Finance Act 1994

Section 137.

SCHEDULE 15 U.K. Enterprise investment scheme

Amendments of the Taxes Act 1988 U.K.

1 U.K. Chapter III of Part VII of the Taxes Act 1988 shall be amended as follows:

2 U.K. For section 289 (the relief) and the heading preceding it there is substituted—

“Enterprise Investment Scheme U.K.

289 Eligibility for relief.

(1) For the purposes of this Chapter, an individual is eligible for relief, subject to the following provisions of this Chapter, if—

(a) eligible shares in a qualifying company for which he has subscribed are issued to him and, under section 291, he qualifies for relief in respect of those shares,

(b) the shares are issued in order to raise money for the purpose of a qualifying business activity, and

(c) the money raised by the issue is employed not later than the time mentioned in subsection (3) below wholly for the purpose of that activity.

(2) In this Chapter “qualifying business activity”, in relation to a company, means—

(a) the company or any subsidiary—

(i) carrying on a qualifying trade which, on the date the shares are issued, it is carrying on, or

(ii) preparing to carry on a qualifying trade which, on that date, it intends to carry on wholly or mainly in the United Kingdom and which it begins to carry on within two years after that date,

but only if, at any time in the relevant period when the qualifying trade is carried on, it is carried on wholly or mainly in the United Kingdom,

(b) the company or any subsidiary carrying on research and development—

(i) which, on the date the shares are issued, it is carrying on or which it begins to carry on immediately afterwards, and

(ii) from which it is intended that a qualifying trade which the company or any subsidiary will carry on wholly or mainly in the United Kingdom will be derived,

but only if, at any time in the relevant period when the research and development or the qualifying trade derived from it is carried on, it is carried on wholly or mainly in the United Kingdom, or

(c) the company or any subsidiary carrying on oil exploration—

(i) which, on the date the shares are issued, it is carrying on or begins to carry on immediately afterwards, and

(ii) from which it is intended that a qualifying trade which the company or any subsidiary will carry on wholly or mainly in the United Kingdom will be derived,

but only if, at any time in the relevant period when the oil exploration or the qualifying trade derived from it is carried on, it is carried on wholly or mainly in the United Kingdom.

(3) The time referred to in subsection (1)(c) above is—

(a) the end of the period of twelve months beginning with the issue of the eligible shares, or

(b) in the case of money raised only for the purpose referred to in subsection (2)(a) above, the end of that period or, if later, the end of the period of twelve months beginning when the company or subsidiary concerned begins to carry on the qualifying trade,

and for the purposes of this Chapter, the condition in subsection (1)(c) above does not fail to be satisfied by reason only of the fact that an amount of money which is not significant is employed for another purpose.

(4) Subsection (2)(c) above shall not apply unless—

(a) throughout the period of three years beginning with the date on which the shares were issued, the company or any subsidiary holds an exploration licence which was granted to it, or to another subsidiary,

(b) the exploration is carried out solely within the area to which the licence applies, and

(c) on the date on which the shares were issued, neither the company nor any subsidiary held an appraisal licence or a development licence relating to that area or any part of that area.

(5) Where, at any time after the issue of the shares but before the end of the period mentioned in subsection (4)(a) above, the company or any subsidiary comes to hold an appraisal licence or development licence which relates to the area, or any part of the area, to which the exploration licence relates, the exploration licence and that other licence shall be treated for the purposes of subsection (4)(a) above as a single exploration licence.

(6) An individual is not eligible for relief in respect of any shares unless the shares are subscribed, and issued, for bona fide commercial purposes and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

(7) In this Chapter “eligible shares” means new ordinary shares which, throughout the period of five years beginning with the date on which they are issued, carry no present or future preferential right to dividends or to a company’s assets on its winding up and no present or future preferential right to be redeemed.

(8) Section 312(1A)(b) applies to determine the relevant period for the purposes of this section.

289A Form of relief.

(1) Where an individual eligible for relief in respect of any amount subscribed for eligible shares makes a claim, then, subject to the following provisions of this Chapter, the amount of his liability for the year of assessment in which the shares were issued (“the current year”) to income tax on his total income shall be the following amount.

(2) That amount is the amount to which he would be so liable apart from this section less whichever is the smaller of—

(a) an amount equal to tax at the lower rate for the current year on the amount or, as the case may be, the aggregate of the amounts subscribed for eligible shares issued in that year in respect of which he is eligible for relief, and

(b) the amount which reduces his liability to nil.

(3) Subject to subsection (4) below, if in the case of any issue of relevant shares, that is, shares—

(a) which are issued before 6th October in the current year, and

(b) in respect of the amount subscribed for which the individual is eligible for relief,

the individual so requests in his claim, subsection (1) above shall apply as if, in respect of such part of that issue as may be specified in his claim, the shares had been issued in the preceding year of assessment; and his liability to income tax for both years of assessment shall be determined accordingly.

(4) Not more than half of the relevant shares comprised in any issue may be treated by virtue of subsection (3) above as issued in the previous year; and the number of relevant shares (comprised in any issues) so treated as issued in a particular year shall not be such that the total amount subscribed for them exceeds £15,000.

(5) In determining for the purposes of subsection (2) above the amount of income tax to which a person would be liable apart from this section, no account shall be taken of—

(a) any income tax reduction under Chapter I of Part VII of this Act or under section 347B,

(b) any income tax reduction under section 353(1A),

(c) any income tax reduction under section 54(3A) of the Finance Act 1989,

(d) any relief by way of a reduction of liability to tax which is given in accordance with any arrangements having effect by virtue of section 788 or by way of a credit under section 790(1), or

(e) any tax at the basic rate on so much of that person’s income as is income the income tax on which he is entitled to charge against any other person or to deduct, retain or satisfy out of any payment.

