Office of Public Sector Information
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
516.This Chapter gives relief for 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.
520.This section explains how the deductions are made. It is based on section 392(2) and (5) of ICTA.
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.
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.
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.
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.
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.
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.
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.
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.
541.This section indicates the content of Chapters that are not mentioned in section 157. It is new.
542.This section signposts other reliefs and material that may be relevant to EIS. It is new.
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.
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.
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).
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.
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”.
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.
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).
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.
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.
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.
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.
572.This Chapter sets out conditions for the general requirements that need to be met in relation to the relevant shares.
Income Tax Act 2007