), (5), (7) and (8) of ICTA.

194.Subsection (2) concerns the making of an election. The election must be in the form specified by the Commissioners for Her Majesty’s Revenue and Customs, in accordance with paragraph 2(3) of Schedule 1A to TMA.

195.Subsection (3) sets out the two circumstances in which an election first takes effect in the year in which it is made rather than in the following year. Where “appropriate notice” is to be given, it must be in writing (see section 989).

Section 51: Transfer of unused relief

196.This section provides for the transfer to a spouse or civil partner of so much the relief as cannot be used in calculating the primary claimant’s liability to income tax. It is based on section 257BB(1), (2) and (3A) of ICTA.

197.In looking to see whether the claimant has unused relief, subsection (1) provides for a comparison to be made between that individual’s tax reduction (including any tax reduction transferred back from the spouse or civil partner) and the individual’s “comparable tax liability”. The meaning of this new term is given in section 53. The unused part of the total tax reduction under this Chapter is the amount eligible for transfer.

198.In order for this provision to apply the spouse or civil partner must be entitled to relief and the primary claimant must give notice that the transfer is to apply. These rules are contained in subsection (4).

Section 52: Transfer back of unused relief

199.This section is effectively the reverse of section 51. It is based on section 257BB(3) and (3A) of ICTA.

200.It applies if a spouse or civil partner has claimed a tax reduction based on the whole or half of the “minimum amount”, but cannot use that relief in full. In such a case, if that spouse or civil partner gives due notice, the excess relief goes back to the primary claimant.

Section 53: Transfer of unused relief: general

201.This section contains general provisions about transfers of unused relief. It is based on sections 256(2) and (3) and 257BB(1), (3) and (5) of ICTA.

202.In particular, the section explains how an individual’s “comparable tax liability” is determined in calculating whether there is excess relief eligible for transfer to a spouse or civil partner under section 51 or 52.

203.Subsection (2) makes it clear that the comparison is made before deducting any double taxation relief. This ensures that any double taxation relief is given last.

204.Certain tax liabilities are ring-fenced so that they cannot be reduced by reliefs given by tax reductions. If an individual makes gift aid donations, the tax reduction under this Chapter may have to be restricted under the gift aid rules. This means that there is a greater reduction potentially available to transfer to the spouse or civil partner. The same applies in reverse if the spouse or civil partner makes gift aid donations and there is a transfer back to the primary claimant. Subsection (3) ensures that these rules work as intended by restricting the amount that may be transferred.

Section 54: Tax reductions in the year of marriage or entry into civil partnership

205.This section provides rules that apply in the year of marriage or entry into civil partnership. It is based on sections 257A(6), 257AB(7) and 257BA(6) of ICTA.

206.Subsection (2) provides that in the year of marriage or entry into civil partnership, the allowance by reference to which the tax reduction is calculated is reduced by one twelfth for each complete month in the tax year prior to the marriage or civil partnership.

207.Subsection (3) makes it clear that the allowance to be reduced under this section is the allowance after it has been adjusted on account of the primary claimant’s income exceeding the threshold.

208.Subsection (4) addresses the situation where an individual has been married or in a civil partnership in the tax year and remarries or enters into a new civil partnership.

209.It may be advantageous for the claim to be made for the later marriage or civil partnership rather than the earlier one even though the later one (but not the earlier one) will usually give rise to an adjustment under subsection (2).

210.The wording here makes it clear that the individual can choose to claim for the later marriage or civil partnership but that, if the claim is made for the marriage or civil partnership which existed at the start of the tax year, the individual will not suffer the adjustment under this section.

211.Subsection (5) ensures that if tax reductions based on the minimum amount are being transferred between spouses or civil partners, the minimum amount is also reduced by one twelfth for each complete month in the tax year prior to the marriage or civil partnership.

Section 55: Sections 45 to 53: supplementary

212.This section contains miscellaneous rules based on several source provisions.

213.Subsection (1) provides that an individual is entitled to only one tax reduction under sections 45 to 48 in a tax year. It is based on sections 257A(6), 257AB(6) and 257BA(9) of ICTA.

214.Subsection (2) corresponds to the rule in section 41(3) in relation to allowances under Chapter 2 that the higher level of relief under this Chapter is given for the tax year in which an individual will reach 75 and is not affected if death occurs before the 75th birthday. It is based on sections 257A(4) and 257AB(3) of ICTA.

215.Subsection (3) is new, but reflects the current law. It addresses the position where an individual dies and corresponds to the rule in section 41(1). It is a clear statement that the amount of the relief is not reduced on account of death, so that the full amount is due, even if death occurs on 6 April.

Chapter 4: General

Overview

216.This Chapter contains the residence requirement for personal reliefs, provides for the indexation of allowances and income thresholds and makes provision about the determination of an individual’s income in connection with the age-related allowances.

Section 56: Residence etc of claimants

217.This section provides details of residence conditions which have to be satisfied for personal reliefs to be available. It is based on section 278 of ICTA.

218.Subsection (1) provides that the section applies in relation to personal allowances, blind person’s allowance and tax reductions for married couples and civil partners. Section 460 provides corresponding rules for certain other reliefs given in Chapter 6 of Part 8.

219.Subsection (2) provides that the requirements of this section are met if the individual is UK resident or meets one of the alternative tests in subsection (3).

220.Residence is a concept that applies to a tax year so that an individual is either resident in or not resident in the United Kingdom for a complete tax year. But ESC A11 allows tax years to be split, and will continue to do so. Personal reliefs are given in full for any tax year in which a qualifying individual is resident in the United Kingdom whether or not the tax year is split under ESC A11.

221.Subsection (3) is based on section 278(2) of ICTA. If the individual is not UK resident then one of conditions (a) to (f) must be satisfied. The drafting makes it explicit that a test only has to be met at some time in the tax year. In rewriting section 278(2)(e) of ICTA it has been assumed that the word “employed” is implicit before the word “service”.

222.Individuals who, under the source legislation, were able to claim the reliefs only by virtue of meeting the condition in section 278(2)(a) are catered for by provisions remaining in ICTA, as amended by this Act. See the overview commentary on this Part.

Section 57: Indexation of allowances

223.This section provides for the annual indexation of allowances. It is based on sections 257C and 265(1A) of ICTA.

224.Subsection (1) lists all the amounts within Chapters 2 and 3 of this Part that are subject to indexation.

225.Subsections (2) to (4) set out how the increases due to indexation are to be calculated. The words “unless Parliament otherwise determines” in section 257C(1) have been omitted as it is always open to a Finance Act to disapply this provision, so no express provision to this effect is needed.

226.Subsection (5) is an administrative provision to reflect the fact that it is usually only known at the time of the Chancellor’s Budget speech whether statutory indexation will apply. This leaves insufficient time before the start of the tax year for employers to update their payroll systems. This rule gives employers until the first pay-day after 17 May to make the necessary changes.

227.Subsection (6) obliges the Treasury to specify the indexed amounts in a statutory instrument which must be made in the tax year before the tax year to which they are to apply.

Section 58: Meaning of “adjusted net income”

228.This section brings together the rules from several source provisions about calculating income for the purposes of the age-related personal allowances. It is based on section 835(5) of ICTA, section 25(9A) of FA 1990 and section 192(5) of FA 2004.

229.The starting point is the measure of an individual’s net income as set out in Step 2 in section 23. An individual’s net income is determined before allowances under Chapter 2 of this Part are deducted. Section 835(5) of ICTA makes it clear that such allowances are not deducted in determining the income threshold for the purpose of sections 257(5) and 257A(5) of ICTA. Due to an oversight in the amendments made by the Tax and Civil Partnership Regulations 2005 (SI 2005/3229), the rule was not applied to the calculation of the income threshold in section 257AB(4) of ICTA. That oversight is corrected here. See Change 8 in Annex 1.

230.Subsection (1) makes a number of adjustments to the amount of net income.

231.Before FA 2000, covenanted donations to charities were charges on income. But section 41 of FA 2000 amended that rule so that charitable donations are no longer charges on income. In order that the measure of income used in the calculation of age-related personal allowances was not affected by this change, section 25(9A) of FA 1990 was inserted to ensure that charitable donations continued to reduce income for this purpose. Step 2 gives effect to this rule.

232.Under the gift aid rules the donor gives an amount (the net amount) which is grossed up at the basic rate of tax to provide a “grossed up amount”. Step 2, together with subsection (2), make it clear that, as has always been understood, it is the gross amount that is to be deducted.

233.Step 3 together with subsection (3) provide for a deduction to be made from income for the gross amount of certain pension contributions paid under deduction of tax. This rule is based on section 192(5) of FA 2004.

234.Step 4 ensures that any relief given under section 457 or 458 that has been deducted in arriving at net income is added back. That reflects section 835(5) of ICTA in relation to the income threshold in the age-related personal allowances and in married couple’s allowance for marriages taking place before 5 December 2005. This provision applies the rule also to the calculation of the income threshold for marriages and civil partnerships entered into to on or after that date. See Change 8 in Annex 1.

Part 4: Loss relief

Overview

235.This Part contains rules relating to various reliefs for losses that are deducted in calculating net income (see Step 2 of section 23). It is based on sections 117 to 118ZO and Chapter 1 of Part 10 (sections 379A to 392) of ICTA.

236.The reliefs are set out in separate Chapters following (so far as relevant) the order in which the types of income concerned are set out in ITTOIA.

Chapter 1: Introduction

Section 59: Overview of Part

237.This section provides an overview of the Part. It is new.

238.Subsection (2) provides that the Part is to be read with Chapter 3 of Part 2. In particular that Chapter provides rules about the order in which different reliefs are deducted in calculating net income.

239.Subsection (3) provides a signpost to rules about the calculation of the amount of losses, for which relief may be available under this Part.

Chapter 2: Trade losses

Overview

240.This Chapter provides relief for trading losses.

Section 60: Overview of Chapter

241.This section provides an overview of the Chapter. It is new.

242.Subsection (1) lists the various reliefs available for trade losses and certain restrictions on the reliefs.

243.Subsection (2) provides a signpost to Schedule 1B of TMA. Schedule 1B gives rules for the mechanics where there is a claim that relief for losses of one tax year be given against income of an earlier tax year.

244.Subsection (3) provides a signpost to provisions which treat an individual as starting or permanently ceasing to carry on a trade, profession or vocation in certain circumstances. It is based on section 384(4) of ICTA.

245.Subsection (4) introduces a label (“sideways relief”) for the two reliefs that allow trading losses for a tax year to be set against other income arising in the same tax year or an earlier tax year.

Section 61: Non-partners: losses of a tax year

246.This section provides that references to losses made in a tax year means losses made in the basis period for the tax year. It is based on sections 382(3) and 385(1) of ICTA.

Section 62: Partners: losses of a tax year etc

247.This section sets out certain rules that apply if the losses are made by a person who is a partner and provides signposts to the relevant provisions in ITTOIA. It is based on sections 110(1A), 118ZE(5) and (6), 382(3), 385(1) and 389(4) of ICTA.

Section 63: Prohibition against double counting

248.This section ensures relief is only given once for a particular loss or part of a loss. It is based on sections 380(1), 381(3), 385(7), 388(2), 504A(5) of ICTA and section 72(2) of FA 1991.

249.This section does not reproduce the rule in section 382(4) of ICTA that an amount of a loss of a trade, which would otherwise be included in calculations for two successive years, is not to be included in the calculation for the second of those years. That rule is covered by section 206 of ITTOIA, to which section 61(5) provides a signpost.

Section 64: Deduction of losses from general income

250.This section provides for trade loss relief against general income. It is based on section 380(1) of ICTA.

251.“Trade loss relief against general income” is a descriptive label for the relief covered by this section; the words “general income” are not used in Chapter 3 of Part 2 (calculation of income tax liability).

252.The section makes explicit what is only implicit in section 380(1) of ICTA:

• in subsection (2), that a claim may be made for both the tax year in which the allowable loss is incurred and the previous tax year;

• in subsection (3), what is required in practice to establish how the claim is to apply to each year;

• in subsection (4), that, in the case of a claim in respect of one year only, the claim must specify which year; and

• in subsection (6), that a claim specifying one year does not prevent a further claim (in respect of an unused part of the loss) which specifies the other.

Section 65: How relief works

253.This section specifies how deductions for the loss are to be made. It is based on section 380(1) and (2) of ICTA.

254.Subsection (1) makes explicit what is only implicit in section 380(1) of ICTA, that:

• the whole amount of the loss must be deducted in calculating the claimant’s net income for the specified tax year;

• if a claim is made in respect of two tax years, then only so much, if any, of the amount of the loss which it has not been possible to deduct from the claimant’s income for the specified year can be deducted in calculating the claimant’s net income for the other year.

255.This section does not deal with the parts of section 380(1)(a) and (b) of ICTA that limit the amount of the deduction for any tax year to the whole of the claimant’s income for the year, where the income is less than the amount of the loss. That limit is in section 25(4) and (5). Section 25 contains rules about how the reliefs listed in section 24, which include trade loss relief, are to be deducted at Step 2 of section 23 in order to calculate the claimant’s net income.

256.Subsections (2) and (3) provide that if claims are made in respect of trade losses incurred in successive tax years and both claims specify that relief is to be given against income of the same tax year, then the claim in respect of the loss in the earlier year takes priority.

257.Subsection (4) makes it explicit that this rule also operates in relation to the interaction between claims for trade loss relief and claims for employment loss relief.

Section 66: Restriction on relief unless trade is commercial

258.This section denies trade loss relief in relation to trades which are not commercial. It is based on section 384 of ICTA.

259.Subsections (2) and (5) provide that whether the trade is commercial is determined by reference to the basis period for the tax year, rather than by reference to the tax year as in the source legislation. See Change 9 in Annex 1.

260.Subsection (4) provides for the case where the trade is carried on as part of a larger undertaking. In such a case the larger undertaking (that is the undertaking as a whole) may be carried on with a view to the realisation of profits even if the smaller trade is not.

261.In subsection (6), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See section 1018 and Change 152 in Annex 1.

Section 67: Restriction on relief in case of farming or market gardening

262.This section restricts, in certain cases, the use of losses arising from a trade of farming or market gardening. It is based on section 397(1), (3) to (5) and (8) of ICTA.

263.Subsection (2) sets out the circumstances in which loss relief is restricted. Broadly, this is once losses have arisen for six successive tax years. A signpost to section 70 is included since that section sets out the way in which losses are determined in previous tax years.

Section 68: Reasonable expectation of profit

264.This section sets out the “reasonable expectation of profit” test which, if met, prevents relief being restricted under section 67. It is based on section 397(3) and (5) of ICTA.

Section 69: Whether trade is the same trade

265.This section sets out a number of assumptions to make in determining whether section 67 restricts relief for losses. It is based on section 397(8) and (10) of ICTA.

Section 70: Determining losses in previous tax years

266.This section provides rules for deciding whether a trade of farming or market gardening made losses in earlier tax years. It is based on section 397(7) and (10) of ICTA.

267.Subsection (2) provides that, for earlier tax years, losses are calculated for actual tax years (6 April to following 5 April) rather than (as is normally the case) for the basis period ending in the tax year.

268.The difference in approach (which prevents any manipulation of periods of account directed at side-stepping the restriction) arises from the fact that losses used to be calculated for actual tax years, but following the move to a current year basis of assessment (in FA 1994) the calculation of losses for the main loss relief provisions was changed to mirror the calculation of profits.

269.Subsection (4) adapts rules in section 203 of ITTOIA to deal with cases where profits or losses have not actually been calculated by reference to tax years. In such cases, the calculation of profits or losses for tax years is an arithmetical exercise, involving apportioning (on a time basis) the profits or losses of periods falling partly within the tax year, and combining these with the profits or losses of any periods falling completely within the tax year.

Section 71: Treating trade losses as CGT losses

270.This section is a signpost to a capital gains tax relief. It is new.

271.Capital gains tax relief may be available for a tax year in which there is insufficient income to absorb a claim for trade loss relief against general income. Details of that relief are set out in new sections 261B and 261C of TCGA, inserted by Schedule 1 to this Act.

Section 72: Relief for individuals for losses in first 4 years of trade

272.This section provides relief for losses made in the first four tax years in which an individual carries on a trade. It is based on sections 380(1) and 381(1), (2) and (7) of ICTA.

273.An individual can make a claim for such losses to be deducted in calculating net income for the three tax years which precede the tax year in which the loss is made.

Section 73: How relief works

274.This section sets out the order in which losses, for which a claim is made under section 72, are deducted from income of the three preceding tax years. It is based on section 381(2) of ICTA.

275.The deduction for the loss is made first from income of the earliest of the three tax years referred to in subsection (2) of section 72, with any remaining loss deducted from income of the next tax year and then from income of the third of those tax years. Any remaining loss is available for a different loss relief claim.

Section 74: Restrictions on relief unless trade is commercial etc

276.This section denies early trade loss relief in relation to trades which are not commercial. It is based on section 381(4), (5) and (7) of ICTA.

277.Subsection (2) provides that whether the trade is commercial is determined by reference to the basis period for the tax year, rather than by reference to the tax year as in the source legislation. There is a similar provision in section 66. See Change 9 in Annex 1.

278.Subsection (3) provides for the case where the trade is carried on as part of a larger undertaking. In such a case the larger undertaking (that is the undertaking as a whole) may be carried on with a view to the realisation of profits even if the smaller trade is not.

Section 75: Trade leasing allowances given to individuals

279.This section denies sideways relief in relation to losses derived from trade leasing allowances if the individual carrying on the trade does not meet the time commitment test. It is based on section 384(6) and (7) of ICTA.

280.Subsection (2) defines a “trade leasing allowance”.

281.The time commitment test requires that conditions A and B are met.

282.Subsection (5) sets out condition A. Its reference to “a continuous period of at least 6 months beginning or ending in the basis period for the tax year in which the loss was made” covers cases of a commencement or a cessation of the trade. In such cases the basis period may be shorter than six months.

283.Subsection (6) sets out condition B. Its reference to “a continuous period of at least 6 months beginning or ending in the loss-making basis period” also covers cases of a commencement or a cessation of the trade. In such cases the basis period may be shorter than six months.

284.The section removes an inconsistency in the source legislation between:

• the period during which substantially the whole of the individual’s time must be devoted to carrying on the trade;

• the period during which the individual must carry on the trade; and

• the basis period in respect of which the loss is calculated.

285.The inconsistency arose because of the change from the preceding year basis of assessment to the current year basis of assessment, made by FA 2004. This change resulted in losses being calculated by reference to basis periods ending in a tax year while the time commitment test continued to relate to the tax year itself. This section provides that the time commitment test also relates to the basis period in which the loss is made. See Change 10 in Annex 1.

Section 76: First-year allowances: introduction

286.This section denies sideways relief for any part of the loss that derives from a first-year allowance in the circumstances set out in either section 77 or section 78. It is based on section 384A(1) of ICTA.

Section 77: First-year allowances: partnerships with companies

287.This section sets out the first circumstance in which section 76 may deny sideways relief for part of a loss. It is based on section 384A(2) and (3) of ICTA.

Section 78: First-year allowances: arrangements to reduce tax liabilities

288.This section sets out the second circumstance in which section 76 may deny sideways relief for part of a loss. It is based on section 384A(4) and (5) of ICTA.

Section 79: Capital allowances restrictions: supplementary

289.This section supplements sections 76 to 78. It is based on sections 384(8) and (11) and 384A(6) and (8) of ICTA.

Section 80: Ring fence income

290.This section provides that sideways relief in respect of a trading loss cannot be given against income arising from oil extraction activities or oil rights, unless the loss also arises from such activities or rights. It is based on sections 492(2) and 502(1) of ICTA.

Section 81: Dealings in commodity futures

291.This section denies sideways relief for a loss made by a person in a trade of dealing in commodity futures, where that person carries on the trade in partnership with a company and arrangements have been made to reduce a tax liability by means of sideways relief. It is based on section 399(2), (3) and (5) of ICTA.

Section 82: Exploitation of films

292.This section provides signposts to sections in Chapter 3 of Part 4 that provide for a restriction on loss relief if an individual carries on a trade as a partner in certain types of partnership, and to a section in Chapter 5 of Part 13 (avoidance involving trading losses). It is new.

Section 83: Carry forward against subsequent trade profits

293.This section provides carry-forward relief for trade losses. It is based on section 385(1) of ICTA and section 72(8) of FA 1991.

294.A person who makes a trading loss in a tax year may claim to carry it forward, to the extent that relief has not been given for it under any other provision.

295.The carry-forward trade loss can only be deducted from profits of the trade in which the loss arose. And a carry-forward trade loss must be deducted from the trading profits of a future tax year before those profits can be reduced by way of any other loss relief.

Section 84: How relief works

296.This section sets out the way in which deductions for the carry-forward trade loss are to be made. It is based on section 385(1) of ICTA.

Section 85: Use of trade-related interest and dividends if trade profits insufficient

297.This section provides that certain interest and dividends are treated as trade profits if the profits are otherwise insufficient to use some or all of a carry-forward trade loss. It is based on section 385(4) of ICTA.

298.Interest and dividends are normally taxed separately from trade profits so, in the absence of this provision, a carry-forward trade loss could not be set against such income. But it is only interest and dividends that would otherwise be treated as receipts of the trade that can attract this treatment.

299.The source legislation refers to interest or dividends on investments arising in that year – meaning interest or dividends arising in the year from investments. But as interest and dividends can only arise from investments, the word “investments” has been dropped, just as it was when earlier legislation was consolidated in ICTA for the purposes of terminal loss relief. See the commentary on section 92.