(6) A claim for relief shall not be allowed unless subsection (7) below is complied with but, where it is complied with, the relief may be given at any time when it appears that the conditions for the relief may be satisfied.

(7) This subsection is complied with if—

(a) in the case of shares issued for the purpose of a qualifying business activity falling within paragraph (a) of section 289(2), the company or subsidiary concerned has carried on the trade for four months,

(b) in the case of shares issued for the purpose of a qualifying business activity falling within paragraph (b) of that subsection or within both paragraph (a) and paragraph (b) of that subsection, the company or subsidiary concerned has carried on the research and development for four months, and

(c) in the case of shares issued for the purpose of a qualifying business activity falling within paragraph (c) of that subsection, the company or subsidiary concerned has carried on the exploration for four months.

(8) Where—

(a) the company or subsidiary concerned, by reason of its being wound up, or dissolved without winding up, carries on a trade for a period shorter than four months, and

(b) it is shown that the winding up or dissolution was for bona fide commercial reasons and not as part of a scheme or arrangement the main purpose or one of the main purposes of which was the avoidance of tax,

subsection (7)(a) above shall have effect as if it referred to that shorter period.

(9) Where effect is given to a claim for relief by repayment of tax, section 824 shall have effect in relation to the repayment as if the time from which the twelve months mentioned in subsections (1)(a) and (3)(a) of that section are to be calculated were the end of the year of assessment in which the shares are issued or, if subsection (7) above is first complied with in a later year, the end of that later year.

289B Attribution of relief to shares.

(1) References in this Chapter, in relation to any individual, to the relief attributable to any shares or issue of shares shall be read, subject to the provisions of this Chapter providing for the reduction or withdrawal of relief, as references to any reduction made in the individual’s liability to income tax which is attributed to those shares or that issue in accordance with this section.

(2) Where an individual’s liability to income tax is reduced in any year of assessment (“the current year”) under section 289A, then—

(a) where the reduction is given by reason of an issue of shares made (or treated as made) in the current year, the amount of the reduction shall be attributed to that issue, and

(b) where the reduction is given by reason of two or more issues of shares made (or treated as made) in the current year, the reduction—

(i) shall be apportioned between those issues in the same proportions as the amounts subscribed by the individual for each issue, and

(ii) shall be attributed to those issues accordingly.

(3) Where under this section an amount of any reduction of income tax is attributed to an issue of shares (“the original issue”) in a company to an individual—

(a) a proportionate part of that amount shall be attributed to each share comprised in the original issue, and

(b) if any bonus shares in that company which are eligible shares are issued to him at any subsequent time—

(i) a proportionate part of the total amount attributed immediately before that time to shares comprised in the original issue shall be attributed to each of the shares in the holding comprising those shares and the bonus shares, and

(ii) this Chapter shall apply as if the original holding had comprised all those shares.

(4) Subject to subsection (5) below, in this Chapter references to an issue of shares in any company to an individual are to any shares in the company issued to him on the same day.

(5) Where section 289A(1) applies in the case of any issue of shares as if part of the issue had been issued in a previous year, this section and the following provisions of this Chapter (except section 290(1)) shall have effect as if that part and the remainder were separate issues of shares (and that part had been issued on a day in the previous year).

(6) Where, at a time when any relief is attributable to, or to any part of, any issue of shares, the relief falls to be withdrawn or reduced under this Chapter—

(a) where it falls to be withdrawn, the relief attributable to each of the shares in question shall be reduced to nil, and

(b) where it falls to be reduced by any amount, the relief attributable to each of the shares in question shall be reduced by a proportionate part of that amount.”

3 (1) In section 290 (minimum and maximum subscriptions), for subsection (2) there is substituted— U.K.

“(2) An individual shall not be eligible for relief in any year of assessment in respect of any amount subscribed for eligible shares exceeding £100,000 (whether the shares are issued in that or a subsequent year).”

(2) Sub-paragraph (1) above shall have effect for the year 1994-95 and subsequent years of assessment.

(3) An individual shall not be eligible for relief in respect of the year 1993-94 in respect of any amount subscribed for eligible shares (whether the shares are issued in that or a subsequent year) which, when aggregated with the amounts (if any) on which relief is claimed under the old scheme in respect of that year, exceeds £40,000.

(4) In this paragraph the “old scheme” means Chapter III of Part VII of the Taxes Act 1988 as it had effect before the amendments made by this Schedule.

4 (1) In section 290A (restriction of relief)— U.K.

(a) for subsection (1) there is substituted—

“(1) Where—

(a) a company raises any amount through the issue of eligible shares, and

(b) the aggregate of that amount and of all other amounts (if any) so raised within the period mentioned in subsection (2) below exceeds £1 million,

the relief shall not be given in respect of the excess”,

(b) in subsection (4), for “£750,000” there is substituted “ £1 million ”,

(c) subsection (10) and the definition of “prospectus” in subsection (11) are omitted, and

(d) after subsection (11) there is added—

“(12) Section 312(1A)(b) applies to determine the relevant period for the purposes of this section.”

(2) References in that section to amounts raised through the issue of eligible shares include amounts raised through the issue before 1st January 1994 of shares which were eligible shares under the old scheme; and the “old scheme” has the same meaning as in paragraph 3 above.

5 U.K. For section 291 (individuals qualifying for relief) there is substituted—

“291 Individuals qualifying for relief.

(1) An individual qualifies for relief in respect of eligible shares in a company (referred to in this section and sections 291A and 291B as the “issuing company”) if—

(a) he subscribes for the shares on his own behalf, and

(b) subject to section 291A(4), he is not at any time in the relevant period connected with the company.

(2) For the purposes of this section and sections 291A and 291B, an individual is connected with the issuing company if he, or an associate of his, is—

(a) an employee of, or of a partner of, the issuing company or any subsidiary,

(b) a partner of the issuing company or any subsidiary, or

(c) subject to section 291A, a director of, or of a company which is a partner of, the issuing company or any subsidiary,

or if he, or an associate of his, is so connected by virtue of section 291B.

(3) In subsection (2) above “subsidiary”, in relation to the issuing company, means a 51 per cent. subsidiary of the issuing company—

(a) whether it becomes such a subsidiary before, during or after the year of assessment in respect of which the individual concerned claims relief, and

(b) whether or not it is such a subsidiary while he or his associate is such an employee, partner or director.

(4) For the purposes of subsections (2) and (3) above and section 291A, in the case of a person who is both a director and an employee of a company—

(a) references (however expressed) to him in his capacity as a director of the company include him in his capacity as an employee of the company, but

(b) (apart from that) he is not to be treated as an employee of the company.

(5) Section 312(1A)(a) applies to determine the relevant period for the purposes of this section and sections 291A and 291B.

291A Connected persons: directors.

(1) An individual is not connected with the issuing company by reason only that he, or an associate of his, is a director of that or another company unless he or his associate (or a partnership of which he or his associate is a member)—

(a) receives a payment from the issuing company or a related person during the relevant period, or

(b) is entitled to receive such a payment in respect of that period or any part of it.

(2) In this section—

(a) “related person”, in relation to the issuing company, means—

(i) any company of which the individual or his associate is a director and which is a subsidiary or a partner of the issuing company or of a subsidiary, and

(ii) any person connected with the issuing company or with a company falling within sub-paragraph (i) above, and

(b) any reference to a payment to an individual includes a payment made to him indirectly or to his order or for his benefit.

(3) For the purposes of subsection (1) above there shall be disregarded—

(a) any payment or reimbursement of travelling or other expenses wholly, exclusively and necessarily incurred by him or his associate in the performance of his duties as a director,

(b) any interest which represents no more than a reasonable commercial return on money lent to the issuing company or a related person,

(c) any dividend or other distribution which does not exceed a normal return on the investment,

(d) any payment for the supply of goods which does not exceed their market value,

(e) any payment of rent for any property occupied by the issuing company or a related person which does not exceed a reasonable and commercial rent for the property, and

(f) any reasonable and necessary remuneration which —

(i) is paid for services rendered to the issuing company or related person in the course of a trade or profession (not being secretarial or managerial services or services of a kind provided by the person to whom they are rendered), and

(ii) is taken into account in computing the profits or gains of the trade or profession under Case I or II of Schedule D or would be so taken into account if it fell in a period on the basis of which those profits or gains are assessed under that Schedule.

(4) An individual (“the subscriber”) who subscribes for eligible shares (“the relevant shares”) may qualify for the relief notwithstanding his connection with the company at any time in the relevant period if—

(a) he is so connected by reason only of his, or his associate’s, being a director of, or of a company which is a partner of, the issuing company or a subsidiary in receipt of, or entitled to receive, remuneration as such, and

(b) the following conditions are satisfied;

and in this subsection and subsection (5) below “remuneration” includes any benefit or facility.

(5) The conditions are that—

(a) in relation to the director (whether he is the subscriber or his associate), his remuneration, or the remuneration to which he is entitled, (leaving out of account any reasonable and necessary remuneration falling within subsection (3)(f) above) consists only of remuneration which is reasonable remuneration for services rendered to the company of which he is a director in his capacity as such,

(b) the subscriber was issued with eligible shares (whether the relevant shares or a previous issue of eligible shares) at a time when he had never been—

(i) connected with the issuing company, or

(ii) an employee of any person who previously carried on the trade carried on by the issuing company, and

(c) where the issue of the relevant shares did not satisfy paragraph (b) above, they were not issued after the end of the period of five years beginning with the date of the latest issue of eligible shares which satisfied that paragraph,

and in paragraph (b) above “trade” includes any business, profession or vocation, and the reference to a trade previously carried on includes part of such a trade.

(6) In this section “subsidiary”, in relation to the issuing company, means a 51 per cent. subsidiary of the issuing company.

291B Connected persons: persons interested in capital etc. of company.

(1) An individual is connected with the issuing company if he directly or indirectly possesses or is entitled to acquire more than 30 per cent. of—

(a) the issued ordinary share capital of the company or any subsidiary,

(b) the loan capital and issued share capital of the company or any subsidiary, or

(c) the voting power in the company or any subsidiary.

(2) An individual is connected with the issuing company if he directly or indirectly possesses or is entitled to acquire such rights as would, in the event of the winding up of the company or any subsidiary or in any other circumstances, entitle him to receive more than 30 per cent. of the assets of the company or subsidiary (the “company in question”) which would then be available for distribution to equity holders of the company in question.

(3) For the purposes of subsection (2) above—

(a) the persons who are equity holders of the company in question, and

(b) the percentage of the assets of the company in question to which the individual would be entitled,

shall be determined in accordance with paragraphs 1 and 3 of Schedule 18, taking references in paragraph 3 to the first company as references to an equity holder and references to a winding up as including references to any other circumstances in which assets of the company in question are available for distribution to its equity holders.

(4) An individual is connected with a company if he has control of it or of any subsidiary.

(5) Where an individual subscribes for shares in a company with which (apart from this subsection) he is not connected, he shall nevertheless be treated as connected with it if he subscribes for the shares as part of any arrangement which provides for another person to subscribe for shares in another company with which (assuming it to be an issuing company) that or any other individual who is a party to the arrangement is connected.