Section 86: Trade transferred to a company

300.This section provides for certain cases in which an individual’s carry-forward trade losses may be used against income that the individual derives from a company to which the trade has been transferred and in which that individual was allotted shares. It is based on section 386(1) and (3) of ICTA.

301.Section 386(2) of ICTA has not been rewritten. See Change 11 in Annex 1.

Section 87: Ring fence trades

302.This section provides that a loss in a tax year derived from oil-related activities can be deducted from the profits of a trade in a future tax year so far as the profits are derived from activities which would be treated as part of the same trade as the oil-related activities but for the ring-fencing rules. It is based on section 492(4) of ICTA.

Section 88: Carry forward of certain interest as loss

303.This section provides for cases where interest paid by an individual in a tax year, and eligible for relief under certain provisions, may be treated as a loss qualifying for carry-forward trade loss relief. It is based on section 390 of ICTA.

304.The interest must be incurred wholly and exclusively for the purpose of a trade, profession or vocation carried on wholly or partly in the United Kingdom and there must be insufficient income for relief to be given under Chapter 1 of Part 8.

Section 89: Carry back of losses on a permanent cessation of a trade

305.This section provides for terminal trade loss relief. It is based on section 388(1) of ICTA.

306.A claim for terminal trade loss relief may be made by a person who permanently ceases to carry on a trade if the person makes a loss in the trade in the final tax year or in the previous tax year. But only that part of a loss from the previous tax year that falls within a period starting 12 months before the cessation is available for this purpose.

307.If a claim is made the full amount of the terminal losses, or as much of them as possible, must be used to reduce the trading profits of the final tax year and the three previous tax years.

308.Subsection (3) omits the concept, in section 388(1) of ICTA, of the trading profits having been “charged” to income tax. See Change 12 in Annex 1.

309.Section 388(5) of ICTA, which is concerned with the interaction between terminal loss relief and charges on income, is not rewritten. This is linked to the approach adopted by this Act to the rules in ICTA about charges on income. The Act gives relief for the payments concerned as a deduction in computing net income, and repeals section 387 of ICTA and section 51 of ITTOIA. See Change 81 in Annex 1.

Section 90: Losses that are “terminal losses”

310.This section sets out how terminal losses are to be calculated. It is based on section 388(6) of ICTA.

311.The relievable loss is calculated by adding (a) any loss in the final tax year to (b) any loss in the part of the previous tax year falling within 12 months of the date of cessation. Each of these losses is called a terminal loss. If a profit arises in either of the periods, it is ignored.

312.Subsections (2) to (4) provide that profits or losses for each of these terminal loss periods are calculated by allocating profits or losses of periods of account to them. Subsection (5) makes it explicit how any deduction allowed for overlap profit arising under section 205 of ITTOIA is taken into account. Subsection (6) makes explicit provision in relation to partnerships. See Change 12 in Annex 1.

Section 91: How relief works

313.This section sets out the way in which terminal trade loss relief is given. It is based on section 388(3) of ICTA.

Section 92: Use of trade-related interest and dividends if trade profits insufficient

314.This section provides that certain interest and dividends are treated as trade profits if the profits are otherwise insufficient to use some or all of a terminal trade loss. It is based on section 388(4) of ICTA.

315.Interest and dividends are normally taxed separately from trade profits so, in the absence of this provision, a terminal trade loss could not be set against such income. But it is only interest and dividends that would otherwise be treated as receipts of the trade that can attract this treatment.

316.The provisions on which the source legislation is based referred to interest or dividends on investments arising in that year, meaning interest or dividends arising in the year from investments. But as interest and dividends can only arise from investments, the word “investments” was dropped when earlier legislation was consolidated in ICTA.

Section 93: Mineral extraction trade and carry back of balancing allowances

317.This section provides that a terminal trade loss relief claim takes precedence over a claim for balancing allowances in circumstances in which both are claimed on the cessation of a mineral extraction trade. It is based on section 389(2) of ICTA.

Section 94: Carry back of certain interest as loss

318.This section provides that where an individual has paid interest in a tax year which is eligible for relief, but is unable to utilise the deduction in full, the amount remaining may be treated for the purposes of terminal trade loss relief as a trade loss made at the date of payment, provided the interest is incurred wholly and exclusively for the purposes of a trade carried on wholly or partly in the United Kingdom. It is based on section 390 of ICTA.

Section 95: Foreign trades etc: reliefs only against foreign income

319.This section provides that losses arising from trades carried on wholly outside the United Kingdom can only be used to reduce profits from certain categories of foreign income, depending on the type of relief being claimed. It is based on section 391 of ICTA.

320.Subsection (2)(c) makes it explicit that losses arising from trades carried on wholly outside the United Kingdom are not available for use for capital gains tax purposes. See Change 13 in Annex 1.

Section 96: Post-cessation trade relief

321.This section provides relief for certain payments made, or certain losses on debts made, after a trade has ceased (and for which relief would not otherwise be available). It is based on section 109A(1) and section 110(1A) and (1B) of ICTA.

322.A claim for post-cessation trade relief is possible if a person ceases carrying on a trade and within seven years makes a qualifying payment (see section 97) or a qualifying event occurs in relation to a debt of the trade owed to the person (see section 98).

Section 97: Meaning of “qualifying payment”

323.This section sets out the meaning of qualifying payment. It is based on section 109A(2) of ICTA.

Section 98: Meaning of “qualifying event” etc

324.This section sets out the meaning of a qualifying event occurring in relation to a debt owed to the person concerned and the amount that may be relievable in relation to such an event. It is based on section 109A(4) and (4A) of ICTA.

325.The source legislation treated the release of a debt or the occasion of a debt proving to be bad as if it were a payment which qualified as post-cessation expenditure. These sections are structured so that such deeming is not needed.

326.Subsection (2)(c) refers to a debt being released as part of a statutory insolvency arrangement. This term is defined by reference to section 259 of ITTOIA. The source legislation used the term “relevant scheme or arrangement”. See Change 14 in Annex 1.

Section 99: Reduction of relief for unpaid trade expenses

327.This section reduces post-cessation trade relief by reference to expenses claimed as a deduction in computing trading profits, but which were unpaid at the time that the trade ceased. It is based on section 109A(5) of ICTA.

328.The section provides that post-cessation trade relief is reduced by the amount of the expenses that are still unpaid at the end of the tax year in question, but that the reduction shall not include any amount taken into account as a reduction in a previous tax year. And it adds that any such expenses paid subsequently are to be treated as a qualifying payment.

Section 100: Prohibition against double counting

329.This section prevents a person from claiming post-cessation trade relief for an amount for which relief is given or available under other provisions of the Income Tax Acts. It is based on section 109A(6) of ICTA.

Section 101: Treating excess post-cessation trade relief as CGT loss

330.This section is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of post-cessation trade relief. It is new.

Chapter 3: Restrictions on trade loss relief for certain partners

Overview

331.This Chapter sets out restrictions on trade loss relief that apply in certain cases where an individual carries on a trade as a member of a partnership. The restrictions do not apply to persons other than individuals, or in relation to professions.

332.The main restrictions are on deducting trading losses from income (other than income from the trade) or capital gains. Broadly, the amount of such deductions must not exceed the amount that the individual stands to lose commercially.

333.In various places, source legislation expresses the amount that a partner stands to lose commercially by reference to the partner’s contribution to the trade that a partnership carries on (the “contribution to the trade”). But, in such cases, the amount that a partner stands to lose commercially is more likely to be reflected in the partner’s contribution to the partnership that carries on the trade.

334.So this Chapter, and Chapter 5 of Part 13 (avoidance involving trading losses), makes a change by expressing the amount that a partner stands to lose commercially in terms of the partner’s contribution to the partnership (the “contribution to the firm”). The change to contribution to the firm requires that the possibility of there being partnerships with more than one trade is addressed by the change. And for consistency with other partnerships, the possibility of a limited liability partnership carrying on more than one trade is also addressed. This change affects many sections in this Chapter and it also makes a number of other clarifications as to what is included in a partner’s contribution. See Change 16 in Annex 1.

Section 102: Overview of Chapter

335.This section introduces the Chapter. It is new.

336.Subsection (1) is a signpost to the main restrictions, which apply in certain cases where the individual is a limited partner, a member of a limited liability partnership or a non-active partner.

337.Subsection (2) is a signpost to a further restriction applying where the trade consists of or includes the exploitation of films.

338.Subsections (3) and (4) provide signposts to sections in Chapter 5 of Part 13 (avoidance involving trading losses).

Section 103: Meaning of “sideways relief”, “capital gains relief” and “firm”

339.This section defines these terms. It is new.

340.The definition of “capital gains relief” refers to section 261B of TCGA, which is inserted by Schedule 1 to this Act.

Section 104: Restriction on reliefs for limited partners

341.This section restricts the use of a trade loss made in a tax year by an individual carrying on the trade as a limited partner. It is based on section 117(1) and (2) of ICTA.

342.Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual’s contribution to the firm.

343.The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit. See Change 13 in Annex 1.

344.The individual’s contribution to the firm is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.

345.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.

Section 105: Meaning of “contribution to the firm”

346.This section sets out details of what is included in determining the contribution to the firm. It is based on section 117(3) and (5) of ICTA.

347.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.

348.The individual’s contribution of capital to the firm is reduced by any amounts drawn out or received back. Subsection (5) provides an exception. The exception is for an amount drawn out or received back which is treated as income chargeable to income tax. This exception is similar to the one in section 111(5), based on section 118ZG(5) of ICTA. See Change 17 in Annex 1.

Section 106: Meaning of “limited partner”

349.This section defines “limited partner”. It is based on section 117(2) of ICTA.

350.A limited partner of a limited partnership registered under the Limited Partnerships Act 1907 is someone who is not entitled to take part in the management of the firm’s business and is not liable for the debts or obligations of the firm beyond a certain limit. And a limited partner of any other firm is someone who is similarly not entitled to take part in management and not liable for debts or obligations in accordance with the rules applying to the firm in question.

351.Subsection (4) is introduced as part of drafting in terms of an individual’s “contribution to the firm” in place of “contribution to the trade”. See Change 16 in Annex 1.

Section 107: Restriction on reliefs for members of LLPs

352.This section restricts the use of a trade loss made in a tax year by an individual carrying on a trade as a member of a limited liability partnership (LLP). It is based on sections 117(1) and (2) and 118ZB(1) and (2) of ICTA.

353.Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual’s “contribution to the LLP”.

354.The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit. See Change 13 in Annex 1.

355.The individual’s contribution to the LLP is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.

356.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.

Section 108: Meaning of “contribution to the LLP”

357.This section sets out details of what is included in determining the contribution to the LLP. It is based on sections 118ZB(1) and 118ZC of ICTA.

358.An LLP formed under the Limited Liability Partnerships Act 2000 is an entity with separate legal personality. That Act defines what is meant by contribution to the limited liability partnership.

359.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.

360.The individual’s contribution of capital to the LLP is reduced by any amounts drawn out or received back. Subsection (6) provides an exception. The exception is for an amount drawn out or received back which is treated as income chargeable to income tax. This exception is similar to the one in section 111(5), based on section 118ZG(5) of ICTA. See Change 17 in Annex 1.

Section 109: Unrelieved losses brought forward

361.This section specifies how the amount of any loss, which could not be relieved because of section 107, may be brought forward for use in a later tax year in which the individual continues to carry on the trade as a member of an LLP. It is based on sections 118ZD and 118ZM(8) of ICTA.

362.The section treats the unrelieved loss as a trading loss of the later tax year, unless it is an excluded loss (see subsection (3)).

363.The interaction between section 72 of FA 1991 and section 117 of ICTA is made explicit in section 107, to which this section refers. See Change 13 in Annex 1.

Section 110: Restriction on reliefs for non-active partners in early tax years

364.This section restricts the use of trade losses made by an individual carrying on a trade as “a non-active partner” in an “early tax year”. It is based on sections 118ZE and 118ZF of ICTA.

365.A non-active partner is an individual who does not devote a significant amount of time to the trade and is not a limited partner. See section 112.

366.Sideways relief or capital gains relief for the trade loss, combined with other relevant relief, must not exceed the individual’s “contribution to the firm”.

367.The restriction applies only to losses made in the first tax year in which the individual carries on the trade or in any of the next three tax years. See section 112(6).

368.The interaction between section 72 of FA 1991 and section 118ZE of ICTA is made explicit. See Change 13 in Annex 1.

369.The individual’s contribution to the firm is measured at the end of the basis period for the relevant tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.

370.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.

371.Subsection (8) disapplies the rules in the case of losses from a trade of underwriting at Lloyd’s. Lloyd’s underwriters are subject to a specific tax regime which reflects the nature of the business and the partners’ liabilities for the underwriting losses.

Section 111: Meaning of “contribution to the firm”

372.This section sets out details of what is included in determining the individual’s contribution to the firm. It is based on section 118ZG of ICTA.

373.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.

374.The definition differs slightly from the definition of “contribution to the firm” for limited partners. The definition for a non-active partner includes a reference to any additional amount contributed on a winding-up, whereas the definition for a limited partner includes no such reference, as a limited partner is under no obligation to contribute any amounts beyond the amount originally agreed as the required contribution.

Section 112: Meaning of “non-active partner” and “early tax year” etc

375.This section sets out details of who is carrying on a trade as a non-active partner in an early tax year. It is based on sections 118ZE, 118ZH and 118ZM of ICTA.

376.The definition excludes limited partners. So only a general partner (that is, a partner other than a limited partner) or a member of an LLP may be a non-active partner.

377.In broad terms, a non-active partner is an individual who does not devote a significant amount of time to the trade and is, therefore, unlikely to be anything more than a financial investor.

378.Subsection (2) provides that a significant amount of time is taken as being a minimum of ten hours per week, on average taken across the period.

379.Subsections (3) and (4) define the “relevant period” for the purposes of subsection (2) as the whole of the basis period for the tax year, or a continuous period of at least six months either beginning with the date of commencement or ending with the date of cessation. For example, if an individual commences a trade on 1 April 2007, the basis period for 2006-07 is 1 April 2007 to 5 April 2007. And the relevant period ends on 30 September 2007 for the purposes of this section in relation to the tax year 2006-07. So the individual must meet the “significant amount of time” test for six months rather than just for five days.

380.Subsection (5) provides that where relief is given but the activity rules prove not to be satisfied, relief is withdrawn by making an assessment under this section.

Section 113: Unrelieved losses brought forward

381.This section specifies how the amount of any loss, which could not be relieved because of section 110, may be brought forward for use in a later tax year in which the individual continues to carry on the trade as a partner (or contributes to the firm on its winding up). It is based on sections 118ZI and 118ZM of ICTA.

382.The section treats the unrelieved loss as a trading loss of the later tax year unless it is an excluded loss (see subsection (4)).

383.The interaction between section 72 of FA 1991 and section 118ZE of ICTA is made explicit in section 110, to which this section refers. See Change 13 in Annex 1.

384.The section reflects the contribution to the firm being measured at the end of the basis period for a tax year, rather than at the end of the tax year as in the source legislation. See Change 15 in Annex 1.

Section 114: Exclusion of amounts in calculating contribution to the firm or LLP

385.This section enables regulations, which can apply on a retrospective basis, to exclude certain amounts from the calculation of the contribution to the firm or LLP. It is based on section 118ZN of ICTA.

386.Regulations made under this section are subject to the affirmative resolution procedure.

387.There is a change from “contribution to the trade” in the source legislation to “contribution to the firm”. See the overview commentary on this Chapter and Change 16 in Annex 1.

388.Some regulations have been made under section 118ZN of ICTA, with effect from 22 July 2005. See the Partnerships (Restrictions on Contributions to a Trade) Regulations 2005 (SI 2005/2017). See also the commentary on Part 5 of Schedule 2 about consequential amendments made to these regulations by this Act.

389.In subsection (4), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See section 1018 and Change 152 in Annex 1.

Section 115: Restrictions on reliefs for firms exploiting films

390.This section extends the restriction on the use of sideways relief and capital gains relief to (effectively) non-active partners carrying on a trade that exploits films, where there is a relevant agreement that guarantees the individual an amount of income. It is based on sections 118ZL and 118ZM of ICTA.

391.The interaction between section 72 of FA 1991 and section 118ZL of ICTA is made explicit. See Change 13 in Annex 1.

Section 116: Exclusion from restrictions under section 115: certain film expenditure

392.This section specifies that the restriction under the previous section does not apply to the extent any loss qualifying for relief derives from unrestricted film expenditure. It is based on sections 118ZL and 118ZM of ICTA.

Chapter 4: Losses from property businesses

Overview

393.This Chapter provides relief for losses from property businesses.

Section 117: Overview of Chapter

394.This section provides an overview of the Chapter. It is new.

395.Subsection (1) lists the types of relief available for property losses and refers to the various sections where the details of the reliefs and associated miscellaneous provisions can be found.

396.Subsection (2) highlights the fact that a UK property business, so far as it consists of the commercial letting of furnished holiday accommodation, is treated as a trade for loss relief purposes.

Section 118: Carry forward against subsequent property business profits

397.This section provides relief for property losses against property business income of later years. It is based on sections 379A and 379B of ICTA.

398.Section 272 of ITTOIA specifies that the same rules apply in calculating profits and losses of a property business as apply for calculating profits and losses of a trade. So rewriting section 379A(7) of ICTA is unnecessary. See the reference to section 272 of ITTOIA in section 59.

Section 119: How relief works

399.This section explains how the deductions are made. It is based on sections 379A(1) and 379B of ICTA.

Section 120: Deduction of property losses from general income

400.This section provides relief for property losses against general income, if the loss has a capital allowances or relevant agricultural connection. It is based on sections 379A and 379B of ICTA.

Section 121: How relief works

401.This section explains how the deductions are made. It is based on sections 379A and 379 B of ICTA.

Section 122: Meaning of “the applicable amount of the loss”

402.This section defines “the applicable amount of the loss”, with the effect that a claim by a person for property loss relief against general income is restricted to the lesser of the loss itself and the amount arising from the relevant connection. It is based on sections 379A(4) and 379B of ICTA.

Section 123: Meaning of “the loss has a capital allowances connection” and “the business has a relevant agricultural connection”

403.This section defines the meaning of “the loss has a capital allowances connection” and “the business has a relevant agricultural connection”. It is based on section 379A and 379B.

Section 124: Supplementary

404.This section provides the time limit for making a claim under section 120 and supplementary matters if a claim is made. It is based on sections 379A(3) and 379B of ICTA.

Section 125: Post-cessation property relief

405.This section provides relief for payments of certain expenses etc after a property business has ceased (and for which relief would not otherwise be available). It is based on section 109A and section 110 of ICTA.

406.A claim for post-cessation property relief is possible if a person ceases carrying on a UK property business and within seven years makes a qualifying payment (see section 97) or a qualifying event occurs in relation to a debt of the business (see section 98).

Section 126: Treating excess post-cessation property relief as CGT loss

407.This section is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of post-cessation property relief. It is new.

Section 127: UK furnished holiday lettings business treated as trade

408.This section provides, subject to modifications, the same range of reliefs for a loss from a UK furnished holiday lettings business as is available for a trade loss. It is based on section 504A of ICTA.

409.Subsection (4) applies Chapter 2 (trade losses) with the omission of the section restricting the availability of trade leasing allowances, as an individual letting furnished holiday accommodation cannot lease out equipment as part of that business.

410.Subsections (5) and (6) deny early trade loss relief to an individual in respect of a tax year if any of the accommodation was first let by the individual as furnished accommodation more than three years before the start of the tax year.

Chapter 5: Losses in an employment or office

Overview

411.This Chapter provides relief for losses in an employment or office.

Section 128: Employment loss relief against general income

412.This section provides relief for a person’s losses in an employment or office. It is based on section 380(1) of ICTA.

413.The reference to “office” is new, but reflects the long-standing HMRC practice of allowing the holder of an office to set off losses against general income. See Change 18 in Annex 1.

414.Section 384A of ICTA restricts relief under section 380 of ICTA in relation to avoidance schemes entered into by individuals carrying on a leasing trade, or another qualifying activity, and involving first-year allowances. See section 76.

415.As section 380 of ICTA provides relief for losses in an employment (as well as in a trade) the restriction in section 384A of ICTA is, in principle, applicable to an employment loss.

416.In view of the remote possibility of section 384A of ICTA ever applying to employment losses, this section is not subject to a restriction equivalent to that in section 76. See Change 19 in Annex 1.

Section 129: How relief works

417.This section explains how deductions are made. It is based on section 380(1) and (2) of ICTA.

418.Subsections (2) and (3) provide that, if claims are made in respect of employment losses incurred in successive tax years and both claims specify that the relief is to be given against income of the same tax year, the claim in respect of the loss in the earlier year takes priority.

419.Subsection (4) makes it explicit that this rule also operates in relation to the interaction between claims for employment losses and those for trade losses.

Section 130: Treating loss in employment or office as CGT loss

420.This section is a signpost to a capital gains tax relief that may be available where there is insufficient income to absorb an amount claimed by way of employment loss relief. It is new.

Chapter 6: Losses on disposal of shares

Overview

421.This Chapter is based on sections 305A and 574 of ICTA and, to the extent that they supplement section 574 of that Act, sections 575 and 576 of that Act. So far as sections 575 and 576 of ICTA supplement section 573 of that Act (share loss relief for companies), they continue in force, together with new sections 576A to 576L of ICTA (see Schedule 1 to this Act and the commentary on those new sections of ICTA).

422.Section 574 of ICTA provides for relief against income tax for allowable losses for capital gains tax purposes incurred on the disposal of ordinary shares in qualifying trading companies for which an individual has subscribed.