(6) In this section “subsidiary”, in relation to the issuing company, means a 51 per cent. subsidiary of the issuing company—

(a) whether it becomes such a subsidiary before, during or after the year of assessment in respect of which the individual concerned claims relief, and

(b) whether or not it is such a subsidiary while he has, or is entitled to acquire, such capital, voting power, rights or control as are mentioned in this section.

(7) For the purposes of this section the loan capital of a company shall be treated as including any debt incurred by the company—

(a) for any money borrowed or capital assets acquired by the company,

(b) for any right to receive income created in favour of the company, or

(c) for consideration the value of which to the company was (at the time when the debt was incurred) substantially less than the amount of the debt (including any premium on it).

(8) For the purposes of this section an individual shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and there shall be attributed to any person any rights or powers of any other person who is an associate of his.

(9) In determining for the purposes of this section whether an individual is connected with a company, no debt incurred by the company or any subsidiary by overdrawing an account with a person carrying on a business of banking shall be treated as loan capital of the company or subsidiary if the debt arose in the ordinary course of that business.

(10) Section 840 applies for the purposes of this section.”

6 U.K. In section 292 (parallel trades)—

(a) in subsection (1), for the words preceding paragraph (a) there is substituted “ An individual is not eligible for relief in respect of any shares in a company if, at the date mentioned in subsection (2) below ”, and

(b) in subsection (4)(a) for “any of its subsidiaries” there is substituted “ any company which is a 51 per cent. subsidiary of that company on the date referred to in subsection (2) above ”.

7 U.K. In section 293 (qualifying companies)—

(a) for subsections (1) to (3) there is substituted—

“(1) Subject to section 294, a company is a qualifying company (whether it is resident in the United Kingdom or elsewhere) if it complies with the requirements of this section.

(2) The company must, throughout the relevant period, be an unquoted company and be—

(a) a company which exists wholly for the purpose of carrying on one or more qualifying trades or which so exists apart from purposes capable of having no significant effect (other than in relation to incidental matters) on the extent of the company’s activities, or

(b) a company whose business consists wholly of—

(i) the holding of shares or securities of, or the making of loans to, one or more qualifying subsidiaries of the company, or

(ii) both the holding of such shares or securities, or the making of such loans, and the carrying on of one or more qualifying trades.

(3) In this section “qualifying subsidiary”, in relation to a company, means a subsidiary of a kind which that company may hold by virtue of section 308”,

(b) subsection (4) is omitted,

(c) in subsection (7), at the end there is inserted “ or would not be fully paid up if any undertaking to pay cash to the company at a future date were disregarded ”,

(d) for subsection (8) there is substituted—

“(8) Subject to section 308, the company must not—

(a) at any time in the relevant period control (or together with any person connected with it control) another company or be under the control of another company (or another company and any other person connected with that other company), or

(b) at any such time be a 51 per cent. subsidiary of another company or itself have a 51 per cent. subsidiary,

and no arrangements must be in existence at any time in that period by virtue of which the company could fall within paragraph (a) or (b) above.

(8A) Section 312(1A)(b) applies to determine the relevant period for the purposes of this section and sections 294, 295 and 296”, and

(e) subsections (9) to (11) are omitted.

8 U.K. In section 294 (companies with interests in land), in subsection (1), for the words preceding paragraph (a) there is substituted “ Subject to section 296, a company is not a qualifying company in relation to any shares if at any time during the relevant period ”.

9 U.K. In section 296 (provisions supplementary to section 294), subsection (6) is omitted.

10 In section 297 (qualifying trades)—

(a) in subsection (1), “(6) and” is omitted,

(b) in subsection (2)—

(i) in paragraph (a), for “commodities, shares, securities, land or futures” there is substituted “ land, in commodities or futures or in shares, securities or other financial instruments ”,

(ii) in paragraph (g), after “another person” there is inserted “ (other than a company of which the company providing the services or facilities is the subsidiary) ”, and

(iii) paragraphs (h) and (j) are omitted,

(c) in subsection (5), for the words preceding paragraph (a) there is substituted “ A trade shall not be treated as failing to comply with this section by reason only that it consists to a substantial extent of receiving royalties or licence fees if ”, and

(d) in subsection (9), for “289(1)(d)” there is substituted “ 289(2)(c) ”.

11 U.K. In section 298 (supplementary provisions)—

(a) for subsection (4) there is substituted—

“(4) The Treasury may by order amend section 297 and this section in such manner as they consider expedient”,

(b) in subsection (5), the definition of “property development” is omitted,

(c) at the end of that subsection there is inserted—

“ and section 312(1A)(b) shall apply to determine the relevant period for the purposes of that section ”, and

(d) subsections (6) to (8) are omitted.

12 U.K. For section 299 (disposal of shares) there is substituted—

“299 Disposal of shares.

(1) Where an individual makes any disposal of eligible shares before the end of the relevant period, then—

(a) if the disposal is made otherwise than by way of a bargain made at arm’s length, any relief attributable to those shares shall be withdrawn, and

(b) in the case of any disposal made by way of a bargain made at arm’s length—

(i) if, apart from this subsection, the relief attributable to those shares is greater than the amount mentioned in subsection (2) below, it shall be reduced by that amount, and

(ii) if sub-paragraph (i) above does not apply, any relief attributable to those shares shall be withdrawn.

(2) The amount referred to in subsection (1) above is an amount equal to tax at the lower rate for the year of assessment for which the relief was given on the amount or value of the consideration which the individual receives for the shares.

(3) Where, in relation to any issue of shares held by any person, the disposal referred to in subsection (1) above is a disposal of part of the shares, that subsection shall apply to the relief that was attributable to that part.

(4) Where an individual’s liability to income tax has been reduced in any year of assessment under section 289A in respect of any issue of shares and the amount of the reduction (“A”) is less than the amount (“B”) which is equal to tax at the lower rate for that year on the amount subscribed for the issue, subsection (2) above shall have effect as if the amount or value referred to in that subsection were reduced by multiplying it by the fraction—

(5) Where an option, the exercise of which would bind the grantor to purchase any shares, is granted to an individual during the relevant period, any relief attributable to the shares to which the option relates shall be withdrawn.

(6) Where any relief is attributable to shares of any class in a company which have been issued to an individual at different times, any disposal by him of shares of that class shall be treated for the purposes of this section as relating to those issued earlier rather than to those issued later.

(7) Where relief is attributable to any shares which have by virtue of any such allotment as is mentioned in section 126(2)(a) of the 1992 Act (not being an allotment for payment) fallen to be treated under section 127 of that Act as the same asset as a new holding, a disposal of the whole or part of the new holding shall be treated for the purposes of this section as a disposal of the whole or a corresponding part of those shares.

(8) For the purposes of this section—

(a) shares in a company shall not be treated as being of the same class unless they would be so treated if dealt with on the Stock Exchange,

(b) references to a disposal of shares include references to the grant of an option the exercise of which would bind the grantor to sell the shares, and

(c) section 312(1A)(a) applies to determine the relevant period.”

13 U.K. In section 299A (loan linked investments)—

(a) in subsection (1), for the words preceding paragraph (a) there is substituted “ An individual is not eligible for relief in respect of any shares in a company if ”, and

(b) after subsection (2) there is inserted—

“(3) Section 312(1A)(a) applies to determine the relevant period for the purposes of this section.”

14 U.K. In section 300 (value received from company)—

(a) for subsection (1) there is substituted—

“(1) Subsection (1A) below applies where an individual who subscribes for eligible shares in a company—

(a) has, before the issue of the shares but within the relevant period, received any value from the company, or

(b) after their issue but before the end of the relevant period, receives any such value.

(1A) Where any relief is attributable to those shares, then (unless the amount of the relief has already been reduced on account of the value received)—

(a) if it is greater than the amount mentioned in subsection (1B) below, it shall be reduced by that amount, and

(b) if paragraph (a) above does not apply, the relief shall be withdrawn.

(1B) The amount referred to in subsection (1A) above is an amount equal to tax at the lower rate for the year of assessment for which the relief was given on the amount of the value received; and section 299(4) above applies for the purposes of this subsection as it applies for the purposes of subsection (2) of that section.

(1C) References in subsection (1) above to the receipt of value from a company include references to the receipt of value from a 51 per cent. subsidiary of that company, whether it becomes such a subsidiary before or after the individual concerned receives any value from it; and other references to the company in this section and section 301 shall be read accordingly.

(1D) Notwithstanding anything in subsection (2) below, for the purposes of this section an individual is not to be treated as receiving value from a company by reason only of the payment to him, or any associate of his, of any remuneration for services rendered to the company as a director if the remuneration is reasonable remuneration.

(1E) Section 291(4) applies for the purposes of subsection (1D) above as it applies for the purposes of section 291A, and the reference in subsection (1D) above to the payment of remuneration includes the provision of any benefit or facility”, and

(b) in subsection (2)—

(i) in paragraph (c), for “291(3)(a) or (e)” there is substituted “ 291A(3)(a) or (f) ”, and

(ii) in paragraph (h), for “section 291(3)(a), (b), (c), (d) or (e)” there is substituted “ any of the paragraphs of section 291A(3) ”.

15 U.K. In section 301 (provisions supplementary to section 300)—

(a) subsections (1) and (2) are omitted,

(b) after subsection (6) there is inserted—

“(6A) Section 312(1A)(a) applies to determine the relevant period for the purposes of section 300”, and

(c) subsection (7) is omitted.

16 U.K. In section 302 (replacement capital)—

(a) for subsection (1) there is substituted—

“(1) Any relief attributable to any shares in a company held by an individual shall be withdrawn if—

(a) at any time in the relevant period, the company or any subsidiary—

(i) begins to carry on as its trade or as part of its trade a trade which was previously carried on at any time in that period otherwise than by the company or any subsidiary, or

(ii) acquires the whole, or a greater part, of the assets used for the purposes of a trade previously so carried on, and

(b) subsection (2) below applies in relation to that individual”,

(b) in subsection (3), for the words preceding paragraph (a) there is substituted “ Any relief attributable to any shares in a company held by an individual shall be withdrawn if ”,

(c) after subsection (4) there is inserted—

“(4A) In determining whether any relief attributable to any shares in a company (the “issuing company”) held by a person who—

(a) is a director of, or of a company which is a partner of, the issuing company or any subsidiary, and

(b) is in receipt of, or entitled to receive, remuneration as such a director falling within section 291A(5)(a),

is to be withdrawn, the second reference in paragraph (b) of each of subsections (2) and (3) above and, so far as relating to those paragraphs, in subsection (1)(a)(i) above to any time in the relevant period shall be read as a reference to any time before the end of the relevant period.

(4B) Section 291(4) applies for the purposes of subsection (4A) above as it applies for the purposes of section 291A, and in subsection (4A) above “remuneration” includes any benefit or facility”, and

(d) in subsection (5)—

(i) for the definition of “subsidiary” there is substituted—

“ “subsidiary” means a company which would be a subsidiary if the relevant period for the purposes of section 308 were the period referred to in section 312(1A)(a) ”, and

(ii)

at the end of that subsection there is inserted— “ and section 312(1A)(a) applies to determine the relevant period for the purposes of this section ”.