423.Section 305A of ICTA provides that section 574 of that Act also applies, with minor modifications, on the disposal by an individual of shares to which enterprise investment scheme income tax relief is attributable under Chapter 3 of Part 7 of ICTA. The provisions of section 305A of ICTA are included as an integral part of this Chapter and a signpost to this Chapter is included in section 161 in Part 5 (Enterprise investment scheme).

424.Section 125A of TCGA introduced by Schedule 1 to this Act is based on section 576(2) and (3) of ICTA, which have effect only for the purposes of capital gains tax or corporation tax on chargeable gains, and on sections 573(4) and 574(1) of ICTA which have effect only for the purposes of corporation tax on chargeable gains and capital gains tax respectively. See the commentary on section 125A of TCGA in Schedule 1.

425.This Chapter contains 21 sections structured as follows:

• three setting out the basic conditions for share loss relief, the entitlement of the individual to make a claim and how the relief works;

• thirteen applying only to shares to which EIS relief is not attributable and setting out requirements to be satisfied if relief is to be available on the disposal of such shares;

• three applying generally and dealing with limits on relief and the identification of shares disposed of; and

• two containing miscellaneous and supplementary provisions.

Section 131: Share loss relief

426.This section deals with eligibility for share loss relief and the requirements relating to the kinds of disposal and to the type of shares disposed of. It is based on sections 305A(1), 574(1) and 575(1) and (3) of ICTA.

427.Subsection (1)(b) provides that the disposal must be of “qualifying shares”. Subsection (2) provides that shares are qualifying shares if either EIS relief is attributable to them or they are shares in a qualifying trading company for which the individual has subscribed. EIS relief is defined in section 151(1) and includes not only relief under Part 5 of this Act attributable to shares issued on or after 6 April 2007 (see section 201) but also relief under Chapter 3 of Part 7 of ICTA attributable to shares issued after 31 December 1993 and before 6 April 2007 (see section 289B of that Act).

428.Subsection (3)(a) is based on section 575(1)(a) of ICTA which specifies as one of the kinds of disposal:

• a disposal by way of a bargain made at arm’s length for full consideration.

Subsection (3)(a) omits the words “for full consideration” on the basis that they add nothing. See Change 20 in Annex 1.

Section 132: Entitlement to claim

429.This section deals with the making of a claim for share loss relief. It is based on section 574(1) of ICTA.

430.This section makes explicit what is only implicit in section 574(1) of ICTA:

• in subsection (1), that a claim may be made for both the tax year in which the allowable loss is incurred and the previous tax year;

• in subsection (2), what is required in practice to establish how the claim is to apply to each year; and

• in subsection (3), that, in the case of a claim in respect of one year only, the claim must specify which year.

Section 133: How relief works

431.This section explains how deductions for the loss are to be made. It is based on section 574(1) and (2) of ICTA.

432.Subsection (1) states explicitly what is implicit in section 574(1) of ICTA, that:

• the whole amount of the loss must be deducted in calculating the claimant’s net income for the specified tax year; and

• if a claim is made in respect of two tax years, then only so much, if any, of the amount of the loss which it has not been possible to deduct from the claimant’s income for the specified year can be deducted in calculating the claimant’s net income for the other year.

433.This section does not include the words in section 574(1)(a) and (b) of ICTA which limit the amount of the deduction for any tax year to the whole of the claimant’s income for the year, where the income is less than the amount of the loss. That limit is included in section 25(5) and (6). Section 25 explains how the reliefs listed in section 24, which include share loss relief, are to be deducted at Step 2 of section 23 in order to calculate the claimant’s net income.

434.Subsection (5) is new. It makes explicit that the balance of any allowable loss for which share loss relief is not obtained continues to be capable of being claimed as a deduction under TCGA.

Section 134: Qualifying trading companies

435.This section is the first of 13 sections which apply only to shares to which EIS relief is not attributable. It is based on section 576(4) of ICTA. It defines what is a qualifying trading company. Shares, other than shares to which EIS relief is attributable, must form part of the ordinary share capital of a qualifying trading company if they are to be qualifying shares (see section 131(2)(b) and the definition of “shares” in section 151(1) and (3) to (6)).

436.Section 576(4) of ICTA defines a “qualifying trading company” in terms of its being an “eligible trading company” and having been such for a specified continuous period. Section 576(4A) of ICTA defines an “eligible trading company” by applying the requirements of section 293 and other provisions of Chapter 3 of Part 7 of ICTA (Enterprise investment scheme) with modifications.

437.This section avoids the double layer of definition in section 576(4) of ICTA and omits the concept of an “eligible trading company”.

438.Subsection (2), therefore, directly introduces the four requirements of section 293 of ICTA (as modified and applied by section 576(4A) and (4B) of that Act) which must be met on a continuing basis (see also subsection (3)).

439.Subsections (2)(b) and (3)(b) omit the words “that is not an eligible trading company” which qualify “trading company” in section 576(4)(a)(ii) and (b)(ii) of ICTA on which those paragraphs are based. Those words are otiose.

440.Subsection (4) directly introduces the two requirements of section 293 of ICTA (as modified and applied by section 576(4A) and (4B) of that Act) which are to be met only when the shares in respect of which share loss relief is claimed are issued.

441.This direct application of these two requirements resolves the apparent inconsistency between sections 293 and 576(4) of ICTA. Section 293 of ICTA requires them to be met only at the time of issue of the shares. But section 576(4) of that Act requires the company to be an eligible trading company at a subsequent time and during a continuous period. Section 576(4) of ICTA thus appears to require the company to meet these requirements also at that subsequent time and during that period.

Section 135: Subscriptions for shares

442.This section sets out the requirements relating to the subscription for shares in a qualifying trading company. It is based on section 574(3) of ICTA and includes a new provision relating to “corresponding bonus shares”.

443.Subsection (2) provides that shares are subscribed for by the individual if they have been issued to the individual in consideration of money or money’s worth. See also subsection (4).

444.Subsection (3) is based on section 574(3)(b) of ICTA, which provides that:

• an individual shall be treated as having subscribed for shares if his spouse or civil partner did so and transferred them to him by a transaction inter vivos.

445.Subsection (3)(a) is extended to cover not only the case where A is the actual subscriber but also cases where A is treated as having subscribed under the provisions relating to the issue of “corresponding bonus shares” (see subsection (4)) or under an earlier application of this subsection. See Change 21 in Annex 1.

446.Subsection (3)(c), read with the definitions of “civil partner” and “spouse” in section 151(1), makes explicit that the relevant time at which A and B must be spouses or civil partners living together is the time of the transfer. See Change 22 in Annex 1.

447.Subsection (4) is new and treats “corresponding bonus shares” issued in respect of shares which have been subscribed for as themselves having been subscribed for. See Change 23 in Annex 1.

Section 136: Disposals of new shares

448.This section applies to the disposal of qualifying shares (other than shares to which EIS relief is attributable) which are identified by virtue of section 127 of TCGA with shares previously held by the individual. The section denies or restricts share loss relief unless certain conditions are met. It is based on section 575(2) of ICTA.

449.The cross-reference to section 145(3) at the end of subsection (2) makes clear that this section does not apply to an exchange of shares to which section 145(1) applies. See the commentary on section 145 and Change 24 in Annex 1.

Section 137: The trading requirement

450.This section is the first of ten new sections relating to the requirements for a company to be a qualifying trading company. These sections replace the provisions of section 576(4A) and (4B) of ICTA which apply section 293 and certain associated provisions of Chapter 3 of Part 7 of that Act, with modifications and omissions.

451.All these sections correspond to sections in Part 5 of this Act (Enterprise investment scheme). So far as possible cross-references to sections of Part 5 have been minimised. Cross-references have, however, been retained where the material referred to is lengthy, for example the definition of “excluded activities” in sections 192 to 199.

452.This section corresponds to section 181 with modifications. Section 181 is based on section 293(2) and (3A) to (3F) of ICTA. Section 134(2) and (3) provide that this requirement must be met over a continuous period, which is the effect of the modification of section 293(2) of ICTA made by section 576(4A)(d) of that Act.

453.Subsection (2) corresponds to section 181(3) and subsection (6) corresponds to section 181(7). For the reason for the introduction of subsections (3) and (7) of section 181, see Change 42 in Annex 1 and the commentary on section 181.

454.Subsection (5) corresponds to section 181(6), including the change made in section 181(6)(d) by Change 41 in Annex 1.

455.In the definition of “incidental purposes” in subsection (7) the words “capable of”, which appear in the definition in section 293(2) of ICTA on which it is based, have been omitted. This mirrors the definition of “incidental purposes” in section 181(8), which is also based on the definition in section 293(2) of ICTA. See the commentary on section 181.

456.The definition of “non-qualifying activities” in subsection (7) includes the change affecting the definition of that term for the purposes of section 181(8) made by Change 43 in Annex 1.

Section 138: Ceasing to meet trading requirement because of administration or receivership

457.This section corresponds to section 182 with two changes. Section 182 is based on section 293(4A) to (6) and (8A) of ICTA.

458.The first change modifies section 182(3) by substituting for the reference to “the end of period B” a reference to “the time that is relevant for the purposes of section 134(2)”. This is the substitution required by section 576(4A)(d) of ICTA to section 293(5) of that Act, on which section 182(3) is based.

459.The second change modifies section 182(4) by omitting the reference to dissolution and adding the condition that the company continues, during the winding up, to be a trading company. These are the modifications required by section 576(4A)(b) of ICTA to section 293(6) of that Act, on which section 182(4) is based.

Section 139: The control and independence requirement

460.This section corresponds to section 185 with modifications. Section 185 is based on section 293(8) and (8A) of ICTA. Section 134(2) and (3) provide that this requirement must be met over a continuous period, which is the effect of the modification of section 293(8) of ICTA made by section 576(4A)(d) of that Act.

461.Subsections (1) to (3) correspond to section 185, with the omission in subsections (1)(a) and (2)(a) of the words “at any time in period B” and the substitution in subsection (3) of a reference to section 145(3) for the reference to section 247(4). Change 44 in Annex 1 relating to section 185(1)(a) is replicated in this subsection.

462.The term “control” is used in both subsection (1)(a) and subsection (2)(a)(ii). There is a definition of “control” in subsection (4), which refers to section 416(2) to (6) of ICTA, but this applies only to the use of that term in subsection (1)(a). This reflects section 257(3), which applies the definition of “control” in section 416(2) to (6) of ICTA in section 185(1)(a) but not in section 185(2)(a)(ii). By virtue of section 1021(2), the term “control” in sections 139(2)(a)(ii) and 185(2)(a)(ii) has the meaning given by section 995.

Section 140: The qualifying subsidiaries requirement

463.This section corresponds to section 187 with modifications. Section 187 is based on sections 293(3A) and 308(1) and (5A) of ICTA. Section 134(2) and (3) provide that this requirement must be met over a continuous period. This, together with the omission of the words “at any time in period B”, gives effect to the modification of sections 293(3A) and 308(1) of ICTA made by section 576(4A)(d) of that Act.

Section 141: The property managing subsidiaries requirement

464.This section corresponds to section 188 with modifications. Section 188 is based on section 293(6ZA) to (6ZC) and (8A) of ICTA. Section 134(2) and (3) provide that this requirement must be met over a continuous period. This, together with the omission of the words “at any time in period B”, gives effect to the modification of section 293(6ZA) of ICTA made by section 576(4A)(d) of that Act.

Section 142: The gross assets requirement

465.This section corresponds to section 186 with modifications. Section 186 is based on section 293(6A) to (6C) of ICTA. This requirement has to be met only at the times specified in subsections (1) and (2) (see section 134(4)(a)).

466.Section 576(4A)(c) of ICTA requires that for the words “the eligible shares” in section 293(6A) of that Act there be substituted the words “the shares in respect of which the share loss relief is claimed under section … 574”. This substitution has been reflected in subsections (1)(a) and (2)(a). Section 150 applies for the purposes of those paragraphs to determine the time of issue of the shares in certain circumstances.

Section 143: The unquoted status requirement

467.This section corresponds to section 184 with modifications. Section 184 is based on sections 293(1A), (1B) and (8A) and 312(1), (1B), (1C) and (1E) of ICTA. This requirement has to be met only at the time specified in subsection (1) (see section 134(4)(b)).

468.Subsection (1) corresponds to section 184(1) with the substitution for “the beginning of period B” of “the time at which the shares in respect of which the share loss relief is claimed are issued”. This is the substitution required by section 576(4A)(ab) of ICTA to section 293(1A) of that Act, on which section 184(1) is based. Section 150 applies for the purposes of this subsection to determine the time of issue of the shares in certain circumstances.

469.In subsection (1)(c)(i) a reference to section 145 is substituted for the reference in section 184(1)(c)(i) to section 247.

Section 144: Power to amend requirements by Treasury order

470.This section is included to enable sections 137 to 143 to be amended by Treasury order whenever the corresponding sections in Part 5 are amended by such an order under the power in section 200. It is based on sections 298(4) and 576(4A) of ICTA.

471.This preserves the position under the source legislation if an amendment were made under the power in section 298(4) of ICTA. In the case of an amendment of a provision which is applied by section 576(4A) of ICTA, the amendment would also have effect for the purposes of section 574 of that Act.

Section 145: Relief after an exchange of shares for shares in another company

472.This section corresponds to section 247 with modifications. Section 247 is based on section 304A(1), (2), (6), (7) and (8) of ICTA.

473.Section 576(4A)(e) of ICTA requires that for the words “eligible shares” in section 304A(1)(e)(i) of that Act there are substituted the words “shares in respect of which relief is claimed under section … 574”. Those words are not entirely apposite, as the relief will be claimed, if at all, in respect of the new shares not the old shares.

474.Section 304A(1)(e)(i) of ICTA is needed in the context of EIS relief (see section 247(1)(e)(i)). But that provision is unnecessary in the context of share loss relief. Section 576(4A)(a) and (4B)(d) require the omission of section 304A(1)(e)(ii) of that Act. Accordingly, section 247(1)(e) has not been replicated in this section.

475.The provision in subsection (1)(e) has been based on paragraph 8(1)(f) of Schedule 5B to TCGA (Enterprise investment scheme: re-investment) rather than section 304A(1)(f) and (8) of ICTA. Accordingly, section 247(2), which is based on section 304A(8) of ICTA, has not been replicated in this section. See Change 25 in Annex 1.

476.Subsection (3) corresponds to section 247(4) with two modifications.

477.Subsection (3)(a) is new and resolves the apparent conflict between section 136 and this section. See Change 24 in Annex 1.

478.In subsection (3)(b) reference to section 139(1) has been substituted for the reference in section 247(4) to section 185.

Section 146: Substitution of new shares for old shares

479.This section corresponds to section 249 with modifications. Section 249 is based on section 304A(3) and (4) of ICTA.

480.Section 249 makes separate provision for circumstances where the shares are held by the individual who subscribed for them and for circumstances where the shares have been transferred to the individual by the individual’s spouse or civil partner.

481.The structure of section 249 is dictated by the differing forms of subsections (2)(d) and (4)(d) which are based on section 304A(3)(d) and (4)(d) of ICTA. The difference between those provisions is necessary for the purposes of EIS relief. But section 576(4B)(d) of ICTA requires that section 304A(3)(d) and (4)(d) of that Act are omitted in the application of section 304A for the purposes of share loss relief.

482.Section 135 provides that references in this Chapter to an individual having subscribed for shares include, in relation to shares to which EIS relief is not attributable, references to the individual being treated as having subscribed for shares for which the individual’s spouse or civil partner subscribed. The structure of section 146 is, therefore, simpler than that of section 249.

483.Subsection (1) corresponds to section 249(1) and (3), with the omission, as required by section 574(4B)(d) of ICTA, of the words “to which EIS relief becomes attributable under section 247” and with two further changes.

484.The first of these changes is that the words “and issued to” in section 249(1) have not been reproduced having regard to the meaning given to “subscribed for” by section 135(2).

485.The second of these changes is that the words “or by a nominee for an individual” have been added. These words reflect so much of section 250(1) as relates to the holding or disposal of shares by a nominee for an individual. In this way, the requirements of section 135 relating to the subscription for the shares by the individual are preserved, while recognising that the individual may have subsequently transferred the shares into the name of a nominee for the individual.

486.Subsection (2)(a) and (b) correspond to section 249(2)(a) and (b) and (4)(a) and (b), with the substitution of “this Chapter” for “this Part”. As required by section 576(4B)(d) of ICTA, section 249(2)(c) and (d) and (4)(c) and (d) are not reproduced in this subsection. Section 150 applies for the purposes of subsection (2)(b) to determine the time of issue of the shares in certain circumstances.

487.Subsection (2)(c) is new. It expressly sets out the effect of sections 145 and 146. This is that, in determining whether the shares in the new company are, on their disposal, qualifying shares, any requirements of this Chapter for the new company to be a qualifying trading company which were met by the old company before the exchange are to be treated as met by the new company.

Section 147: Limits on share loss relief

488.This section deals with the calculation of the amount of share loss relief. It is based on section 576(1) of ICTA. It is the first of a group of three sections which apply generally for the purposes of this Chapter.

489.Section 576(1) of ICTA provides that, if a person disposes of shares for which the person has subscribed and which form part of a holding, the share loss relief in relation to those shares is not to exceed the sums which would have been allowable as deductions in computing the allowable loss for capital gains tax purposes if the shares had not formed part of the holding.

490.To cater for the abolition of pooling in relation to shares issued on or after 6 April 1998 and the changes in section 148 described in Change 29 in Annex 1, section 147 refines the circumstances in which the provision applies. See Change 26 in Annex 1.

491.Subsection (8) explains what is meant by shares “that are not capable of being qualifying shares” for the purposes not only of this section but also of section 148. Change 27 in Annex 1 contains a detailed explanation of why a mixed holding is defined for the purposes of section 148 in terms of a holding which includes such shares.

492.Subsection (9) extends this meaning for the purposes only of subsection (5) to cover reorganisations involving the issue of shares of a different class.

Section 148: Disposal of shares forming part of mixed holding

493.This section deals with the identification of shares disposed of where those shares form part of a “mixed holding”. It is based on section 576(1) to (1B) and (5) of ICTA, with a number of changes.

494.Section 576(1) of ICTA defines a mixed holding as one which comprises shares for which a person has subscribed and shares which the person has acquired otherwise than by subscription.

495.Subsection (1) provides that this section applies to a holding in which some only of the shares are shares “that are not capable of being qualifying shares” (as defined in section 147(8)). See Change 27 in Annex 1 which contains a detailed explanation of why a mixed holding has been defined in terms of a holding which includes such shares.

496.Subsection (2) provides that the section applies for the purpose of answering the questions:

• whether the shares disposed of are qualifying shares; and

• which of any qualifying shares acquired at different times are disposed of.

497.This is a change from section 576(1) of ICTA, which is not expressed to apply for the purpose of determining which of any qualifying shares are disposed of. See Change 28 in Annex 1.

498.Subsection (3) introduces the rules for determining the answers to the questions in subsection (2).

499.Section 576(1) of ICTA, on which subsection (3)(a) is based, identifies the shares disposed of on a last in first out (LIFO) basis. Section 576(1) of ICTA and its predecessor, section 37 of FA 1980, were enacted at a time when shares were pooled and treated as a single asset for capital gains tax purposes. Accordingly, it was and remains necessary to have a rule identifying the order in which shares in the pool are disposed of, in order to ensure that share loss relief is obtained only on the disposal of qualifying shares.

500.FA 1998 made changes to the identification rules in TCGA, as a result of which shares acquired on or after 6 April 1998 are not pooled but, on a disposal, are in most cases identified on a LIFO basis.

501.Taking account of those changes, subsection (3)(a) applies the FA 1998 rules (see subsection (4)) or, in the case of shares acquired on different dates before 6 April 1998, a specific LIFO rule (see subsection (5)). See Change 29 in Annex 1.

502.Subsection (3)(b) is based on section 576(1A) of ICTA and applies the rules in subsection (6), based on section 576(1B) of that Act, if the mixed holding includes any of:

• shares issued before 1 January 1994 to which business expansion scheme relief is attributable;

• shares to which EIS income tax relief is attributable; and

• shares to which EIS deferral relief is attributable.

503.Subsection (7) is new and puts on a statutory basis the practice under which questions which cannot be determined by the specific provisions of this section are to be determined on a just and reasonable basis. This subsection will principally be required in cases where some but not all of the shares of the same class acquired, or treated as having been acquired, on the same day are shares that are not capable of being qualifying shares. See Change 29 in Annex 1.

Section 149: Section 148: supplementary

504.This section supplements section 148. It is new.

505.Subsection (1) corrects the absence of an amendment to section 299 of ICTA as applied by section 576(1B) of that Act consequential upon the enactment of section 105A of TCGA by FA 2002. It applies if an individual has a mixed holding which includes shares to which business expansion scheme relief, EIS income tax relief or EIS deferral relief is attributable.

506.Subsection (1) ensures that, if the individual makes an election for the alternative identification rule under section 105A of TCGA to apply for the purposes of capital gains tax on the disposal of shares in the holding where “approved scheme shares” are acquired on the same day as other shares of the same class, the alternative rule will also apply for the purposes of share loss relief. See Change 30 in Annex 1.

507.Subsection (2) determines the time of acquisition for the purposes of section 148 of shares issued in a reorganisation within the meaning of section 126 of TCGA to which section 127 of that Act applies. See Change 31 in Annex 1.

508.Subsection (3) clarifies that shares held or disposed of by a nominee or bare trustee for an individual are part of the individual’s holding for the purposes of section 148. See Change 32 in Annex 1.

Section 150: Deemed time of issue for certain shares

509.This section contains provisions which determine the time of issue of shares for the purposes of the provisions listed in subsection (1). It is based on section 574(3) of ICTA.

510.Subsection (2) mirrors section 135(3) and applies in cases where the shares have been transferred to an individual by that individual’s spouse or civil partner. See Change 33 in Annex 1.

511.Subsection (3) mirrors section 135(4) and applies to corresponding bonus shares. See Change 34 in Annex 1.

Section 151: Interpretation of Chapter

512.This section explains the meaning of expressions used in this Chapter. It is based on section 576(5) of ICTA.

513.Subsection (1) includes the definition of “corresponding bonus shares”. Subsection (2) amplifies that definition. See Change 23 in Annex 1.

514.The introduction of sections 137 to 146 makes it necessary to ensure that the word “shares” has the same meaning in those sections as it does in the sections of Part 5 to which they correspond with modifications. Accordingly, subsections (3) to (6) provide that the application of the definition of “shares” in subsection (1) is subject to the exceptions mentioned in section 576(5) of ICTA, those required for the purposes of sections 137 to 146 of this Act and those required for the purposes of section 147 as a result of the changes described in Change 26 in Annex 1.

515.Subsection (8) is new and clarifies that the date of disposal is the time when the disposal is made or treated as made for the purposes of the capital gains tax legislation. See Change 35 in Annex 1.

Chapter 7: Losses from miscellaneous transactions

Overview

516.This Chapter gives relief for losses from miscellaneous transactions.

Section 152: Losses from miscellaneous transactions

517.This section provides relief for losses from certain transactions (known as Case VI losses before the enactment of ITTOIA). It is based on section 392 of ICTA.

518.The provisions relating to Case VI income are in Chapter 8 of Part 5 of ITTOIA. That Act amended section 392 of ICTA (which operates by reference to section 836B of ICTA, also inserted by Schedule 1 to ITTOIA). Section 836B of ICTA is rewritten as section 1016 of this Act.

519.A person can make a claim to deduct a loss incurred in a relevant transaction in computing the person’s net income of the tax year or of a subsequent tax year, but only from the person’s miscellaneous income from relevant transactions. Transactions are relevant if any profits from them would be liable to income tax under a provision listed in section 1016.

Section 153: How relief works

520.This section explains how the deductions are made. It is based on section 392(2) and (5) of ICTA.

Section 154: Transactions in deposit rights

521.This section explains the application of the loss relief against miscellaneous income rules as they apply to transactions in deposit rights. It is based on section 398 of ICTA.

Section 155: Time limit for claiming relief

522.This section sets out the time limits for making claims for loss relief against miscellaneous income. It is based on section 392(6) and (7) of ICTA.

Part 5: Enterprise investment scheme

Overview

523.This Part provides income tax reductions to individuals who subscribe for shares in smaller unquoted trading (and some other) companies with which they are not connected.

524.A tax reduction is available where an individual provides additional full risk equity finance by subscribing money for shares and holds those shares, in most cases, for at least three years and the other conditions of the scheme are met.

525.The structure of the Part is as follows:

• The tax reduction and an overview (Chapter 1);

• Conditions relating to the investor (Chapter 2);

• Conditions relating to money raised and other matters (Chapter 3);

• Conditions relating to the issuing company (Chapter 4);

• Claiming the tax reduction and attributing the reduction to shares (Chapter 5);

• Withdrawing tax reductions that prove to be excessive (Chapter 6);

• Method of withdrawing tax reduction and related matters (Chapter 7); and

• Supplementary provisions (Chapter 8).

526.As set out in section 156(3), this Part has effect only in relation to shares issued on or after 6 April 2007 in accordance with section 1034(3). This is subject to provisions in Schedule 2, in particular the general provisions concerning the continuity of the law in Part 1 and the transitional provisions in Part 7 of that Schedule.

527.For example, the effect of Part 1 of Schedule 2 on section 218 (value received when there is more than one issue of shares) is that the section is read, in relation to shares issued before 6 April 2007, as a reference to the corresponding provision in the source legislation.

528.As a result of the commencement basis applying to Part 5, the minor changes in the law made by this Act will not affect shares issued before 6 April 2007, subject to one exception. This exception is the consequential amendment to section 312(2A) of ICTA, explained in the explanatory note on this section in Schedule 1.

529.Section 1034(3) also provides that consequential amendments and repeals associated with Part 5 have effect only in relation to shares issued on or after 6 April 2007. So enterprise investment scheme (EIS) shares and BES shares (BES is the common name for the business expansion scheme) issued before that date are unaffected.

530.Sections 292, 294, 295, 296 and 395 of ICTA have not been rewritten since these provisions are spent.

Chapter 1: Introduction

Overview

531.This Chapter sets out the conditions for an individual to be entitled to a tax reduction and quantifies the amount of the entitlement. It also gives an overview of the Part, labels certain concepts and provides signposts to other material related to EIS.

Section 156: Meaning of “EIS relief” and commencement

532.This section says the relief is a tax reduction and provides labels for the scheme and the relief. It is based on section 312(1) of ICTA.

533.Subsection (3) sets out the commencement basis for Part 5 in accordance with section 1034(3). See the notes in the general overview to this Part.

Section 157: Eligibility for EIS relief

534.This section states the conditions to be satisfied for the relief to be available and indicates where further detail can be found on certain conditions. It is based on sections 289(1), 290(1) and 291(1) of ICTA.

Section 158: Form and amount of EIS relief

535.This section quantifies the amount of the income tax reduction to which an individual is entitled if the individual claims EIS relief for a tax year. It is based on sections 289A(1) to (4) and 290(2) of ICTA.

536.Subsection (1) provides that an individual may, if that individual wishes, claim EIS relief in respect of some, but not all, of the shares in relation to which the individual is eligible for relief. See Change 36 in Annex 1. There are consequential changes in later sections to deal with cases where an individual claims EIS relief in relation to some, but not all, of the shares in relation to which the individual is eligible for relief. The commentary on those later sections refers back to the commentary on this section.

537.Subsection (1) is expressed in terms of the individual’s entitlement to a tax reduction. Sections 27 and 29 (within the calculation of income tax liability Chapter in Part 2) contain provisions about how effect is given to the entitlement to a reduction and how the actual reduction is quantified.

538.Subsection (2)(a) adds the words “and claims”, before “EIS relief”, to make explicit a requirement that is implied when sections 289A(1) and 289A(2)(a) of ICTA are considered together.

539.Subsection (2)(b) provides that there is an upper limit on the amount of an individual’s entitlement to EIS relief rather than an upper limit on the subscriptions in respect of which the relief may be claimed. See Change 37 in Annex 1.

Section 159: Periods A, B and C

540.This section labels and defines periods (relating to an issue of shares) that are referred to in other sections in this Part. It is based on section 312(1) and (1A) of ICTA.

Section 160: Overview of other Chapters of Part

541.This section indicates the content of Chapters that are not mentioned in section 157. It is new.

Section 161: Other tax reliefs relating to EIS

542.This section signposts other reliefs and material that may be relevant to EIS. It is new.

Chapter 2: The investor

Overview

543.This Chapter sets out the conditions which the investor must meet in order to be a “qualifying investor” in relation to the issue of shares in question.

Section 162: Overview of Chapter

544.This section states the three conditions that must be met by an investor in order to be a qualifying investor and indicates where further detail can be found about them. It is new.

Section 163: The no connection with the issuing company requirement

545.This section provides that the investor must not be connected with the issuing company during the period indicated. It is based on section 291(1) of ICTA.

546.There is a reference to connection before the issuing company is incorporated. This covers for example a former employee of a company which becomes a subsidiary or partner of the issuing company within the prescribed period, see section 167(1)(a).

Section 164: The no linked loans requirement

547.This section denies relief in the cases set out (loans connected with the subscription for the relevant shares). It is based on section 299A of ICTA.

548.The effect of the cross-reference in section 299A(2) of ICTA to section 307(6)(ca) of ICTA is achieved by making reference in section 239(1) of this Act (date from which interest is chargeable) to the meaning of “the making of the loan” in this section.

549.Section 1008(1) notes that “assignation” is the term used in Scotland for “assignment”. Both terms are used in section 299A(2)(b) of ICTA.

Section 165: The no tax avoidance requirement

550.This section stops the investor being a qualifying investor if the subscription was not for commercial reasons or if a main purpose was tax avoidance. It is based on section 289(6) of ICTA. There is a complementary requirement in respect of the issue of the shares in Chapter 3 of this Part.

551.Section 289(6) of ICTA has introductory wording about the investor “not being eligible for relief”. There is no need for similar introductory words in this section, because section 162 already provides that the investor is not a qualifying investor if the no tax avoidance requirement is not met, and is therefore not eligible for EIS relief (section 157(1)(b)).

552.To be consistent with related legislation, for example paragraph 14 of Schedule 15 to FA 2000 (corporate venturing scheme), this section refers to “commercial reasons” rather than “commercial purposes”.

Section 166: Connection with issuing company

553.This section defines, for the purposes of this Chapter, the meaning of an individual being connected with the issuing company and provides signposts to the sections that provide further detail of the way in which such connection can occur. It is based on section 291(2) of ICTA.

554.This section clarifies the application of the definition of connected in section 291(2) of ICTA. See Change 38 in Annex 1.

Section 167: Employees, directors and partners

555.This section defines how an individual can be connected with the issuing company as a result of a person being “an employee, director or partner”. It is based on section 291(2), (3) and (4) of ICTA.

556.Subsection (3) is based on section 291(4) of ICTA. It provides that an individual who is both a director and an employee of the issuing company is covered by subsection (1)(c) rather than subsection (1)(a) and so can benefit from the let-outs in sections 168 and 169. In such a case, references in sections 167 to 169 to an individual in his or her capacity as a director also includes the individual in his or her capacity as an employee. So, for example, in these cases any remuneration received as an employee is taken into account in section 169(2).

Section 168: Directors excluded from connection

557.This section provides that an individual will, in specific circumstances, not be connected with the issuing company. It is based on sections 291(5) and 291A(1), (2), (3) and (6) of ICTA.

558.This section allows, in limited cases, the investor to be eligible for EIS relief in relation to a share issue even if the investor (or an associate) is a director of the issuing company. Such limited cases broadly include those where:

• the sole reason for connection would have been the relationship as director; but

• in relation to the period over which connection is tested;

  • there are no payments to the individual (or to certain other persons), and no entitlement to such payments, from the issuing company (or from certain other persons), or

  • any such payments fall to be disregarded by virtue of subsection (2).

559.Subsection (4)(a)(i) narrows the definition of “related person”. See Change 39 in Annex 1.

560.The meaning of “connected” in subsection (4)(a)(ii) is found in section 993. This differs from the other references to “connected” in this Chapter, which take their meaning from section 166.

561.The words “at any time in period A” in subsection (5) are needed to convey the full meaning of the expression “51% subsidiary” in section 291A(6) of ICTA. For the source legislation, this expression has a specific definition in section 312(1) of ICTA, but this is not reproduced in the rewritten EIS sections. Instead a “51% subsidiary” in this Part takes its meaning from section 838 of ICTA - see section 989.

Section 169: Directors qualifying for relief despite connection

562.This section provides an exception to the rule that a person is not a qualifying investor if that person is connected with the issuing company. It is based on section 291(5) and section 291A(4) and (5) of ICTA.

563.This exception might apply to certain, otherwise unconnected, business angel investors whose only connection with the issuing company will be as directors. (A business angel is the term used for investors who also make their business expertise available to a company by becoming a director.)

564.In subsection (3)(a) the reference to “connected” takes its meaning from section 166, see Change 38 in Annex 1.

565.In section 291A(5) of ICTA there is a reference to the word “trade” including “any business, profession or vocation”. As an incorporated company cannot carry on a vocation there is now in subsection (3)(b) a reference to “the trade, business or profession” carried on by the company or its subsidiary.

Section 170: Persons interested in capital etc of company

566.This section sets out cases in which an individual is treated as connected with the issuing company because of certain interests in that company or a subsidiary of that company. It is based on section 291(5) and section 291B of ICTA other than section 291B(5).

567.In subsection (1)(a), based on section 291B(1)(a) of ICTA, there is a reference to ordinary share capital without the word “issued”. This is because the definition of ordinary share capital in section 989 defines ordinary share capital in terms of issued share capital.

568.In subsections (1)(a), (2)(a) and (10), it has been made clear that the subsidiary referred to is the subsidiary of the issuing company.

569.Subsection (6) refers to “the issuing company”. This replaces a reference to “a company” in section 291B(4) of ICTA, on which subsection (6) is based. The clarification is consistent with the context of section 291B of ICTA generally and with the reference in section 291B(5) of ICTA to “another company … assuming it to be an issuing company” in particular.

Section 171: Persons subscribing for shares under certain arrangements

570.This section provides a further instance where an individual is treated as connected with the issuing company. It is based on section 291B(5) of ICTA.

571.The references to “connected” take their meaning from section 166, see Change 38 in Annex 1.

Chapter 3: General requirements

Overview

572.This Chapter sets out conditions for the general requirements that need to be met in relation to the relevant shares.

Section 172: Overview of Chapter

573.This section lists the various conditions that are contained in this Chapter and where further detail can be found. It is new.

Section 173: The shares requirement

574.This section sets out the conditions that the relevant shares must satisfy. It is based on section 289(1), (7), (8) and (8A) of ICTA.

575.The shares (apart from bonus shares) have to be fully paid up in cash at the time they are issued. Bonus shares are defined in section 257.

576.Subsection (2) provides in effect that the shares must also be full-risk ordinary shares throughout period B. The label “eligible shares” which appears in section 289(7) of ICTA is no longer used. Instead of references to “eligible shares”, there are now references elsewhere in this Part to shares which meet the requirements of this subsection.

577.There are several instances in ICTA where the reference to eligible shares adds nothing to the meaning. The word eligible has been omitted in the Part where this is the case, and if identification of the shares in question is needed, an alternative such as “the relevant shares” has been used.

578.Similarly the term “new ordinary shares” has not been reproduced. As EIS relief depends on subscribing for shares that are issued to the investor, it is not necessary to describe the shares as “new”. This approach mirrors that in paragraph 35 of Schedule 15 to FA 2000 (corporate venturing scheme).

Section 174: The purpose of the issue requirement

579.This section sets out the condition concerning the purpose for which the share issue raises money. It is based on section 289(1) of ICTA.

Section 175: The use of the money raised requirement

580.This section sets out the requirements for the employment of the money raised by the issue of relevant shares. It is based on section 289(1), (3) and (3A) of ICTA.

581.Subsection (1) contains a reference to bonus shares which are defined in section 257(1). Such shares do not need to meet the tests of this section. This enables for example section 201(4) (attribution of EIS relief to shares) to work. As a result, under section 201(4)(b) this Part applies as if the “original issue” of shares included “corresponding bonus shares”.

582.Section 257(5) explains when shares are treated as being of the same class.

Section 176: The minimum period requirement

583.This section requires that the companies mentioned in subsection (2) must carry on the qualifying business activity for a certain period of time. It is based on section 289A(6) to (8A) of ICTA.

584.Subsection (1) makes the requirements of this section a condition of eligibility for EIS relief instead of, as in section 289A(6) of ICTA, a condition for claiming the relief. See Change 40 in Annex 1.

585.Subsections (2) and (3) refer to “at or after the time of the issue” to make more obvious the fact that the period in question may end after the share issue has occurred.

Section 177: The no pre-arranged exits requirement

586.This section denies relief if certain arrangements exist in connection with the issue of shares. It is based on section 299B of ICTA.

587.The words in brackets in subsection (1)(c) “in terms of value” are not in section 299B(1)(c), although they do appear in paragraph 37(1) of Schedule 15 to FA 2000 (corporate venturing scheme). Introducing the words here is intended to clarify what is meant by “a substantial amount” in this context.

Section 178: The no tax avoidance requirement

588.This section requires that there be commercial reasons for the issue of the relevant shares and that a main purpose is not tax avoidance. It is based on section 289(6) of ICTA.

589.There is a complementary requirement in respect of the subscription for the shares in Chapter 2.

590.To be consistent with related legislation, for example, in paragraph 14 of Schedule 15 to FA 2000 (corporate venturing scheme), this section refers to “commercial reasons” rather than “commercial purposes”.

Section 179: Meaning of “qualifying business activity”

591.This section says what “qualifying business activity” means. It is based on section 289(2), (3A) and (8) of ICTA.

592.For EIS relief to be available, the share issue must raise money for the purpose of a qualifying business activity. (See section 174.)

593.In subsection (1) a qualifying business activity is explained by reference to activity A and activity B. The requirement is that these activities are carried out by the company or a qualifying 90% subsidiary.

594.The phrase “or preparing to carry on and then carrying on” in subsection (2)(b) is intended to be clearer than the phrase “preparing to carry on, or carrying on,” in section 289(2)(a)(ii) of ICTA. Each is concerned with money being raised both for the preparations for a trade and the subsequent carrying on of that trade.

595.Subsections (4) and (5) extend the cases in which R&D activities can be treated as a qualifying business activity. See Change 41 in Annex 1.

596.Subsection (7) enables certain requirements to be met in relation to a company that is not a qualifying 90% subsidiary at the time the shares are issued. See Change 42 in Annex 1.

Chapter 4: The issuing company

Overview

597.This Chapter sets out the conditions to be met if the issuing company is to be a qualifying company in relation to the relevant shares.

Section 180: Overview of Chapter

598.This section summarises the conditions to be met and indicates where further detail can be found. It is based on sections 289(1)(ba) and 293(1) of ICTA but there is no equivalent provision in ICTA that draws these conditions together.

599.Where there are shared provisions, the order matches Chapter 4 of Part 6, “qualifying holdings” in the venture capital trust scheme (VCT), as far as possible.

Section 181: The trading requirement

600.This section sets out the trading requirement which the issuing company must meet throughout period B. It is based on section 293(2), (3A) to (3F) and (8A) of ICTA.

601.The nature of the requirement is set out in subsection (2). The requirement can be met in one or other of two ways. Either the issuing company must exist essentially for the purpose of carrying on one or more qualifying trades during period B, or it can be a parent company of a group that carries on qualifying activities. It can alternate between these two conditions providing that at all times within period B it meets one or other of them.

602.The meaning of “qualifying trade” is explained in section 189. “Parent company”, “group” and “group company” are defined in section 257(1). Only part of section 293(3A) of ICTA appears in this section: it is in subsection (4). The requirements in section 293(3A)(a) and (b) of ICTA are covered respectively by the definition of “parent company” in section 257(1) and by section 187.

603.Subsections (3) and (7) provide that certain requirements can be met in relation to a company that is not part of the group at the time the shares are issued. See Change 42 in Annex 1.

604.The provision for property used for R&D in subsection (6)(d) has been extended. See Change 41 in Annex 1.

605.The words “capable of” have been omitted in subsection (8), rewriting the definitions of “incidental purposes” and of “mainly trading subsidiary” in sections 293(2)(a) and 293(3F)(a) of ICTA. The intention is to make the definitions simpler to interpret. In practice the test will not change.

606.The label “non-qualifying activities” in subsection (2)(b) is defined in subsection (8). Paragraph (a) of that definition refers to excluded activities. These are listed in section 192. Section 194 provides a let-out for certain leasing of ships from being treated as a non-qualifying activity.

607.The way that subsection (8) interprets non-qualifying activities means that no distinction is made between the let-out in section 194(4), derived from section 297(6)(a) to (d) of ICTA, and the let-out in section 194(7), derived from the final words of section 297(6) of that Act. This contrasts with section 293(3C)(b) of ICTA. See Change 43 in Annex 1.

Section 182: Ceasing to meet trading requirement because of administration or receivership

608.This section provides an exception to section 181 in the cases specified. It is based on section 293(4A) to (6) and (8A) of ICTA.

609.The cases specified relate to administration or receivership carried out for commercial reasons and which do not have tax avoidance as a main purpose.

610.The meanings of “in administration” and “in receivership” are provided by section 252.

Section 183: The issuing company to carry on the qualifying business activity requirement

611.This section requires that, subject to the rules in the section, during period B it is only the issuing company or a qualifying 90% subsidiary of the issuing company that carries on the qualifying business activity for which money was raised by the share issue. It is based on section 289(1A) to (1E) and (8) and section 312(1) of ICTA.

612.Section 289(1)(ba) of ICTA, stating that the requirements of section 289(1A) of that Act must be met, is not reproduced explicitly. Instead it is implicit in section 180(b), as part of the list of the requirements in relation to the issuing company.

Section 184: The unquoted status requirement

613.This section requires that when the relevant shares are issued:

• the issuing company is unquoted; and

• no arrangements as are mentioned in the section are in existence.

It is based on sections 293(1A), (1B) and (8A) and 312(1), (1B), (1C) and (1E) of ICTA.

614.The words in brackets in section 293(1) of ICTA “whether it is resident in the United Kingdom or elsewhere” have not been rewritten. The words do not add anything to the tests in section 179 (meaning of “qualifying business activity”).

615.The definition of unquoted company in section 312 of ICTA is set out in this section, rather than in Chapter 8, since this is the only mention of unquoted status in the EIS provisions.

616.Section 312(1D) of ICTA is not rewritten in this Part. It concerns orders made by the Commissioners for Her Majesty’s Revenue and Customs and is covered by section 1014 which is based on section 828 of ICTA.

617.FA 2001 removed the requirement that the issuing company remain unquoted throughout the relevant period. Following that change, section 312(1E) of ICTA has little or no practical significance, but in exceptional circumstances this provision could still apply in relation to the “arrangements” in section 293(1B) of ICTA, (rewritten in subsection (1)(b) and (c)). Section 312(1E) has therefore been rewritten in subsection (6).

618.“Arrangements” are defined in section 257(1).