17 In section 303 (value received by persons other than claimants)—

(a) for subsection (1) there is substituted—

“(1) Where any relief is attributable to any shares in a company held by an individual, subsection (1A) below shall apply if at any time in the relevant period the company or any subsidiary repays, redeems or repurchases any of its share capital which belongs to any member other than—

(a) that individual, or

(b) another individual the relief attributable to whose shares in the company is thereby withdrawn or reduced by virtue of section 299 or 300(2)(a),

or makes any payment to any such member for giving up his right to any of the share capital of the company or subsidiary on its cancellation or extinguishment.

(1A) The relief—

(a) if it is greater than the amount mentioned in subsection (1B) below, shall be reduced by that amount, and

(b) if paragraph (a) above does not apply, shall be withdrawn.

(1B) The amount referred to in subsection (1A) above is an amount equal to tax at the lower rate for the year of assessment for which the relief was given on the amount receivable by the member or, if greater, the nominal value of the share capital in question; and section 299(4) above applies for the purposes of this subsection as it applies for the purposes of subsection (2) of that section”,

(b) in subsection (3), for “291(4)” there is substituted “ 291B(1) ” and for “291” there is substituted “ 291B ”,

(c) after subsection (6) there is inserted—

“(6A) The reference in subsection (3) above to the receipt of value from a company includes the receipt of value from a subsidiary, and the reference to the company in subsection (6) above shall be read accordingly”,

(d) subsection (8) is omitted,

(e) after subsection (9) there is inserted—

“(9A) References in this section to a subsidiary of a company are references to a 51 per cent. subsidiary of the company, whether it becomes such a subsidiary before or after the redemption, repayment, repurchase or payment in question or, as the case may be, the receipt of value in question.

(9B) Section 312(1A)(a) applies to determine the relevant period for the purposes of this section”, and

(f) subsections (10) and (11) are omitted.

18 U.K. For section 304 (husband and wife) there is substituted—

“304 Husband and wife.

(1) Section 299(1) shall not apply to a disposal of shares to which an amount of relief is attributable made by a married man to his wife or a married woman to her husband at a time when they are living together.

(2) Where such shares issued to one of them (“the transferor”) are transferred to the other (“the transferee”) by a transaction inter vivos to which that section does not apply, this Chapter shall have effect, in relation to any subsequent disposal or other event, as if—

(a) the transferee were the person who had subscribed for the shares,

(b) the transferee’s liability to income tax had been reduced under section 289A in respect of those shares for the same year of assessment as that for which the transferor’s liability was so reduced and, accordingly, that amount of relief had continued to be attributable to the shares notwithstanding the transfer.

(3) Any assessment for reducing or withdrawing the relief by reason of any such disposal or other event shall be made on the transferee”.

19 U.K. For section 305 (re-organisation of share capital) there is substituted—

“305 Reorganisation of share capital.

(1) Subsection (2) below applies where—

(a) there is by virtue of any allotment in the relevant period, being such an allotment for payment as is mentioned in section 126(2)(a) of the 1992 Act, a reorganisation affecting ordinary shares,

(b) immediately before the reorganisation an amount of relief (“X”) is attributable to the shares, and

(c) both—

(i) the amount subscribed for the shares (“Z”), and

(ii) the market value of the shares immediately before the reorganisation,

exceed the market value of the shares immediately after the reorganisation.

(2) Where this subsection applies, the relief attributable to the shares shall be reduced by the following amount—

where “Y” is whichever is the smaller of the amounts by which Z, and the market value of the shares immediately before the reorganisation, exceed the market value of the shares immediately after the reorganisation.

(3) Subsection (2) above also applies where—

(a) an individual, who at any time in the relevant period has received, or become entitled to receive, in respect of any ordinary shares in a company, a provisional allotment of shares in or debentures of the company, disposes of his rights, and

(b) that subsection would have applied if he had not disposed of the rights but the allotment had been made to him by virtue of those rights.

(4) Section 312(1A)(a) applies to determine the relevant period for the purposes of this section”.

20 U.K. After section 305 there is inserted—

“305A Relief for loss on disposal of shares.

(1) Section 574 shall apply on the disposal by an individual of shares to which relief is attributable as it applies to a disposal by him of shares in a qualifying trading company for which he has subscribed (“qualifying trading company” and “subscribed” having for this purpose the same meaning as in that section).

(2) For the purposes of that section (as applied by this) sections 575(1) and (3) and 576(2) and (3) shall apply”.

21 In section 306 (claims)—

(a) in subsection (1)—

(i) in paragraph (a), for “289(8)(a), (b) or (c)” there is substituted “ 289A(7)(a), (b) or (c) ”, and

(ii) for paragraph (b) there is substituted—

“(b) not later than twelve months after an inspector authorises the issue of a certificate for the purposes of subsection (2) below”,

(b) after subsection (3) there is inserted—

“(3A) A company may not furnish an inspector with a statement in respect of any shares issued in any year of assessment—

(a) later than two years after the end of that year of assessment, or

(b) if the period of four months referred to in subsection (1)(a) above ended after the end of that year, later than two years after the end of that period,

but section 289B(5) shall not apply for the purposes of this subsection”,

(c) in subsection (8), for “entitled to” there is substituted “ eligible for ”,

(d) in subsection (10), the second sentence is omitted, and

(e) after that subsection there is inserted—

“(11) Section 312(1A)(b) applies to determine the relevant period for the purposes of this section”.

22 U.K. In section 307 (withdrawal of relief)—

(a) in subsection (1), the words from “but” to the end are omitted,

(b) for subsection (2) there is substituted—

“(1A) Relief may not be withdrawn, in relation to shares issued by a company on any date, on the ground that the company is not a qualifying company or that the requirements of section 289(1)(b) or (c) are not met unless—

(a) the company has given notice under section 310, or

(b) an inspector has given notice to the company stating that, by reason of that ground, the whole or any part of the relief given to individuals to whom the shares were issued on that date was not, in his opinion, due.

(1B) The giving of notice by an inspector under subsection (1A) above shall be taken, for the purposes of the provisions of the Management Act relating to appeals against decisions on claims, to be a decision refusing a claim made by the company.

(2) Subject to subsections (3) to (7) below, no assessment for withdrawing relief may be made, and no notice may be given under subsection (1A) above, more than six years after the end of the year of assessment—

(a) in which the time mentioned in section 289(3) falls, or

(b) in which the event by reason of which the claimant ceases to be eligible for relief occurs,

whichever is the later”,

(c) in subsection (6)—

(i) in paragraph (a), for “289(11)” there is substituted “ 289(6) ”,

(ii) after that paragraph there is inserted—

“(aa) in the case of relief withdrawn by virtue of section 289(1)(c), the date on which the relief was granted”, and

(iii) after paragraph (c) there is inserted—

“(cca) in the case of relief withdrawn by virtue of section 299(5), the date on which the option was granted”,

(d) after subsection (8) there is inserted—

“(8A) References in this section to the withdrawal of relief include its reduction”, and

(e) subsection (9) is omitted.

23 U.K. In section 308 (application to subsidiaries)—

(a) after subsection (5) there is inserted—

“(5A) Section 312(1A)(b) applies to determine the relevant period for the purposes of this section”, and

(b) subsection (6) is omitted.

24 U.K. Section 309 (further provisions as to subsidiaries) is omitted.

25 In section 310 (information)—

(a) in subsection (1), for “304(2) to (6)” there is substituted “ 304 ”,

(b) in subsection (2), for “289(11)” there is substituted “ 289(1)(c) or (6) ”,

(c) in subsection (5), for “289(11), 291(10)” there is substituted “ 289(6), 291B(5) ”,

(d) in subsection (6), for “289(11)” (in both places) there is substituted “ 289(6) ” and for “291(10)” there is substituted “ 291B(5) ”, and

(e) subsections (10) and (11) are omitted.

26 U.K. In section 311 (nominees, etc.)—

(a) in subsection (2), for the words preceding “this Chapter” there is substituted “ Where eligible shares are held on a bare trust for two or more beneficiaries ”, and

(b) in subsection (2B), for the words preceding paragraph (a) there is substituted— “ In any case where this subsection applies, sections 289A and 289B shall have effect as if ”.

27 U.K. In section 312 (interpretation)—

(a) in subsection (1)—

(i) in the definition of “control”, for “291(7), 308(2) and 309(6)(a)” there is substituted “ 291B(4) and 308(2) ”,

(ii) after the definition of “director” there is inserted—

““eligible for relief” has the meaning given by section 289(1),

“eligible shares” has the meaning given by section 289(7)”,

(iii) the definition of “fixed-rate preference share capital” is omitted,

(iv) the definition of “the relevant period” is omitted,

(v) for the definition of “the relief” and “relief” there is substituted—

““relief” means relief under this Chapter,

“subsidiary”, in relation to any company (except in the expression “51 per cent. subsidiary” or where otherwise defined), means a subsidiary of that company of a kind which that company may hold under section 308,

“51 per cent. subsidiary”, in relation to any company, means (except in the case of references to a company which is a 51 per cent. subsidiary on a particular date or at a particular time) a company which is a 51 per cent. subsidiary of that company at any time in the relevant period (applying subsection (1A)(a) below)”, and

(vi) for the definition of “unquoted company” there is substituted—

““unquoted company” means a company none of whose shares, stocks, debentures or other securities are marketed to the general public”,

(b) after that subsection there is inserted—

“(1A) In any provision of this Chapter “relevant period”, in relation to relief in respect of any eligible shares issued by a company, means whichever of the following periods is applied for the purposes of that provision (disregarding section 289B(5))—

(a) the period beginning with the incorporation of the company (or, if the company was incorporated more than two years before the date on which the shares were issued, beginning two years before that date) and ending five years after the issue of the shares, and

(b) the period beginning with the date on which the shares were issued and ending either—

(i) three years after that date, or

(ii) in a case falling within section 289(2)(a) where the company or subsidiary concerned had not begun to carry on the trade in question on that date, three years after the date on which it begins to carry on that trade.

(1B) For the purposes of the definition of “unquoted company” in subsection (1) above, shares, stocks, debentures or other securities are marketed to the general public if they are—

(a) listed on a recognised stock exchange,

(b) listed on a designated exchange in a country outside the United Kingdom, or

(c) dealt in on the Unlisted Securities Market or dealt in outside the United Kingdom by such means as may be designated.

(1C) In subsection (1B) above “designated” means designated by an order made by the Board for the purposes of that subsection; and an order made for the purposes of paragraph (b) of that subsection may designate an exchange by name, or by reference to any class or description of exchanges, including a class or description framed by reference to any authority or approval given in a country outside the United Kingdom.

(1D) Section 828(1) does not apply to an order made for the purposes of subsection (1B) above.

(1E) Where a company is an unquoted company at the time when any shares are issued, it shall not be treated for the purposes of this Chapter as ceasing to be an unquoted company in relation to those shares at any subsequent time by reason only that any shares, stocks, debentures or other securities of the company are at that time listed on an exchange, or dealt in by any means, designated by such an order if the order was made after the shares were issued”,

(c) in subsection (2), for “section 291” there is substituted “ sections 291 to 291B ”,

(d) for subsections (4) and (5) there is substituted—

“(4) In this Chapter—

(a) references in any provision to the reduction of any relief attributable to any shares include a reference—

(i) to the reduction of the relief to nil, and

(ii) where no relief has yet been given, to the reduction of the amount which apart from that provision would be the relief, and

(b) references to the withdrawal of any relief, in respect of any shares, are to the withdrawal of the relief attributable to those shares or, in a case where no relief has yet been given, to ceasing to be eligible for relief in respect of those shares.