Section 185: The control and independence requirement

619.This section is based on section 293(8) and (8A) of ICTA. It broadly requires that throughout period B:

• any company that the issuing company (on its own or together with connected persons) controls is a qualifying subsidiary of the issuing company

• the issuing company is not a 51% subsidiary of or controlled by another company (on its own or together with connected persons); and

• there are no arrangements which could lead the issuing company to fail either of these tests.

620.Section 293(3) of ICTA has not been rewritten. The definition of “a qualifying subsidiary of another company” is contained in section 191.

621.In subsection (1)(a) the words “of the issuing company” have been added after “a qualifying subsidiary”. See Change 44 in Annex 1.

622.“Control” in subsection (2)(a) is defined in section 995. The meaning of “control” in subsection (1)(a) is different and is given by section 257(3).

Section 186: The gross assets requirement

623.This section sets out the limits that apply to the value of a company’s gross assets before and after a share issue. It is based on section 293(6A) to (6C) of ICTA.

624.The requirement differentiates between a “single company” and a “parent company”. Both these terms are defined in section 257(1).

625.Section 293(6D) of ICTA has not been rewritten as a separate provision. The term the “company’s group” and the reference to “in relation to any time” are not needed given the definitions in section 257(1) and the way in which this section as a whole is drafted.

626.Subsection (3)(b) sets out more clearly what is meant in relation to a group of companies by the words “aggregate value at that time of the gross assets” in section 293(6B)(b) of ICTA. Similar wording is used in paragraph 12(3) of Schedule 5 to ITEPA (enterprise management incentives).

Section 187: The qualifying subsidiaries requirement

627.This section requires that during period B any subsidiary of the issuing company must be a qualifying subsidiary. It is based on sections 293(3A) and 308(1) and (5A) of ICTA.

Section 188: The property managing subsidiaries requirement

628.This section requires that any property managing subsidiary of the issuing company must also be its qualifying 90% subsidiary. It is based on section 293(6ZA) to (6ZC) and (8A) of ICTA.

629.In section 293(6ZC) of ICTA “land” and “property deriving its value from land” take the meaning in section 776 of ICTA. Subsection (3), applying for the purposes of subsection (2) of the rewritten section, provides the definition of “property deriving its value from land”. “Land” itself is not defined in this Act and instead relies on the definition in Schedule 1 to the Interpretation Act 1978. See the commentary on section 772.

Section 189: Meaning of “qualifying trade”

630.This section gives the meaning of “qualifying trade”. It is based on sections 297(2) and (8) and 298(3) and (5) of ICTA.

631.The wording of subsection (1)(b) is more compact than section 297(2) of ICTA. The comparable wording is that the trade must not “consist of one or more of the following activities if that activity amounts, or those activities when taken together amount, to a substantial part of the trade”.

632.Excluded activities referred to in this subsection are set out in section 192.

633.Subsection (2) excepts references to a trade in certain sections in this Chapter from the extended meaning of “trade” in section 989, based on the definition in section 832(1) of ICTA.

Section 190: Meaning of “qualifying 90% subsidiary”

634.This section gives the meaning of “qualifying 90% subsidiary”. It is based on section 289(9) to (13) of ICTA.

Section 191: Meaning of “qualifying subsidiary”

635.This section defines “qualifying subsidiary”. It is based on section 308(2) to (4) and (5B) of ICTA.

636.The term “51% subsidiary” in subsection (2)(a), which is based on section 308(2)(ca) of ICTA, takes its meaning from the definition in section 989. The definition provides a signpost to section 838 of ICTA. Section 308(5B) of ICTA, which applies section 838(2) to (10) to section 308(2)(ca), has not been rewritten as it is unnecessary.

Section 192: Meaning of “excluded activities”

637.This section gives the meaning of “excluded activities”. It is based on section 297(2) of ICTA.

638.The meaning of excluded activities is needed to determine whether a trade is a qualifying trade and the extent to which the business of a group includes non-qualifying activities.

639.Subsection (2) indicates where further detail can be found on certain of the activities listed in subsection (1).

Section 193: Excluded activities: wholesale and retail distribution

640.This section supplements section 192(1)(b). It is based on section 297(3) of ICTA.

641.Subsection (2) makes it clear that there are two sets of determinants, one set establishing what is a trade of wholesale and retail distribution and the other what is an ordinary trade of wholesale and retail distribution.

642.The words “or exposed” before “for sale” have been added in subsection (4). This is intended to reflect the normal description of a trade of retail distribution in United Kingdom statute law.

643.Subsection (5)(b) refers to “the trader” rather than “the company” which is referred to in section 297(3)(c)(ii) of ICTA. See Change 45 in Annex 1.

Section 194: Excluded activities: leasing of ships

644.This section supplements section 192(1)(d). It is based on sections 297(6) and (7) and 298(5) of ICTA.

645.Subsection (2) takes paragraph 18(2) of Schedule 5 to ITEPA (enterprise management incentives) as its model. This additional material, which is not in the source legislation, makes it clear that the requirements of subsection (4) do not have to be met in relation to offshore installations and pleasure craft.

646.Change 43 applies for the purposes of subsection (7). See the commentary on section 181.

Section 195: Excluded activities: receipt of royalties and licence fees

647.This section supplements section 192(1)(e). It is based on section 297(4) to (5C) of ICTA.

Section 196: Excluded activities: property development

648.This section supplements section 192(1)(g). It is based on section 298(5), (5B) and (5C) of ICTA.

Section 197: Excluded activities: hotels and comparable establishments

649.This section supplements section 192(1)(j). It is based on sections 297(3A) and 298(5A) of ICTA.

Section 198: Excluded activities: nursing homes and residential care homes

650.This section supplements section 192(1)(k). It is based on sections 297(3A) and 298(5) of ICTA.

Section 199: Excluded activities: provision of services or facilities for another business

651.This section treats the provision of services or facilities as excluded activities if:

• the services or facilities are provided to businesses which themselves consist largely of excluded activities; and

• the specified control requirements exist.

It is based on sections 297(2) and 298(1) to (3) of ICTA.

652.The section is written in terms of a business. As a consequence, the way in which the definition of a trade in section 298(3) of ICTA, governing sections 297 and 298, is applied within those sections has been simplified. See Change 46 in Annex 1.

Section 200: Power to amend by Treasury order

653.This section allows the Treasury to make orders amending the provisions mentioned in the section. It is based on section 298(4) of ICTA.

Chapter 5: Attribution of and claims for EIS relief

Overview

654.This Chapter deals with attributing EIS relief to shares, claiming the relief and associated matters.

Section 201: Attribution of EIS relief to shares

655.This section attributes EIS relief for a tax year:

• first, to the issues of shares on which relief is claimed; and

• second, to shares included in those issues.

It is based on section 289B(1) to (3A) and (5) and (6) of ICTA.

656.These attributions are needed because the investor may have subscribed to more than one share issue of a single company, or to share issues of more than one company, during the tax year. Each such share issue to the investor may have different periods associated with it for the purpose of recovery or withdrawal of relief. And the question of whether relief is attributable to shares disposed of is also relevant to relief for losses on shares and for capital gains tax purposes.

657.Subsections (2) to (4) cater for cases where an individual claims EIS relief in respect of all of the shares in relation to which the individual is eligible for relief. They also cater for cases where an individual claims EIS relief in respect of some, but not all, of the shares in relation to which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

Section 202: Time for making claims for EIS relief

658.This section sets out the intervals during which claims for EIS relief can be made for a tax year. It is based on sections 289B(5) and 306(1) of ICTA.

Section 203: Entitlement to claim

659.This section requires the investor to hold a certificate (compliance certificate) from the issuing company before claiming EIS relief. It is based on section 306(2), (7), and (8) of ICTA.

660.Subsection (2) omits the words “and admitted” which are in section 306(7) of ICTA. Those words are not needed as there is no separate PAYE admittance procedure.

Section 204: Compliance certificates

661.This section says what compliance certificates are and deals with matters associated with their issue to investors (including the pre-condition that the issuing company gives a compliance statement to HMRC). It is based on section 306(2), (3) and (4) of ICTA.

662.The compliance certificate is commonly known as an EIS 3, the form provided by HMRC for the issuing company to issue to its investors.

663.The reference to requirements for EIS relief being “for the time being met” in subsection (1)(b) is new. There is an explanation in Change 57 in Annex 1.

664.Subsection (5) requires an officer of Revenue and Customs to notify the officer’s decision on a request by the issuing company for permission to issue a compliance certificate. See Change 47 in Annex 1.

Section 205: Compliance statements

665.This section says what compliance statements are and deals with associated matters (including the period during which they can be given). It is based on section 306(3), (3A), (5) and (11) of ICTA.

666.The compliance statement is commonly known as an EIS 1, the form provided by HMRC for completion by the issuing company.

667.The reference to requirements for EIS relief being “for the time being met” in subsection (1)(a) is new. There is an explanation in Change 57 in Annex 1.

Section 206: Appeal against refusal to authorise compliance certificate

668.This section allows an issuing company to appeal, to an independent body, if the officer of Revenue and Customs refuses to authorise the issue of compliance certificates by the company. It is based on section 306(10) of ICTA.

Section 207: Penalties for fraudulent certificate or statement etc

669.This section provides for penalties in the circumstances set out. It is based on section 306(6) of ICTA.

Chapter 6: Withdrawal or reduction of EIS relief

Overview

670.This Chapter deals with cases in which EIS relief, otherwise available to the investor in relation to a share issue, is reduced or withdrawn.

Section 208: Overview of Chapter

671.This section provides a signpost to the various ways in which EIS relief may be withdrawn or reduced. It is new.

Section 209: Disposal of shares

672.This section withdraws or reduces EIS relief if the investor disposes of relevant shares before the end of period A relating to those shares. It is based on sections 299(1), (2) and (8) and 304(1) of ICTA.

673.EIS relief is only reduced to the extent that the relief is attributable to the shares which are the subject of the disposal.

674.Subsection (4) provides an exception in the case of certain disposals between spouses or civil partners.

675.Section 299(3) of ICTA is not rewritten. It is not needed because other provisions identify the shares that are disposed of and calculate the appropriate proportion of the relief attributable to those shares.

Section 210: Cases where maximum EIS relief not obtained

676.This section deals with the case where EIS relief on a subscription for shares was effectively obtained for a tax year at a rate that is below the savings rate of tax for the tax year concerned. It is based on sections 289B(5) and 299(4) of ICTA.

677.Subsection (1) effectively reduces the rate at which section 209(3)(a) recovers EIS relief on the proceeds from a disposal of the shares concerned. The rate of recovery is reduced, from the savings rate of tax for the year in which the shares were issued, to the rate at which EIS relief was effectively obtained.

678.The subsection also caters for cases where an individual claims EIS relief in respect of some, but not all, of the shares in relation to which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

679.Subsection (2) deals with the complication that arises where the investor has obtained relief on some of the shares as if they were issued in the previous tax year. Subsection (1) is then applied as if there were two separate issues. That is necessary because the investor may have obtained EIS relief at different effective rates in the two years concerned (and one or both of these effective rates could be less than the savings rate for the tax year concerned).

680.Subsections (3) and (4) are new and correspond to provisions in paragraph 46(5) and (6) of Schedule 15 to FA 2000 (corporate venturing scheme - disposal of shares). See Change 48 in Annex 1.

Section 211: Call options

681.This section treats the grant of a call option by the investor as if it were a disposal of shares for the purpose of section 209 (disposal of shares). It is based on section 299(8) of ICTA.

Section 212: Put options

682.This section deals with put options granted to the investor during period A relating to the relevant shares concerned. It is based on section 299(5), (5A) and (8) of ICTA.

683.The grant of the put option to the investor leads to the withdrawal of any EIS relief attributable to the shares to which the put option relates.

Section 213: Value received by the investor

684.This section sets out what happens if the investor receives value from the issuing company at any time during period C relating to an issue of shares. It is based on sections 300(1) to (1B), 301(4A), 301A(5) and 312(1) of ICTA.

685.Any EIS relief attributable to the issue of shares is either withdrawn or reduced. The amount of value received by the investor is taken into account in determining whether there is a withdrawal or reduction of relief (and the size of any reduction).

686.Subsection (3) makes explicit the order in which to apply sections 218 to 220.

Section 214: Value received: receipts of insignificant value

687.This section prevents section 213 applying to insignificant amounts of value received by the investor. But such amounts are not ignored if, taken together with certain other receipts of value by the investor, the total amount received is not insignificant. It is based on section 300(1) and (1BC) and section 312(1) of ICTA.

Section 215: Meaning of “receipts of insignificant value”

688.This section gives the meaning of “receipts of insignificant value” for the purpose of section 214. It is based on section 301A(1) to (4) and section 312(1) of ICTA.

Section 216: When value is received

689.This section sets out the time at which, and circumstances in which, the investor is treated as receiving value from the issuing company. It is based on sections 300(1D) to (3), (5) and (6) and 301(3), (4) and (5) of ICTA.

690.Subsection (3) refers, for clarity, to “the issuing company” where the source legislation refers to “a company”.

Section 217: The amount of value received

691.This section contains a table which sets out the amount of value received by the investor in cases where section 216 treats value as received by the investor. It is based on section 300(4) and (5) of ICTA.

Section 218: Value received where there is more than one issue of shares

692.This section deals with cases where the investor receives value but there is more than one issue of shares from which section 213 reduces or withdraws EIS relief. It is based on section 300(1BA) and (1BB) and section 312(1) of ICTA.

693.Subsection (2) apportions the value received between the different share issues before the calculation in section 213(2) takes place. Without such a provision the value received might be counted two, or more, times for reducing or withdrawing EIS relief.

694.By referring to the amount on which the investor obtains relief the subsection also caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

Section 219: Value received where part of share issue treated as made in previous tax year

695.This section deals with a complication that can arise where section 213(2) applies to an issue of shares. The complication occurs where the investor has obtained relief on part of that share issue as if that part of the share issue had taken place in the previous tax year. It is based on sections 289B(5), 299(4) and 300(1B) of ICTA.

696.If that complication occurs,subsection (2) sets out the steps by which to arrive at the amount referred to in section 213(2)(a). Setting out these steps is a change because the source legislation is not explicit on this aspect. See Change 49 in Annex 1.

697.By referring to the amount on which the investor obtains relief Step 1 also caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

698.Step 2 includes a deeming of two separate issues of shares and apportionment of the value received between those two deemed issues. That is necessary because there may be a different savings rate of tax in each of the tax years.

699.Step 2 also requires the application of section 220, where appropriate, to deal with cases where the investor has not obtained EIS relief at the savings rate for one or both of the two years concerned in Step 2.

Section 220: Cases where maximum EIS relief not obtained

700.This section deals with the case where EIS relief on a subscription for shares was obtained for a tax year at a rate which is less than the savings rate of tax for that tax year. It is based on sections 299(4) and 300(1B) of ICTA.

701.Subsection (1) effectively lowers the rate at which section 213(2) recovers EIS relief on value received by the investor. The rate of recovery is reduced to the rate at which EIS relief was effectively obtained. The subsection also caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

702.Subsections (2) and (3) are new and correspond to provisions in paragraph 52(2) and (3) of Schedule 15 to FA 2000 (corporate venturing scheme - cases where maximum relief not obtained). See Change 48 in Annex 1.

Section 221: Receipts of value by and from connected persons etc

703.This section extends the meaning of terms used in some of the preceding sections. It is based on sections 300(1C) and 301(6) and (6A) of ICTA.

704.Without this extension the rules in preceding sections about reduction or withdrawal of EIS relief might be avoided in various ways.

Section 222: Receipt of replacement value

705.This section prevents section 213 reducing or withdrawing EIS relief in certain cases. It is based on sections 300A(1) to (6) and (11), 301(5) and 312(1) of ICTA.

706.This section applies to certain cases where the person who received value effectively repays all of it to the person who gave that value.

Section 223: Section 222: supplementary

707.This section supplements section 222. It is based on section 300A(1), (2) and (7) to (11) and section 312(1) of ICTA.

708.Subsections (1) and (2) contain limitations on the application of section 222.

709.There is a new reference in subsection (2)(c) to “the day” on which the amount of relief is determined. This is in line with the interpretation that the provision disqualifies restitution if it happens on the 61^st day after the day of the determination.

710.Subsections (3) and (4) set out, for one particular case, the consequences of section 222 applying. Subsection (4) combines part of the provision in section 300A(10) of ICTA with material from paragraph 13C(4) of Schedule 5B to TCGA. A consequential amendment to that paragraph completes the picture (see the commentary in Part 2 of Schedule 1 to this Act on paragraph 13C of Schedule 5B to TCGA).

Section 224: Repayments etc of share capital to other persons

711.This section reduces or withdraws EIS relief in certain cases where, broadly, the issuing company (group) repays some of its share capital within period C relating to the issue of shares in question. It is based on sections 303(1) to (1C), (9A) and (9B), 303AA(2), 303A(2) and 312(1) of ICTA.

712.Subsection (2) sets out the calculation of the withdrawal or reduction in the simplest case where the repayment affects only a single issue of shares and only a single subscriber to that issue.

713.Subsection (3) provides a signpost to other sections that, depending on the particular combination of circumstances present, may modify (or remove the need for) the calculation in subsection (2). Subsection (3) makes explicit the order in which to apply sections 226 to 229.

714.Subsections (4) and (5) prevent this section applying in two cases. First, where the repayment causes a withdrawal or reduction of EIS relief (under other sections) or of relief under Schedule 15 to FA 2000 (the corporate venturing scheme) or precipitates a qualifying chargeable event for the purposes of Schedule 5B to TCGA (enterprise investment scheme: reinvestment). Second, where there would be a withdrawal etc in these cases if the repayment were not treated as insignificant.

715.The references in subsections (4)(b) and (c) to “that person’s shares in the issuing company” are more explicit than in the source legislation and are consistent with section 303(IB)(a) of ICTA.

716.Subsection (6) is new and corresponds to paragraph 58(1) of Schedule 15 to FA 2000 (corporate venturing scheme - supplementary to value received). See Change 50 in Annex 1.

Section 225: Insignificant repayments ignored for purposes of section 224

717.This section provides an exception to section 224 in certain cases where the repayment is insignificant. It is based on section 303AA(1) to (5) and section 312(1) of ICTA.

Section 226: Amount of repayments etc where there is more than one issue of shares

718.This section apportions the repayment for cases where that repayment results in relief being reduced or withdrawn, under section 224(2), in relation to two or more issues of shares. It is based on section 303(2) and (2A) of ICTA.

719.By referring to the relief which the individuals obtain subsection (2) caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

Section 227: Single issue affecting more than one individual

720.This section apportions the repayment for cases where, in relation to a single issue of shares affected by that repayment, there is more than one individual that has shares to which EIS relief is attributable. It is based on section 303(1C) and (1D) of ICTA.

721.By referring to the relief which the individual obtains, subsection (2) caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

Section 228: Single issue treated as made partly in previous tax year

722.This section deals with a complication that can arise where section 224(2) applies to an issue of shares. The investor may obtain relief as if part of that share issue had taken place in the previous tax year; a different savings rate may apply in the previous tax year. It is based on sections 289B(5), 299(4) and 303(1C) of ICTA.

723.Setting out steps, involving apportionment of the repayment, in subsection (2) is a change because the source legislation is not explicit on how to deal with such a complication. See Change 49 in Annex 1.

724.By referring to the amount on which the individual obtains relief the subsection also caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

Section 229: Maximum relief not obtained for share issue

725.This section deals with the case where EIS relief on a subscription for shares was obtained for a tax year at a rate that is less than the savings rate for that tax year. It is based on sections 299(4) and 303(1C) of ICTA.

726.Subsection (1) caters for the case where an individual claims EIS relief on some, but not all, of the shares in respect of which the individual is eligible for relief. See the commentary on section 158 and Change 36 in Annex 1.

727.Subsection (2) lowers the rate at which section 224(2) recovers EIS relief on the repayment. The rate of recovery is reduced to the rate at which EIS relief was effectively obtained.

728.Subsections (3) and (4) are new and correspond to provisions in paragraph 56(7) and (8) of Schedule 15 to FA 2000 (corporate venturing scheme - value received by other persons). See Change 48 in Annex 1.

Section 230: Repayment of authorised minimum within 12 months

729.This section provides an exception to section 224 for certain repayments. It is based on section 303(9) of ICTA.

730.Subsection (1)(b) widens the exception in the source legislation and corresponds to paragraph 58(5)(b) of Schedule 15 to FA 2000 (corporate venturing scheme - repayment of authorised minimum within 12 months). See Change 51 in Annex 1.

Section 231: Restriction on withdrawal of relief under section 224

731.This section provides for section 224 to apply as if the repayment were a reduced, or zero, amount in cases where the repayment has led to a reduction of relief under Schedule 15 to FA 2000 (corporate venturing scheme). It is based on section 303A(1), (3) to (7) and (9) of ICTA.

Section 232: Acquisition of a trade or trading assets

732.This section withdraws relief from an individual in the circumstances set out in the section. It is based on section 302(1), (2) and (4) to (5) of ICTA.

733.The definition of “subsidiary” in section 302(5) of ICTA is not needed in sections 232 and 233 because they refer to “any qualifying subsidiary” and apply to period A.

734.Subsection (7) differs from the source legislation by not referring to a vocation. That is on the footing that an incorporated company cannot carry on a vocation.

Section 233: Acquisition of share capital

735.This section withdraws relief from an individual in the circumstances set out in the section. It is based on section 302(3), (4A), (4B) and (5) of ICTA.

Section 234: Relief subsequently found not to have been due

736.This section withdraws EIS relief in cases where the conditions for EIS relief, having been satisfied at the time it was obtained, cease to be satisfied. It is based on section 307(1) and (1A) of ICTA.