(5) For the purposes of this Chapter, the market value at any time of any asset shall be taken to be the price which it might reasonably be expected to fetch on a sale at that time in the open market free from any interest or right which exists by way of security in or over it”, and

(e) in subsection (7), for “289(1)(d)” there is substituted “ 289(2)(c) ”.

Amendments of the Taxation of Chargeable Gains Act 1992 U.K.

28 U.K. The M1 Taxation of Chargeable Gains Act 1992 shall be amended as follows:

Marginal Citations

M1 1992 c. 12.

29 U.K. In section 150 (business expansion schemes), at the end of subsection (1) there is inserted “ and references in this section to Chapter III of Part VII of the Taxes Act or any provision of that Chapter are to that Chapter or provision as it applies in relation to shares issued before 1st January 1994 ”.

30 U.K. After that section there is inserted—

“150A Enterprise investment scheme.

(1) For the purpose of determining the gain or loss on any disposal of eligible shares by an individual where—

(a) an amount of relief is attributable to the shares, and

(b) apart from this subsection there would be a loss,

the consideration given by him for the shares shall be treated as reduced by the amount of the relief.

(2) Subject to subsection (3) below, if on any disposal of eligible shares by an individual after the end of the period referred to in section 312(1A)(a) of the Taxes Act where an amount of relief is attributable to the shares, there would (apart from this subsection) be a gain, the gain shall not be a chargeable gain.

(3) Where—

(a) an individual’s liability to income tax has been reduced (or treated by virtue of section 304 of the Taxes Act (husband and wife) as reduced) for any year of assessment under section 289A of that Act in respect of any issue of shares, and

(b) the amount of the reduction (“A”) is less than the amount (“B”) which is equal to tax at the lower rate for that year on the amount subscribed for the issue,

then, if there is a disposal of the shares on which there is a gain, subsection (2) above shall apply only to so much of the gain as is found by multiplying it by the fraction—

(4) Any question as to—

(a) which of any shares issued to a person at different times a disposal relates, being shares to which relief is attributable, or

(b) whether a disposal relates to shares to which relief is attributable or to other shares,

shall for the purposes of capital gains tax be determined as for the purposes of section 299 of the Taxes Act; and Chapter I of this Part shall have effect subject to the foregoing provisions of this subsection.

(5) Sections 104, 105 and 107 shall not apply to shares to which relief is attributable.

(6) Where—

(a) an individual holds shares which form part of the ordinary share capital of a company, and

(b) relief is attributable to some of the shares but not others,

then, if there is within the meaning of section 126 a reorganisation affecting those shares, section 127 shall apply (subject to the following provisions of this section) separately to the shares to which relief is attributable and to the other shares (so that shares of each kind are treated as a separate holding of original shares and identified with a separate new holding).

(7) Where—

(a) an individual holds shares (“the existing holding”) which form part of the ordinary share capital of a company,

(b) there is, by virtue of any such allotment for payment as is mentioned in section 126(2)(a), a reorganisation affecting the existing holding, and

(c) immediately following the reorganisation, relief is attributable to the existing holding or the allotted shares,

sections 127 to 130 shall not apply in relation to the existing holding.

(8) Sections 135 and 136 shall not apply in respect of shares to which relief is attributable.

(9) Where the relief attributable to any shares is reduced by virtue of section 305(2) of the Taxes Act—

(a) the sums allowable as deductions from the consideration in the computation, for the purposes of capital gains tax, of the gain or loss accruing to an individual on the disposal of any of the allotted shares or debentures shall be taken to include the amount of the reduction apportioned between the allotted shares or (as the case may be) debentures in such a way as appears to the inspector, or on appeal to the Commissioners concerned, to be just and reasonable, and

(b) the sums so allowable on the disposal (in circumstances in which the preceding provisions of this section do not apply) of any of the shares referred to in section 305(1)(a) shall be taken to be reduced by the amount mentioned in paragraph (a) above, similarly apportioned between those shares.

(10) There shall be made all such adjustments of capital gains tax, whether by way of assessment or by way of discharge or repayment of tax, as may be required in consequence of the relief being given or withdrawn.

(11) Chapter III of Part VII of the Taxes Act (enterprise investment scheme) applies for the purposes of this section to determine whether relief is attributable to any shares and, if so, the amount of relief so attributable; and “eligible shares” has the same meaning as in that Chapter.

(12) References in this section to Chapter III of Part VII of the Taxes Act or any provision of that Chapter are to that Chapter or provision as it applies in relation to shares issued on or after 1st January 1994”.

31 U.K. At the end of section 164M of that Act (exclusion of double relief) there is inserted “ but the reference in this section to that Chapter is to that Chapter as it applies in relation to shares issued before 1st January 1994 ”.

32 (1) After that section there is inserted— U.K.

“164MA Exclusion of double relief

If a person makes a claim for relief under Chapter III of Part VII of the Taxes Act (enterprise investment scheme) in respect of any shares, those shares shall not be, or be treated as ever having been, eligible shares”.

(2) This paragraph has effect in relation to shares issued on or after 1st January 1994.

33 U.K. In section 164N(1), in the definition of “eligible shares”, for “and 164M” there is substituted “ 164M and 164MA ”.

34 U.K. In section 231(1)(d), “(business expansion scheme)” is omitted.