Chapter 7: Withdrawal or reduction of EIS relief: procedure

Overview

737.This Chapter deals with the withdrawal or reduction of EIS relief after it has been obtained along with related matters such as information requirements, interest and penalties.

Section 235: Assessments for the withdrawal or reduction of EIS relief

738.This section provides that an assessment must be made to withdraw or reduce EIS relief after it has been obtained. It is based on section 307(1) and (8A) of ICTA.

Section 236: Appeals against section 234(3)(b) notices

739.This section allows the issuing company to appeal to an independent tribunal in cases where the issuing company disagrees with a notice under section 234(3)(b). It is based on section 307(1B) and (1C) of ICTA.

Section 237: Time limits for assessments

740.This section sets out the time limits for making an assessment or giving a notice under section 234(3)(b). It is based on section 307(2), (5) and (8A) of ICTA.

Section 238: Cases where assessment not to be made

741.This section provides for two cases in which EIS relief will not be withdrawn or reduced. It is based on section 307(3), (4) and (8A) of ICTA.

742.Subsections (2) and (3) cover the case of events occurring after the individual has disposed of all the shares, on which reduction of relief is still possible, by way of bargains at arm’s length. An assessment cannot be made in relation to such events unless the individual is connected with the issuing company.

743.Subsection (2) limits, compared to the source legislation, the shares that need consideration in deciding whether an assessment cannot be made. See Change 52 in Annex 1.

Section 239: Date from which interest is chargeable

744.This section gives the date from which interest runs if EIS relief is withdrawn or reduced by an assessment. It is based on sections 299A(2) and 307(6) and (8A) of ICTA.

745.Subsection (1) contains a table setting out the dates that apply. Those dates depend on the provision on which the assessment is based.

746.The table does not include anything derived from section 307(6)(a) and (aa) and (7) of ICTA. Nor is there any material derived from 306(9) of ICTA. Those provisions do not fit with Self Assessment. See Change 53 in Annex 1.

747.Section 307(8) of ICTA is redundant as it refers to spent legislation and has not been rewritten.

Section 240: Information to be provided by the investor

748.This section requires an investor to provide information to an officer of Revenue and Customs if certain events occur after the investor has obtained EIS relief. It is based on section 310(1), (2A) and (9A) of ICTA.

Section 241: Information to be provided by the issuing company etc

749.This section requires the issuing company, or certain other persons, to provide information to an officer of Revenue and Customs if certain events occur which could withdraw or reduce EIS relief. It is based on section 310(2), (2A) and (9A) of ICTA.

750.Subsection (1) differs from section 310 of ICTA as it links the provision of a compliance statement to the requirement to give notice of certain events and it refers to events having an effect “if EIS relief had been obtained”. This follows the approach in paragraph 65(1) of Schedule 15 to FA 2000 (corporate venturing scheme). See Change 54 in Annex 1.

751.Subsection (4) also follows the corporate venturing scheme approach and differs from section 310 of ICTA It allows the issuing company to provide notice of one particular event within 60 days of coming to know of that event. See Change 54 in Annex 1.

752.Section 310(3) of ICTA is redundant as it refers to spent legislation and has not been rewritten.

Section 242: Power to require information where section 240 or 241 applies or could have applied

753.This section allows an officer to require information in certain cases. It is based on section 310(4) of ICTA.

Section 243: Power to require information in other cases

754.This section provides additional circumstances in which an officer can require information for the purposes of this Part. It is based on section 310(5) to (8) of ICTA.

Section 244: Obligations of secrecy

755.This section allows an officer of Revenue and Customs to give certain information to the issuing company. It is based on section 310(9) of ICTA.

Chapter 8: Supplementary and general

Overview

756.This Chapter deals with some special cases and definitions.

Section 245: Transfers between spouses or civil partners

757.This section provides for step in shoes treatment where shares are transferred between spouses or civil partners in specified circumstances. It is based on section 304(2) and (3) of ICTA.

758.Subsection (2)(b) and (d) and subsection (3) contain material, not in the source legislation, making clearer how the step in shoes treatment operates. See Change 55 in Annex 1.

Section 246: Identification of shares on a disposal

759.This section gives rules identifying which shares are disposed of. It is based on sections 299 (6) to (6D) and 304(4) of ICTA.

Section 247: Continuity of EIS relief where issuing company is acquired by new company

760.This section allows, in limited circumstances, the issuing company to become a wholly-owned subsidiary of another company without jeopardising EIS relief attributable to shares in the issuing company. It is based on section 304A(1), (2) and (6) to (8) of ICTA.

761.When this section applies, the exchange of shares and the issuing company becoming a subsidiary do not cause a reduction or withdrawal of EIS relief.

762.There is effectively step in shoes treatment given to the shares in the new company (which the shareholder receives in exchange for shares in the issuing company). The following two sections deal with that “step in shoes” treatment.

Section 248: Carry over of obligations etc where EIS relief attributed to new shares

763.This section gives the new company the rights and obligations, in relation to EIS relief, of the issuing company that has been acquired. It is based on section 304A(5) of ICTA.

Section 249: Substitution of new shares for old shares

764.This section treats the shareholder in the new company broadly as if actions etc taken in relation to the issuing company had been taken in relation to the new company. It is based on section 304A(3) and (4) of ICTA.

Section 250: Nominees and bare trustees

765.This section deals with the actions of nominees or bare trustees. It is based on section 311(1) to (2A), (4) and (5) of ICTA.

766.Subsection (2) adopts a different approach from that in section 311 of ICTA. Section 311 begins with the words “where eligible shares are held on a bare trust” and section 289(7) of ICTA defines “eligible shares” in terms of “new” shares. Subsection (2) begins with the words “if shares have been issued to a bare trust” and thereby makes it clear that these “new” shares are issued to bare trustees.

767.Elsewhere in this Part the concept of eligible shares being “new” has been dropped as redundant in the context of a subscription for shares. Subsection (3) reproduces the other conditions of “eligible” shares by applying section 173(2).

Section 251: Approved investment fund as nominee

768.This section removes the minimum subscription requirement for shares in a company and allows the investment to be treated as made earlier than was in fact the case where investment is made through an approved investment fund. It is based on section 311(2A) to (6) of ICTA.

769.The use in subsection (1) of “at a time when” makes it clear that the conditions in paragraphs (a) to (c) all have to be met but not in any prescribed order.

770.The certificate issued to the investor in an approved fund by the manager (see subsection (5)) is commonly known as an EIS 5, the form provided for this purpose by HMRC.

Section 252: Meaning of a company being “in administration” or “in receivership”

771.This section gives the meaning of a company being in administration (or receivership). It is based on section 312(2A) of ICTA.

772.The reference to Northern Ireland legislation in subsection (2)(a) takes into account amendments to the Insolvency (Northern Ireland) Order 1989 by the Insolvency (Northern Ireland) Order 2005. The reference in subsection (2)(b) to the law of a country or territory outside the United Kingdom accords with the insolvency law in force in Great Britain and in Northern Ireland. See Change 56 in Appendix 1.

Section 253: Meaning of “associate”

773.This section gives the meaning of “associate” in relation to a person. It is based on sections 312(1) and 417(3) and (4) of ICTA.

Section 254: Meaning of “disposal of shares”

774.This section extends references to a disposal of shares and treats some matters as if they were disposals of shares. It is based on section 312(3) of ICTA.

775.Section 136 of TCGA may treat the investor, in the case of certain reorganisations, as having exchanged “old shares” even though the investor continues to hold the same “old shares” as were held before the reorganisation (together with some “new shares”). This section treats that reorganisation as a disposal of the “old shares”.

Section 255: Meaning of “issue of shares”

776.This section gives a meaning to (a) an issue of shares and (b) an issue of shares to an individual. It is based on sections 289B(4) and 312(4A) of ICTA.

777.Section 289B(4)of ICTA, on which subsection (1)(b) is based, is subject to the rule in section 289B(5).

778.Section 289B(5) of ICTA has been rewritten in section 201(6) for the purposes of that section and in other sections where that rule is relevant. So subsection (2) makes subsection (1)(b) subject to section 201(6) and also to the other sections where that rule is applied.

779.The exception for section 289A(6) and (7) of ICTA was inserted into section 289B(4) of ICTA by FA 2004 to ensure that the wording of those subsections did not invoke the interpretation in section 289B(4) and instead was linked clearly to the interpretation in section 312(4A) of ICTA. To achieve the same end the formulation in section 176(1) is directly linked to the interpretation in section 255(1)(a), (based on section 312(4A) of ICTA).

Section 256: Meaning of “the termination date”

780.This section gives the meaning of “the termination date”. It is based on section 312(1) and (1ZA) of ICTA.

Section 257: Minor definitions etc

781.This section contains more definitions. It is based on sections 289(9), 291B(10), 293(3A), (6D) and (8AA), 297(5A), 308(2) and 312(1), (2), (4), (4B), (5) and (6) of ICTA.

782.The definitions of “group”, “group company”, “parent company” and “single company” are new.

783.These new labels rely on the way “qualifying subsidiary” is defined in this Part. The definitions of “subsidiary” and “51% subsidiary” in section 312(1) of ICTA have not been reproduced. Instead “qualifying subsidiary” is explained in section 191 and “51% subsidiary” in section 989.

784.The definition of “51% subsidiary” in section 312(1) of ICTA adds a condition that the definition applies for a particular period (period A in the sections). The aim has been to reproduce the same effect of this definition without carrying over the same level of complication. (See the commentary on section 168(5).)

785.In some cases the definition of a term included in the Act-wide index of defined expressions in Schedule 4 is distinguished from the particular use of the term in this Part.

786.For example, the definition of “control” in subsection (3) sets out the references to control which are explained by section 416(2) to (6) of ICTA. The entry in Schedule 4, which refers to the meaning in section 995 has a signpost to the exceptions in this subsection.

787.The two references to the “reduction” of relief in subsection (7)(b) are new: section 312(6) of ICTA refers only to the withdrawal of relief.

788.The word “withdrawal” in EIS is used both for the occasions for a clawback of relief (in particular in the provisions in Chapter 6) and for the procedure for withdrawing relief which is set out in Chapter 7.

789.Although the word “withdrawal” can cover both a full and a partial withdrawal of relief, this is made explicit in sections 307 and 310 of ICTA by section 307(8A) and section 310(9A). These subsections note that “references in this section to the withdrawal of relief include its reduction”. This has been handled in this Part by spelling out, wherever relevant, that the rules encompass both the reduction and withdrawal of relief.

790.Making reference to the reduction as well as the withdrawal of relief in subsection (7) ensures that there is consistency with the language used for the occasion of a clawback and with sections 307 and 310 of ICTA, which are concerned with the procedure for withdrawing relief.

791.Subsection (8) is new. Paragraph 102(7)(a) of Schedule 15 to FA 2000 (corporate venturing scheme) contains a similar provision.

792.The subsection interprets the reference to requirements being met “for the time being” in section 204(1) (compliance certificates) and section 205(1) (compliance statements), derived from section 306 of ICTA. At the time the compliance certificate is issued by the issuing company it cannot be known if all the EIS requirements will be met in the relevant period.

793.The interpretation addresses this by treating conditions that must be met over a period of time as met at times before that period has ended (provided the condition then remains capable of being met). See Change 57 in Annex 1.

Part 6: Venture capital trusts

Overview

794.This Part provides income tax reductions to individuals who subscribe money for full risk shares in certain quoted companies that, in turn, mainly provide additional equity and loan finance to smaller unquoted trading (or certain other) companies with which the quoted company is not connected.

795.The structure of the Part is as follows:

• An overview and a definition of venture capital trust (“VCT”) (Chapter 1);

• The tax reduction and related matters (Chapter 2);

• Conditions for approving a company for the purposes of this Part and related matters (Chapter 3);

• The meaning of “qualifying holding” (Chapter 4);

• Powers to make regulations relating to VCT winding up or mergers (Chapter 5); and

• Supplementary provisions (Chapter 6).

796.In contrast to the enterprise investment scheme (EIS), section 1034(1) (commencement) applies to the VCT scheme: see the overview to Part 5. The minor changes made to the law in this Part are the subject of transitional provisions in Part 8 of Schedule 2.

Chapter 1: Introduction

Overview

797.This Chapter gives an overview of the Part, labels certain concepts and gives signposts to material contained elsewhere.

Section 258: Overview of Part

798.This section says that the relief dealt with by this Part (“VCT relief”) is a tax reduction and it provides a navigational aid regarding the content of later Chapters. It is based on section 332A of ICTA.

Section 259: Venture capital trusts and VCT approvals

799.This section defines “venture capital trust”, “VCT” and “VCT approval”. It is based on section 842AA(1) of ICTA and paragraphs 7(4) and 17 of Schedule 33 to FA 2002.

Section 260: Other tax reliefs relating to VCTs

800.This section provides signposts to other tax reliefs relating to VCTs. It is new.

Chapter 2: VCT relief

Overview

801.This Chapter:

• identifies who is eligible for VCT relief and on what amounts;

• identifies the claims to VCT relief that may be made;

• quantifies the entitlement to the tax reduction;

• deals with cases in which VCT relief is not available or will be reduced or withdrawn; and

• deals with other matters (information and powers to make regulations).

Section 261: Eligibility for relief

802.This section identifies cases in which, and amounts in respect of which, an individual is eligible for VCT relief for a tax year. It is based on paragraph 1(1), (2), (4), (9) and (10) of Schedule 15B to ICTA.

Section 262: Entitlement to claim relief

803.This section provides for an individual to claim VCT relief for a tax year. It is based on paragraph 1(1) and (3) of Schedule 15B to ICTA.

804.Subsection (2) explicitly provides that a claim by the individual does not have to extend to all the shares by reference to which such eligibility exists for the tax year. This is implied by paragraph 1(3) of Schedule 15B to ICTA which simply sets a limit on a claim for relief.

Section 263: Form and amount of relief

805.This section specifies that a claim for VCT relief gives entitlement to a tax reduction and quantifies the amount of that entitlement. It is based on paragraph 1(5) of Schedule 15B to ICTA.

806.Subsection (1) is expressed in terms of the individual’s entitlement to a tax reduction. Sections 27 and 29 contain provisions about how effect is given to the entitlement to a reduction and how the actual reduction is quantified.

Section 264: No entitlement to relief if there is a linked loan

807.This section removes an individual’s entitlement to VCT relief by reference to shares if certain loans are made, as described in this section, to the individual or an associate of the individual. It is based on paragraph 2 of Schedule 15B to ICTA.

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

808.This section removes entitlement to VCT relief by reference to shares if, before the relief is obtained, circumstances have arisen that would cause the relief to be withdrawn or reduced. It is based on paragraph 1(8) of Schedule 15B to ICTA.

809.This and other sections follow the terminology used by other venture capital schemes and refer to relief being “obtained” where paragraph 1(8) refers, and other paragraphs in Schedule 15B to ICTA refer, to relief being “given”.

Section 266: Loss of relief if shares disposed of within 5 years

810.This section reduces or withdraws any VCT relief obtained by reference to shares that are disposed of within five years of their issue. It is based on paragraph 3(1) to (4) and (8) of Schedule 15B to ICTA.

Section 267: Transfers of shares between spouses or civil partners

811.This section prevents loss of VCT relief occurring where the shares in question are disposed of between spouses or civil partners who are living together at the time of disposal. It also provides for step-in-shoes treatment, for VCT relief purposes, in respect of shares transferred between those spouses or civil partners. It is based on paragraph 3(5) to (7) of Schedule 15B to ICTA.

Section 268: Loss of relief if VCT approval withdrawn

812.This section treats certain shares in a company as disposed of, for VCT relief purposes, at the time VCT approval is withdrawn from a company. It is based on paragraph 3(9) of Schedule 15B to ICTA.

813.Subsection (1) does not apply where section 281(3) treats VCT approval as never having been given to a company. In those cases there never was any entitlement to VCT relief in respect of the company’s shares and any relief that was obtained is withdrawn under section 269.

814.Subsection (2) has provisions about the timing (immediately before loss of VCT approval) and nature (not arm’s length) of any disposal of shares that is treated as taking place. These provisions ensure that any VCT relief recapture (where the shares were issued less than five years before loss of approval) covers all the VCT relief obtained in respect of the shares concerned.

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

815.This section withdraws any VCT relief that has been obtained but which should not have been obtained. It is based on paragraph 4(1) of Schedule 15B to ICTA.

Section 270: Assessment on withdrawal or reduction of relief

816.This section provides that withdrawal or reduction of VCT relief, under the preceding sections, is by way of assessment for the tax year for which the relief was obtained. It is based on paragraph 4 of Schedule 15B to ICTA.

Section 271: Provision of information

817.This section, in connection with VCT relief, provides for cases where information must be given to an officer of Revenue and Customs and cases where the officer may require information. It is based on paragraphs 1(11) and 5 of Schedule 15B to ICTA.

818.Subsection (4) requires a VCT to give notice to an individual if section 261(4) (issue of own shares) prevents the individual from being eligible for relief. Section 261(4) contains a signpost to this requirement.

Section 272: Regulations as to procedure etc

819.This section allows the Treasury to make regulations about certain aspects of VCT relief and other reliefs related to VCTs. It is based on section 73(1) and (2) of FA 1995.

820.This power has been used in relation to the Venture Capital Trust Regulations 1995 (SI 1995/1979).

Section 273: Interpretation of Chapter

821.This section provides definitions of certain terms used in the Chapter. It is based on paragraph 6(1) and (3) of Schedule 15B to ICTA.

822.The section removes a possible doubt as to the effectiveness of the amendment made by section 73(1)(b) of FA 1998 to the definition of “eligible shares” in paragraph 6(1) of Schedule 15B to ICTA. See Change 58 in Annex 1. Part 8 of Schedule 2 to this Act contains a provision to preserve this possible doubt as to the meaning of eligible shares for shares issued before 6 April 2007.

Chapter 3: VCT approvals

Overview

823.This Chapter:

• lists the conditions relevant to VCT approval;

• sets out alternative bases on which VCT approval may be given and the time from which VCT approval has effect;

• deals with the withdrawal of VCT approval and the time from which withdrawal has effect; and

• deals with related matters (including powers to make regulations for certain matters).

Section 274: Requirements for the giving of approval

824.This section sets out the conditions which must be met before the Commissioners for Her Majesty’s Revenue and Customs are able to approve a company as a VCT. It is based on section 842AA(2) and (3) of ICTA.

825.Subsection (1) specifies the accounting periods in relation to which the conditions have to be met.

826.Subsection (2) gives labels to each of the conditions in section 842AA(2) of ICTA, changes the order in which they appear and uses a tabular layout as an aid to navigation.

827.References in the conditions to qualifying holdings and eligible shares are explained in section 285(1) and (2).

828.Subsection (3) provides a signpost to the provisions that contain material supplementing some of the conditions listed in the table.

Section 275: Alternative requirements for the giving of approval

829.This section allows the Commissioners to approve a company as a VCT if they are satisfied that conditions, which are not met in relation to the company’s most recent accounting period, will be met in certain other accounting periods. It is based on section 842AA(4) of ICTA.

830.Most approvals are in practice given under this provision.

Section 276: Conditions relating to income

831.This section supplements the nature of income condition and the income retention condition. It is based on section 842(1AB) and (2A) to (2C), section 842AA(11) of ICTA and paragraph 40 of Schedule 26 to FA 2002.

832.Section 842AA(11)(za) and (b) of ICTA relies on the user adapting material that applies to similar conditions in section 842 (investment trusts). This section eliminates the need to refer to section 842 of ICTA. In addition subsections (1)and (2) rewrite paragraph 40 of Schedule 26 to FA 2002 which deals with derivative contracts in relation to VCTs.

Section 277: The 15% holding limit condition

833.This section effectively restricts the times at which the 15% holding limit condition is applied in relation to investments in a company and provides supplementary material relating to that condition. It is based on section 842(1A), (2), (3) and (4) and section 842AA(11) of ICTA.

834.Section 842AA(11)(a) and (c) of ICTA applies certain provisions in section 842 (investment trusts) to section 842AA(2)(d). This section eliminates the need to refer to section 842 of ICTA.

835.Subsection (1) is based on section 842(3)(b) of ICTA, which provides that if an addition is made to a holding, the holding is treated as acquired at that time. Subsection (1) is also based on section 842(2)(b). The effect is that the 15% holding condition only applies on the occasion or occasions when the holding is acquired or when it is added to.

836.The underlying approach is that the 15% holding limit condition is applied in relation to a company only at times when shares or securities are acquired in that company. This prevents the condition being breached solely as a result of fluctuations in the value of investments.

Section 278: Conditions relating to value of investments: general

837.This section provides rules about the values of holdings of investments of particular descriptions. Those rules are used in applying the 15% holding limit condition, the 70% qualifying holdings condition and the 30% eligible shares condition. It is based on section 842(3) and (4) and section 842AA(5) and (11) of ICTA.

838.The underlying approach is that there is a valuation (or revaluation) of investments of any particular description only when investments of that description are acquired. In that way the three conditions will not cease to be satisfied solely because of later fluctuations in the value of investments.

839.The section makes it clear that the rules about the valuation of a holding in this section apply equally to the 15% holding limit condition, the 70% qualifying holdings condition and the 30% eligible shares condition. See Change 59 in Annex 1.

Section 279: Conditions relating to value of investments: qualifying holdings

840.This section provides what is to be taken as the value of shares or securities acquired on certain exchanges or conversions if those shares or securities are treated as meeting some of the conditions in Chapter 4 (qualifying holdings). It also provides power to make regulations about the value of shares or securities in certain cases. It is based on section 842AA(5AA) to (5AE) of ICTA.

841.An exchange has to meet the requirements of section 326 (restructuring arrangements) and a conversion has to meet the requirements of section 329 (conversion of convertible shares and securities).

842.The power to treat conditions in Chapter 4 as met under section 330 (power to facilitate company reorganisations etc involving exchange of shares) is extended to encompass the valuation of shares and securities involved in reorganisations.

Section 280: Conditions relating to qualifying holdings and eligible shares

843.This section provides a period of grace during which the proceeds from most further issues of ordinary shares by a VCT are disregarded in determining whether the VCT meets the 70% qualifying holdings condition and the 30% eligible shares condition. It is based on section 842AA(5A) and (5B) of ICTA and paragraph 11(1), (2) and (4) of Schedule 33 to FA 2002.

844.The underlying rationale is to give the VCT a reasonable amount of time to invest the proceeds of the further share issue in qualifying holdings before taking those proceeds into account for the 70% qualifying holdings condition and the 30% eligible shares condition. Without any period of grace those conditions might deter VCTs from issuing further share capital to raise funds for investment in qualifying holdings.

845.The section also contains powers to make regulations varying the treatment that would otherwise apply under this section. These powers have been used in making the Venture Capital Trust (Winding up and Mergers) (Tax) Regulations 2004 (SI 2004/2199).

Section 281: Withdrawal of VCT approval of a company

846.This section sets out cases in which a company’s approval as a VCT may be withdrawn and the time from which the withdrawal has effect, and contains supplementary material concerning the time limits for assessing tax consequent on the withdrawal. It is based on section 842AA(6) to (10) of ICTA.

Section 282: Withdrawal of VCT approval in cases for which provision made under section 280(3)

847.This section gives the Treasury power to make regulations that provide, in certain cases, for withdrawal of VCT approval to have effect before notice of withdrawal is given. It is based on paragraph 12 of Schedule 33 to FA 2002.

848.The cases are limited to those where, but for regulations under section 280(3), section 280(2) (disregard of money raised by further share issue) would have prevented withdrawal of approval.

Section 283: Time as from which VCT approval has effect

849.This section explains when a VCT approval takes effect. It is based on section 842AA(1) of ICTA.

850.Paragraph (a) of section 842AA(1) of ICTA, which refers to an approval given in 1995-96, has not been rewritten.

851.Section 842AA(1) and (4)(b) of ICTA, and regulation 4(2)(b) of SI 1995/1979, make it clear that the date from which approval has effect is not necessarily the date on which approval is given. Subsection (3) notes that an approval can be forward-dated as well as back-dated.

Section 284: Power to make regulations as to procedure

852.This section gives the Treasury powers to make regulations regarding VCT approvals, the obligations of VCTs in relation to certain matters and the persons liable to account for tax consequent on withdrawal of VCT approval. It is based on section 73(2) of FA 1995.

853.This power has been used in relation to the Venture Capital Trust Regulations 1995 (SI 1995/1979).

Section 285: Interpretation of Chapter

854.This section provides various definitions for this Chapter. It is based on section 842AA(11A) to (14) of ICTA.

855.Subsections (4) to (6), based on section 842AA(11A) to (11C) of ICTA, provide an interpretation of references to a company’s investments. Paragraph 8 of Schedule 14 to FA 2006 does not extend this interpretation explicitly to the definitions in section 842(3) of ICTA. Subsection (4) of this section applies the interpretation to Chapter 3 as a whole. See Change 59 in Annex 1.

Chapter 4: Qualifying holdings

Overview

856.One of the conditions relating to VCT approval is that the investing company holds at least 70% of its investments in qualifying holdings (the 70% qualifying holdings condition in section 274). This Chapter sets out the requirements that need to be met for an investment to be a qualifying holding.

Section 286: Qualifying holdings: introduction

857.This section describes the ground-rules for what is a qualifying holding. It is based on paragraph 1 of Schedule 28B to ICTA.

858.Subsection (1) introduces certain labels. The company invested in is described as “the relevant company”, the shares or securities are “the relevant holding” and in this Chapter the company that makes the investments is described as “the investing company”.

859.Where there are shared provisions, the order matches that in Part 5 Chapter 4 (EIS: the issuing company) as far as possible.

860.Subsections (4) and (5) provide that in this Chapter, if only part of the money raised by a relevant holding meets the requirements of section 287, section 293 and section 294, the holding is treated as two separate holdings.

Section 287: The maximum qualifying investment requirement

861.This section requires that the relevant holding does not represent an investment that exceeds “the maximum qualifying investment”. It is based on paragraph 7 of Schedule 28B to ICTA.

862.The maximum qualifying investment is £1m, see subsection (2).

863.Subsection (3)(a) makes it explicit that if the maximum qualifying investment is exceeded, the £1m can be included as a qualifying holding and the shares or securities which represent the excess over the maximum qualifying investment are not regarded as part of the relevant holding.

864.Subsection (3)(b) ensures that there can be no double counting of an amount that represented such an excess. See Change 60 in Annex 1.

865.Subsections (4) and (5) provide a rule for attributing shares or securities subsequently disposed of to the part of an investment that is in excess of the maximum qualifying investment.

866.Subsections (6) and (7) set out the consequences if the trade which meets the requirements of section 291(1) is carried on by the relevant company in a partnership or joint venture. The £1m is divided by the number of the members of the partnership or the parties to the joint venture. In subsection (6)(b) the words “as such” after “the joint venture” in paragraph 7(4)(b) of Schedule 28B to ICTA have not been reproduced, as they do not add anything.

867.In subsection (8), which sets out what the relevant period is, it is made clear that the period ends with the issue of the relevant holding.

Section 288: The no guaranteed loan requirement

868.This section requires that the relevant holding does not include any securities that are backed up by a “guaranteed loan” and explains what is meant by this term. It is based on paragraph 10A of Schedule 28B to ICTA.

Section 289: The proportion of eligible shares requirement

869.This section requires a certain proportion of an investment in a relevant company to be in eligible shares. It is based on paragraph 10B of Schedule 28B to ICTA.

870.Subsections (2) and (3) set out rules about the value of shares in or securities of a company. The underlying approach is to value shares and securities at their value when acquired so that the requirement will not cease to be satisfied purely because of later fluctuations in the value of those investments.

871.Subsection (4) ensures that the value of the investment cannot be less than its initial cost price.

Section 290: The trading requirement

872.This section requires that the relevant company exists essentially for the purpose of carrying on qualifying trades or is a parent company of a group that carries on qualifying activities. It is based on paragraph 3(2) and (6) to (11) of Schedule 28B to ICTA.

873.A parent company, a group and a group company are defined in section 332.

874.Paragraph 3(6)(c) of Schedule 28B to ICTA is rewritten in subsection (1)(b) andsubsection (3). The requirements in paragraph 3(6)(b) and (c) are covered respectively by the definition of “parent company” in section 332 and by section 298.

875.Subsections (2) and (6) provide that certain requirements can be met in relation to a company that is not part of the group at the time the shares are issued. See Change 61 in Annex 1. The provision for property used for R&D in subsection (5)(d) has been extended. See Change 41 in Annex 1.

876.The words “capable of” have been omitted in subsection (7), rewriting the definitions of “incidental purposes” and of “mainly trading subsidiary” in paragraph 3(2)(a) and (11) of Schedule 28B to ICTA. The intention is to make the definitions simpler to interpret: in practice the test will not change.

877.The label “non-qualifying activities” in subsection (1)(b) is defined in subsection (7). Paragraph (a) in subsection (7) refers to excluded activities. These are listed in section 303. Section 305 provides a let-out for certain leasing of ships from being treated as a non-qualifying activity.

878.The way that subsection (7) interprets non-qualifying activities means that no distinction is made between the let-out in section 305(4), derived from paragraph 4(7)(a) to (d) of Schedule 28B to ICTA, and the let-out in section 305(7), derived from the final words of paragraph 4(7). This contrasts with paragraph 3(8)(b) of Schedule 28B to ICTA. See Change 43 in Annex 1.

879.There is no reference to R&D in the definition of non-qualifying activities in subsection (7)(b), in contrast to the definition in section 181(8)(b) in Part 5 (Enterprise investment scheme). This is because in VCT the carrying on of R&D is treated as the carrying on of a trade in section 300(2).

Section 291: The carrying on of a qualifying activity requirement

880.This section requires that the relevant company carries on, or certain of its subsidiaries carry on, a qualifying activity at all times from the issue of the relevant holding to the time in question. It is based on paragraph 3(3) to (5B) of Schedule 28B to ICTA.

881.Subsection (1) introduces the term “qualifying activity” to cover the activities in paragraph 3(3)(a) and (b) of Schedule 28B to ICTA and these activities are set out in subsections (2) and (3). This should make it easier for persons, who are not relying on subsection (3) to meet any of the requirements in this Chapter, to disregard the material in subsections (3) to (6).

882.Subsection (8) is new. The change enables the requirement in subsection (3) to be met in relation to a company that is not a qualifying 90% subsidiary at the time the shares are issued. See Change 61 in Annex 1.

Section 292: Ceasing to meet requirements because of administration or receivership

883.This section provides a disregard from sections 290(1) and 291(1) where a company is in administration or receivership and there is no tax avoidance purpose. It is based on paragraph 11A(1) and (3) of Schedule 28B to ICTA.

884.The meanings of “in administration” and “in receivership” are provided by section 331.

Section 293: The use of the money raised requirement

885.This section sets out the times when, and extent and purpose for which, the money raised by the issue of the relevant holding must be intended to be employed or actually employed. It is based on paragraph 6(1) to (2AA) and (3) of Schedule 28B to ICTA.

Section 294: The relevant company to carry on the relevant qualifying activity requirement

886.This section contains requirements as to the persons who may carry on the relevant qualifying activity by reference to which the conditions in the preceding section have been met. It is based on paragraph 6(2AB) to (2AG) of Schedule 28B to ICTA.

887.Subsection (1) links the relevant qualifying activity that it refers to with the use of the money raised from the issue of shares in question. See Change 62 in Annex 1.

Section 295: The unquoted status requirement

888.This section requires the relevant company to be unquoted and defines an unquoted company. It is based on paragraph 2 of Schedule 28B to ICTA.

889.The words in brackets in paragraph 2(1), “whether or not it is resident in the United Kingdom” are not rewritten. The words do not add anything to the tests in section 291.

890.Paragraph 2(5) of Schedule 28B to ICTA which concerns orders made by the Board is not rewritten in this section. It is instead covered by section 1014 which is based on section 828 of ICTA.

Section 296: The control and independence requirement

891.This section requires that:

• any company that the relevant company controls (on its own or together with connected persons) is a qualifying subsidiary of the relevant company;

• the relevant company is not controlled by another company (on its own or together with connected persons); and

• there are no arrangements which could lead the relevant company to fail either of these tests.

It is based on paragraph 9 of Schedule 28B to ICTA.

Section 297: The gross assets requirement

892.This section sets out the limits that apply to the value of a relevant company’s gross assets before and after a share issue. It is based on paragraph 8 of Schedule 28B to ICTA.

893.The requirement differentiates between a “single company” and a “parent company”. Both these terms are defined in section 332.

894.Subsection (3) sets out more clearly what is meant in relation to a group of companies by the “aggregate value at that time of the gross assets” in paragraph 8(2)(b) of Schedule 28B to ICTA. A similar wording is used in paragraph 12(3) of Schedule 5 to ITEPA (enterprise management incentives).

Section 298: The qualifying subsidiaries requirement

895.This section requires that any subsidiary of the relevant company must be a qualifying subsidiary. It is based on paragraphs 3(6) and 10(1) of Schedule 28B to ICTA.

Section 299: The property managing subsidiaries requirement

896.This section requires that any property managing subsidiary of the relevant company must also be its qualifying 90% subsidiary. It is based on paragraph 10ZA of Schedule 28B to ICTA.

897.In paragraph 10ZA(3) “land” and “property deriving its value from land” take the meaning in section 776 of ICTA. Subsection (3), applying for the purposes of subsection (2) of the rewritten section, provides the definition of “property deriving its value from land”. “Land” itself is not defined in this Act and instead relies on the definition in Schedule 1 to the Interpretation Act 1978. See the commentary on section 772.

Section 300: Meaning of “qualifying trade”

898.This section explains the term “qualifying trade”. It is based on paragraph 4(1), (2) and (9) and on paragraph 5(4) of Schedule 28B to ICTA.

899.In subsection (1)(b) there is a reference to excluded activities. Excluded activities are set out in section 303.

900.Subsection (2) provides that the carrying on of any R&D activities is treated as the carrying on of a qualifying trade in certain circumstances. Paragraph (b) of subsection (2) now extends the cases in paragraph (a) in which this treatment occurs. See Change 41 in Annex 1.

901.Subsection (3) provides that preparing to carry out R&D does not count as preparing to carry on a qualifying trade. See Change 63 in Annex 1.

Section 301: Meaning of “qualifying 90% subsidiary”

902.This section gives the meaning of “qualifying 90% subsidiary”. It is based on paragraph 5A of Schedule 28B to ICTA.

903.The label “qualifying 90% subsidiary” copies EIS section 190 and replaces “the relevant qualifying subsidiary”.

Section 302: Meaning of “qualifying subsidiary”

904.This section says what “qualifying subsidiary” means. It is based on paragraph 10 of Schedule 28B to ICTA.

905.The term “51% subsidiary” in this paragraph and elsewhere takes its meaning from the definition in section 989. This provides a signpost to section 838 of ICTA.

Section 303: Meaning of “excluded activities”

906.This section gives the meaning of “excluded activities”. It is based on paragraph 4(2) of Schedule 28B to ICTA.

907.The meaning of excluded activities is needed to determine whether a trade is a qualifying trade and the extent to which the business of a group includes non-qualifying activities.

908.Subsection (2) indicates where further detail can be found on certain of the activities listed in subsection (1).

Section 304: Excluded activities: wholesale and retail distribution

909.This section supplements section 303(1)(b). It is based on paragraph 4(3) and (4) of Schedule 28B to ICTA.

910.Subsection (2) makes it clear that there are two sets of determinants, one set establishing what is a trade of wholesale and retail distribution and the other what is an ordinary trade of wholesale and retail distribution.

911.The words “or exposed” before “for sale” have been added in subsection (4). This is intended to reflect the normal description of a trade of retail distribution in United Kingdom statute law.

912.Subsection (5)(b) refers to “the trader” rather than “the company” which is referred to in paragraph 4(3)(c)(ii) of Schedule 28B to ICTA. See Change 45 in Annex 1.

Section 305: Excluded activities: leasing of ships

913.This section supplements section 303(1)(d). It is based on paragraph 4(7) and (8) and paragraph 5(1) of Schedule 28B to ICTA.

914.Subsection (2) uses as its model paragraph 18(2) of Schedule 5 to ITEPA (enterprise management incentives). This additional material, which is not in the source legislation, makes it clear that the requirements of subsection (4) do not have to be met in relation to offshore installations and pleasure craft.

915.Change 43 in Annex 1 applies for the purposes of subsection (7). See the commentary on section 290(7).

Section 306: Excluded activities: receipt of royalties and licence fees

916.This section supplements section 303(1)(e). It is based on paragraph 4(5) to (6D) of Schedule 28B to ICTA.

Section 307: Excluded activities: property development

917.This section supplements section 303(1)(g). It is based on paragraph 5(1), (5) and (7) of Schedule 28B to ICTA.

Section 308: Excluded activities: hotels and comparable establishments

918.This section supplements section 303(1)(j). It is based on paragraph 4(3A) and paragraph 5(6) of Schedule 28B to ICTA.

Section 309: Excluded activities: nursing homes and residential care homes

919.This section supplements section 303(1)(k). It is based on paragraph 4(3A) and paragraph 5(1) of Schedule 28B to ICTA.

Section 310: Excluded activities: provision of services or facilities for another business

920.This section treats the provision of services or facilities as excluded activities if:

• the services or facilities are provided to businesses which themselves consist largely of excluded activities; and

• the specified control requirements exist.

It is based on paragraph 4(2) and paragraph 5(2) to (4) of Schedule 28B to ICTA.

921.The section is written in terms of a business. The way the definition of a trade in paragraph 5(4), governing paragraph 4 and 5 of Schedule 28B, is applied within those paragraphs has been simplified. See Change 64 in Annex 1.

Section 311: Power to amend Chapter

922.This section allows the Treasury to make orders amending the provisions mentioned in the section. It is based on paragraph 12 of Schedule 28B to ICTA.

Section 312: Winding up of the relevant company

923.This section provides that if the requirements of this Chapter would be met but for the winding up of the relevant company, they are treated as met. The winding up must be commercial and not entered into for tax avoidance purposes. It is based on paragraph 11 of Schedule 28B to ICTA.

924.This supplements the provisions on winding up in section 294(4) and (5) in relation to the relevant company or any other company (in this case this extends to a dissolution too) and in section 302(3) in relation to a qualifying subsidiary or any other company.

Section 313: Interpretation of Chapter

925.This section provides an interpretation for certain terms used in this Chapter. It is based on paragraphs 1(1), 5(4) and 13 of Schedule 28B to ICTA.

926.Subsection (3) excepts references to a trade in certain sections in this Chapter from the extended meaning of “trade” in section 989, based on the definition in section 832(1) of ICTA. See the commentary on section 310 and Change 64 in Annex 1.

Chapter 5: Powers: winding up and mergers of VCTs

Overview

927.This Chapter gives the Treasury power to make regulations for cases where a VCT is liquidated or two or more VCTs merge. Any such regulations will mainly ensure that reliefs available to shareholders in a VCT are “protected” in the cases that they cover.

928.These powers have been used in making the Venture Capital Trust (Winding up and Mergers) (Tax) Regulations 2004 (SI 2004/2199).

Section 314: Power to treat VCT-in-liquidation as VCT

929.This section allows regulations to treat a VCT-in-liquidation as if it remained a VCT and withdrawal of its VCT approval as taking place at a time different to when withdrawal actually takes place. It is based on paragraph 2 of Schedule 33 to FA 2002.

Section 315: Power to treat conditions for VCT approval as met with respect to VCT-in-liquidation

930.This section allows regulations to treat a VCT-in-liquidation as if it met conditions in section 274(2). It is based on paragraph 3 of Schedule 33 to FA 2002.

Section 316: Power to make provision about distributions by VCT-in-liquidation

931.This section allows regulations to apply, disapply or modify the way in which tax enactments affect distributions by a VCT-in-liquidation. It is based on paragraph 4 of Schedule 33 to FA 2002.

Section 317: Power to facilitate disposal to VCT by VCT-in-liquidation

932.This section allows regulations to be made that have the effect of treating certain holdings acquired by a VCT, from a VCT-in-liquidation, as if those holdings were qualifying holdings of the acquiring VCT. It is based on paragraph 5 of Schedule 33 to FA 2002.

Section 318: Power in respect of periods before and after winding up

933.This section extends the powers in the preceding sections to periods before and after a company becomes a VCT-in-liquidation. It is based on paragraph 6 of Schedule 33 to FA 2002.

Section 319: Sections 314 to 318: supplementary

934.This section supplements the preceding sections. It is based on paragraph 7(1), (2) and (5) of Schedule 33 to FA 2002.

Section 320: Meaning of “VCT-in-liquidation”

935.This section provides a definition and allows regulations to specify when winding up starts or ends in certain cases. It is based on paragraph 1 of Schedule 33 to FA 2002.

Section 321: Power to facilitate mergers of VCTs

936.This section, in the case of certain mergers of VCTs, allows regulations to be made covering matters set out in section 322. It is based on paragraph 8(1) and (2) of Schedule 33 to FA 2002.

Section 322: Provision that may be made by regulations under section 321

937.This section sets out what regulations under section 321 may provide. It is based on paragraph 9 of Schedule 33 to FA 2002.

Section 323: Meaning of “merger” and “successor company”

938.This section defines certain terms for the purposes of the Chapter. It is based on paragraph 10 of Schedule 33 to FA 2002.

Section 324: Regulations under Chapter

939.This section sets out further matters that may be dealt with by regulations under this Chapter. It is based on paragraph 16 of Schedule 33 to FA 2002.

Section 325: Interpretation of Chapter

940.This section defines some terms used in this Chapter. It is based on paragraph 17 of Schedule 33 to FA 2002.

Chapter 6: Supplementary and general

Overview

941.This Chapter:

• deals with two cases in which a company’s holding may be treated as a qualifying holding (where it would not otherwise be);

• gives power to make regulations having a similar effect in other cases; and

• contains supplementary material.

Section 326: Restructuring to which section 327 applies

942.This section sets out the conditions for section 327 to apply (treating some requirements in Chapter 4 (qualifying holdings) as met) where a company is issued with a holding in a new company (Newco) in exchange for a qualifying holding in another company (Oldco). The section also sets out limitations on such application of section 327. It is based on paragraph 10C(1) to (3), (11) and (13) of Schedule 28B to ICTA.

943.These provisions are similar to provisions in Part 5 (Enterprise investment scheme) under which, assuming that EIS relief is attributable to shares in Oldco held by an individual, the EIS relief would carry over to the shares in Newco received by the individual in exchange (see section 247). Companies do not get EIS relief or VCT relief for a holding in Oldco. But the company’s holding in Oldco may represent a “qualifying holding” and thus influence the VCT approval of that company. This section may permit the company’s holding in Newco (received in exchange for the holding in Oldco) to be treated as a qualifying holding.

Section 327: Certain requirements of Chapter 4 to be treated as met

944.This section sets out the requirements of Chapter 4 (qualifying holdings) that are treated as met, and the periods for which they are so treated, in cases to which this section applies. It is based on paragraph 10C(4) to (10) of Schedule 28B to ICTA.

945.If this section applies, a holding in Newco may be treated as a qualifying holding of a company where that holding has been received in exchange for a qualifying holding in Oldco.

Section 328: Supplementary

946.This section extends the previous two sections so that they apply to securities as well as shares and defines certain terms. It is based on paragraph 10C(12) and (14) to (17) of Schedule 28B to ICTA.

Section 329: Conversion of convertible shares and securities

947.This section sets out cases in which shares in company A, acquired by company B on the conversion of other shares or securities in company A, can be treated as meeting certain requirements in Chapter 4 (qualifying holdings). It is based on paragraph 10D of Schedule 28B to ICTA.

948.If this section applies, the shares in company A acquired on the conversion may be treated as part of company B’s qualifying holdings.

Section 330: Power to facilitate company reorganisations etc involving exchange of shares

949.This section allows regulations to be made which treat certain requirements in Chapter 4 (qualifying holdings) as met where company reorganisations involve the replacement of shares or securities that meet those requirements with shares or securities that do not. It is based on paragraph 11B of Schedule 28B to ICTA.

950.This power has been used in making the Venture Capital Trust (Exchange of Shares and Securities) Regulations 2002 (SI 2002/2661).

Section 331: Meaning of a company being “in administration” or “in receivership”

951.This section explains references to a company being in administration or in receivership. It is based on paragraphs 6(2AH), 10(4C) and 11A(2) of Schedule 28B to ICTA.

952.Paragraph 11A(1) and (3) of Schedule 28B to ICTA is rewritten in section 292.

953.The reference to Northern Ireland legislation in subsection (2)(a) takes into account amendments to the Insolvency (Northern Ireland) Order 1989 by the Insolvency (Northern Ireland) Order 2005. The reference in subsection (2)(b) to the law of a country or territory outside the United Kingdom accords with the insolvency law in force in Great Britain and in Northern Ireland. See Change 56 in Appendix 1.

Section 332: Minor definitions etc

954.This section contains various definitions that apply to the whole Part. It is based on sections 842(4) and 842AA(11) of, and paragraph 6(2) of Schedule 15B and paragraph 5(1) and (5) of Schedule 28B to, ICTA and paragraph 17 of Schedule 33 to FA 2002. Other definitions are new.

955.A single definition of “company” and “shares” is applied for the whole Part. That follows their usage for investment trusts (section 842 of ICTA) from which various provisions are applied to VCTs (section 842AA(11) of ICTA). As the general application of these two definitions is not explicit this might represent a change in the law. See Change 65 in Appendix 1.

956.The definitions of “group”, “group company”, “parent company” and “single company” are new.

Part 7: Community investment tax relief

Overview

957.This Part provides for community investment tax relief, that is income tax reductions to individuals for investments in community development finance institutions (CDFIs). It is based on Schedule 16 to FA 2002.

958.Schedule 16 to FA 2002 continues in force so far as it relates to relief for companies by way of reduction of corporation tax.

959.Schedule 1 to this Act inserts new sections 151BA, 151BB and 151BC in TCGA, which replace paragraphs 40 and 41 of Schedule 16 to FA 2002 and, so far as they apply for purposes of capital gains tax or corporation tax on chargeable gains, paragraphs 47 and 48(2) of that Schedule. Paragraphs 47(1) to (4), (7) and (8) and 48(2) of Schedule 16 to FA 2002 continue in force for the purposes of corporation tax relief under that Schedule. Sections 377 and 379(2) are based on those paragraphs for the purposes of income tax relief under this Part.

Chapter 1: Introduction

Overview

960.This Chapter quantifies the tax reduction potentially available to an individual, labels certain concepts and provides signposts to material contained elsewhere.

Section 333: Meaning of “CITR”

961.This section sets out a general description of the nature of the relief, an entitlement to tax reductions, and defines it as “CITR”. It is based on paragraph 51(1) of Schedule 16 to FA 2002.

Section 334: Eligibility for CITR

962.This section summarises the general conditions which need to be met for an individual (“the investor”) to be eligible for CITR. It is based on paragraph 1 of Schedule 16 to FA 2002.

Section 335: Form and amount of CITR

963.This section specifies the amount of the income tax reduction available and the tax years for which it may be claimed. It is based on paragraph 19 of Schedule 16 to FA 2002.

964.The provision in paragraph 19(2) of Schedule 16 to FA 2002 (limiting the tax reduction to the amount which reduces the investor’s tax liability to nil) has not been included in this section. Subsection (2) is expressed simply in terms that the investor is entitled to a tax reduction for the relevant tax year of 5% of the amount invested. The provision limiting the tax reduction is included in section 29(2) (tax reductions: supplementary).

965.The provisions of paragraph 19(6) of Schedule 16 to FA 2002 are included in section 27(4) (order of deducting tax reductions: individuals). That section sets out the order of priority of all the tax reductions (including CITR) that may be available to an individual.

Section 336: Meaning of “making an investment”

966.This section provides that an investment in a CDFI may take the form of a loan or an issue of securities or shares. It is based on paragraph 2 of Schedule 16 to FA 2002.

Section 337: Determination of “the invested amount”

967.This section sets out rules for determining the amount invested for the purposes of section 335. In particular, it deals with the complications which arise where a loan may be drawn down in tranches, by requiring the average capital balance of the loan in relation to the tax year to be calculated. It is based on paragraph 21 of Schedule 16 to FA 2002.

Section 338: Meaning of “the 5 year period” and “the investment date”

968.This section provides the definitions of two significant terms. It is based on paragraph 3 of Schedule 16 to FA 2002. “The 5 year period”, which begins with “the investment date”, is the period during which conditions as to the repayment or redemption of the investment are imposed.

Section 339: Overview of other Chapters of Part

969.This section indicates the subject matter of the Chapters of this Part not previously mentioned in Chapter 1. It is new.

Chapter 2: Accredited community development finance institutions

Overview

970.For an investment in a CDFI to qualify for relief, the CDFI must be accredited by the Secretary of State. Part 2 of Schedule 16 to FA 2002 sets out the criteria for accreditation. It also contains powers to determine the manner of making applications and the terms and conditions of accreditation, and authorises delegation of the Secretary of State’s functions. These functions have been assigned to the Secretary of State for Trade and Industry.

971.This Chapter is based on Part 2 of Schedule 16 to FA 2002. So that there is only one set of provisions relating to accreditation, Schedule 1 to this Act substitutes for paragraphs 4 to 7 of Schedule 16 to FA 2002 a new paragraph 4 applying Chapter 2 of this Part for the purposes of corporation tax relief for companies under that Schedule.

Section 340: Application and criteria for accreditation

972.This section sets out the way in which an application for accreditation as a CDFI is to be made and the basis on which it is to be admitted. It is based on paragraph 4 of Schedule 16 to FA 2002.

973.Subsection (2)(b) contains powers for the Treasury to make regulations. Under the powers in paragraphs 4 and 5 of Schedule 16 to FA 2002, the Treasury have made the Community Investment Tax Relief (Accreditation of Community Development Finance Institutions) Regulations 2003 (SI 2003/96).

974.Regulations may make different provision for bodies whose principal objective in providing finance is to invest in enterprises whose business does not consist of financing other enterprises or does so only to the extent permitted by the regulations. If such a body is accredited, it is designated as a retail community development finance institution (a “retail CDFI”). See subsections (6)(b) to (8).

975.The distinction between a retail CDFI and an accredited CDFI which is not a retail CDFI (a “wholesale CDFI”) is relevant to the limits on the total value of investments which a CDFI can make for an accreditation period and which are set out in section 348(4). SI 2003/96 provides different limits on the value of investments which a retail CDFI and a wholesale CDFI may make in any enterprise.

Section 341: Terms and conditions of accreditation

976.This section provides that the terms and conditions for accreditation are to be those set out in regulations and any other terms or requirements the Secretary of State considers appropriate, and specifies what regulations may contain. It is based on paragraph 5 of Schedule 16 to FA 2002. SI 2003/96 contains regulations made under that paragraph.

Section 342: Period of accreditation

977.This section sets out the period for which an accreditation has effect. It is based on paragraph 7 of Schedule 16 to FA 2002.

978.Paragraph 7(2) of Schedule 16 to FA 2002 (relating to applications for accreditation made before 6 April 2003) has been omitted, as it no longer has any relevance.

Section 343: Delegation of Secretary of State’s functions

979.This section is based on paragraph 6 of Schedule 16 to FA 2002.

Chapter 3: Qualifying investments

Overview

980.This Chapter sets out the conditions which must be met if an investment is to be a qualifying investment.

Section 344: Qualifying investments: introduction

981.This section introduces:

• the respective conditions which apply to loans (section 345), to securities (section 346) and to shares (section 347); and

• the provisions which apply to all kinds of investment (sections 348 and 349).

It is based on paragraph 8 of Schedule 16 to FA 2002.

Section 345: Conditions to be met in relation to loans

982.This section sets out the three conditions applicable to loans. It is based on paragraph 9 of Schedule 16 to FA 2002.

Section 346: Conditions to be met in relation to securities

983.This section sets out the two conditions applicable to securities. It is based on paragraph 10 of Schedule 16 to FA 2002.

984.Condition A (subsection (1)) requires that securities must be subscribed for wholly in cash and fully paid for on the investment date. It is in similar terms to section 347(1) which sets out identical requirements in relation to shares.

985.Section 347(3) (based on paragraph 11(1) of Schedule 16 to FA 2002) provides that shares are not fully paid up for the purposes of section 347(1) if there is any undertaking to pay cash to the CDFI at a future date in connection with the acquisition of the shares. The effect of this is to distinguish the meaning of “paid up” for that purpose from the meaning of those words for the purposes of the Companies Act 1985. Section 738(2) of that Act provides that a share is deemed paid up in cash, or allotted for cash, if the consideration for the allotment or payment up is an undertaking to pay cash to the company at a future date.

986.There is no similar provision in the Companies Act 1985 applicable to the issue of securities, but the position in relation to securities has been made explicit by the inclusion of subsection (3), equivalent to section 347(3). This clarification is not a change in either law or practice.

Section 347: Conditions to be met in relation to shares

987.This section sets out the two conditions applicable to shares. It is based on paragraph 11 of Schedule 16 to FA 2002.

Section 348: Tax relief certificates

988.This section sets limits on the value of investments in respect of which a CDFI may issue tax relief certificates in an accreditation period (as defined in section 342). It is based on paragraph 12 of Schedule 16 to FA 2002. Without a tax relief certificate, an investor may not claim CITR (see section 335(5)(b)).

989.Subsections (2) and (3) provide that the limit applies to the total value of investments in the CDFI made in the accreditation period by individuals under this Part and by companies under Schedule 16 to FA 2002.

990.Subsection (4) provides different limits for retail and wholesale CDFIs. See the commentary on section 340.

991.In subsection (8), the words “wholly or partly”, which appear before “in contravention” in paragraph 12(6) of Schedule 16 to FA 2002, have been omitted as being unnecessary.

Section 349: No pre-arranged protection against risks

992.This section is an anti-avoidance provision concerned with ensuring that the investor is subject to all usual investment risks and is not protected from their effect by insurance, indemnity, guarantee or other means. It is based on paragraph 13 of Schedule 16 to FA 2002.

Chapter 4: General conditions

Overview

993.This Chapter contains various general conditions to be met by the investor. It is based on Part 4 of Schedule 16 to FA 2002, with the exception of paragraph 16 of that Schedule which applies only to investors that are companies.

Section 350: No control of CDFI by investor

994.This section provides that the investor will not qualify for CITR in relation to an investment if the investor or a person connected with the investor controls the CDFI at any time in the 5 year period. It is based on paragraph 14 of Schedule 16 to FA 2002.

995.The legal structure of a CDFI may take a number of forms. It may be a company or some other form of body corporate or it may be a partnership or some other form of unincorporated association. The different meanings of control needed to deal with the possible different forms of a CDFI’s constitution are set out in subsections (3) to (6).

Section 351: Investor must have beneficial ownership

996.This section provides that the investor must be the sole beneficial owner of the investment. It is based on paragraph 15 of Schedule 16 to FA 2002. Trustees and joint investors are thus precluded from obtaining CITR. But see section 375 which enables investments to be made by a nominee or a bare trustee for an individual.

Section 352: No acquisition of share in partnership

997.This section provides that an investor cannot obtain CITR for capital contributed to a CDFI which is a partnership, including loan capital accounted for as partners’ capital. It is based on paragraph 17 of Schedule 16 to FA 2002.

Section 353: No tax avoidance purpose

998.This section denies CITR if the investment is part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax. It is based on paragraph 18 of Schedule 16 to FA 2002.

999.Equivalent provisions are to be found in sections 165 and 178 (enterprise investment scheme) and 261 (venture capital trusts).

Chapter 5: Claims for and attribution of CITR

Overview

1000.This Chapter is based on those paragraphs of Part 5 of Schedule 16 to FA 2002 which apply to individual investors other than paragraphs 19 and 21. Sections 335 and 337 in Chapter 1 are based on those two paragraphs.

Section 354: Loans: no claim after disposal or excessive repayments or receipts of value

1001.This section prevents a claim being made for any tax year in respect of an investment by way of loan in certain circumstances. It is based on paragraph 22 of Schedule 16 to FA 2002. This section links to the provisions in sections 360, 362 and 363 which provide for a tax reduction already given to be recaptured in similar circumstances.

Section 355: Securities or shares: no claim after disposal or excessive receipts of value

1002.This section sets out two conditions to be met before a claim can be made for any tax year in respect of a subscription for securities or shares. It is based on paragraph 23 of Schedule 16 to FA 2002.

1003.The first condition (subsection (1)) is that the investor has not disposed of the securities or shares before the first anniversary of the investment date which occurs after the end of the tax year.

1004.The second condition (subsection(2)) is that the investor has not received or is not treated as having received value from the CDFI in excess of the limits allowed under section 364.

Section 356: No claim after loss of accreditation by the CDFI

1005.This section provides that no claim may be made if the CDFI ceases to be accredited. It is based on paragraph 24 of Schedule 16 to FA 2002. Depending on the investment date and the date upon which the CDFI ceased to be accredited, this section may prevent a claim being made for the tax year before that in which the CDFI ceased to be accredited (see subsection (2)).

Section 357: Attribution: general

1006.This section sets out the general rules dealing with the attribution to the loan, securities or shares included in the investment of the reduction in the investor’s income tax liability for any tax year made as a result of the investor’s entitlement to CITR. It is based on paragraph 26 of Schedule 16 to FA 2002.

1007.Attribution is required for the purpose of determining the amount of the tax reduction which must be withdrawn or reduced in accordance with Chapter 6 of this Part.

Section 358: Attribution: bonus shares

1008.This section sets out additional rules relating to attribution, to deal with the consequences of an issue of “corresponding bonus shares” (see subsection (4)) to the investor in respect of the original shares included in the investment. It is based on paragraph 26 of Schedule 16 to FA 2002.

1009.The CITR attributable to the original shares is to be re-attributed across the bonus shares and the original shares proportionately and the bonus shares are to be treated as having been issued at the time the original shares were issued and as having been held by the investor from that date.

Chapter 6: Withdrawal or reduction of CITR

Overview

1010.This Chapter sets out the circumstances in which CITR attributable to an investment for any tax year must be reduced to nil (withdrawn) or reduced proportionately. It is based on Part 6 of Schedule 16 to FA 2002, with the exception of paragraph 27(4) of that Schedule which applies only to investors that are companies.

Section 359: Overview of Chapter

1011.This section provides an overview of the Chapter and contains signposts to its principal provisions. It is new.

1012.Subsection (3) defines the term, “the 6 year period”. This new term replaces the term “the period of restriction” defined in the same way in paragraph 33 of Schedule 16 to FA 2002. The 6 year period is relevant to sections 363 and 364 which deal with receipts of value. As an anti-avoidance measure, receipts of value in the year before the investment date are taken into account, as well as those in the 5 year period, which begins with the investment date. See the commentary on section 338 for the meaning of “the 5 year period” and “the investment date”.

Section 360: Disposal of loan during 5 year period

1013.This section provides that the CITR attributable to a loan must be withdrawn if, within the 5 year period, the investor disposes (otherwise than by receiving repayment) of part of the loan or, unless it is by way of a permitted disposal, of the whole of the loan. It is based on paragraph 28 of Schedule 16 to FA 2002.

1014.A permitted disposal is defined in subsection (2). If the disposal is a permitted disposal, any tax reduction already obtained is not withdrawn, but no further tax reduction may be claimed (see sections 335(6) and 354).

Section 361: Disposal of securities or shares during 5 year period

1015.This section provides for the withdrawal or reduction of CITR attributable to securities or shares, if the investor disposes of the whole or part of the investment in the securities or shares (except upon repayment, redemption or repurchase by the CDFI) within the 5 year period and the CDFI is accredited at the time of the disposal. It is based on paragraph 29 of Schedule 16 to FA 2002.

1016.Subsections (2) and (3) provide for different consequences depending upon whether the disposal is a qualifying disposal.

1017.Subsection (4) defines what is a qualifying disposal. It is based on paragraph 29(4) of Schedule 16 to FA 2002 with the omission of the words “for full consideration” in paragraph (a). See Change 20 in Annex 1.

1018.Subsection (5)provides for circumstances where 5% of the invested amount is greater than the income tax liability of the investor for the tax year.

Section 362: Repayment of loan capital during 5 year period

1019.This section provides for the circumstances in which the CITR attributable to a loan must be withdrawn as a consequence of a repayment other than a “non‑standard” repayment (see subsections (3) to (5)). It is based on paragraph 30 of Schedule 16 to FA 2002.

Section 363: Value received by investor during 6 year period: loans

1020.This section applies if the investment consists of a loan and the investor or a person connected with the investor receives any value, other than an amount of insignificant value (as defined in subsection (5)), from the CDFI or a person connected with the CDFI in the 6 year period. It is based on paragraph 31 of Schedule 16 to FA 2002.

1021.Subsection (2) provides that, if value is so received, the invested amount (see section 337) is adjusted by the amount treated as repaid and the investor is treated as having received a repayment other than a non-standard repayment for the purposes of section 362(see subsection (4)).

Section 364: Value received by investor during 6 year period: securities or shares

1022.This section applies if the investment consists of securities or shares and the investor or a person connected with the investor receives any value, other than an amount of insignificant value (as defined in subsection (4)), from the CDFI or a person connected with the CDFI in the 6 year period. It is based on paragraph 32 of Schedule 16 to FA 2002.

1023.Subsection (2) provides, that if value is so received and its amount wholly or partly exceeds the permitted level (see subsection (3)) by more than an amount of insignificant value, the CITR attributable to the investment must be withdrawn.

Section 365: Receipts of insignificant value to be added together

1024.This section applies at a time when the investor receives value, if the investor has also received value earlier in the 6 year period and the total amount of the value received earlier was of insignificant value. It is based on paragraph 34 of Schedule 16 to FA 2002.

1025.The amount of the receipt in question is to be added to the amounts of value previously received. If the total value of the amounts received is not an amount of insignificant value, the total value is treated as received at that time for the purposes of this Part, including in particular sections 362, 363 and 364.

Section 366: When value is received

1026.This section explains when value is received. It is based on paragraph 35 of Schedule 16 to FA 2002.

Section 367: The amount of value received

1027.This section, which determines the respective values received in relation to the respective transactions listed in section 366(1), is set out in tabular form for clarity. It is based on paragraph 36 of Schedule 16 to FA 2002.

Section 368: Value received if there is more than one investment

1028.This section provides that, if there is more than one investment, any value received is to be apportioned among the investments according to the respective amounts invested and sets out how those amounts are to be calculated. It is based on paragraph 37 of Schedule 16 to FA 2002.

Section 369: Effect of receipt of value on future claims for CITR

1029.This section applies if an investor holding securities or shares receives value (other than an amount of insignificant value) but, because that value is less than the permitted level, the CITR attributable to those securities or shares is not withdrawn under section 364. It is based on paragraph 38 of Schedule 16 to FA 2002.

1030.Subsection (2) reduces the amount invested (see section 337) in respect of which CITR may be claimed for the tax years specified in subsection (3).

Section 370: Receipts of value by or from connected persons

1031.This section extends the meaning of “the investor” and “the CDFI” in sections 363 to 369. It is based on paragraph 39 of Schedule 16 to FA 2002.

1032.This section includes the words “if the context permits”, which do not appear in paragraph 39 of Schedule 16 to FA 2002. The inclusion of these words does not change the law but makes sections 363 to 369 clearer, by stating explicitly what is implicit in the source legislation.

Section 371: CITR subsequently found not to have been due

1033.This section provides the basis for making an assessment under section 372 in cases where a claim for a tax reduction has been incorrectly allowed. It is based on paragraph 27(1) of Schedule 16 to FA 2002.

Section 372: Manner of withdrawal or reduction of CITR

1034.This section authorises the making of assessments to recapture CITR attributable to an investment which has been withdrawn or reduced, except where the event giving rise to the withdrawal or reduction of the CITR occurs after the death of the investor. It is based on paragraph 27 of Schedule 16 to FA 2002.

Chapter 7: Supplementary and general

Overview

1035.This Chapter contains miscellaneous provisions and definitions applicable to Part 7.

Section 373: Information to be provided by the investor

1036.This section imposes obligations on the investor to notify an officer of Revenue and Customs of events giving rise to the withdrawal or reduction of any CITR attributable to a loan or any securities or shares. It is based on paragraph 42 of Schedule 16 to FA 2002.

Section 374: Disclosure

1037.This section authorises disclosure of information between HMRC and the Secretary of State for the purpose of discharging their respective functions under this Part. It is based on paragraph 43 of Schedule 16 to FA 2002.

1038.Reference to “the Income Tax Acts” has been substituted in subsection (1)(a) for the reference to “the Tax A