Income Tax Act 2007

Chapter 3 U.K. General requirements

Introduction U.K.

172 Overview of Chapter U.K.

The general requirements are met in respect of the relevant shares if the requirements of this Chapter are met as to—

(a) the shares (see section 173),

[F1 (aa) the maximum amount raised annually through risk capital schemes (see section 173A),]

(b) the purpose of the issue (see section 174),

(c) the use of the money raised (see section 175),

(d) the minimum period (see section 176),

(e) no pre-arranged exits (see section 177), and

(f) no tax avoidance (see section 178).

Textual Amendments

F1 S. 172(aa) inserted (19.7.2007) by Finance Act 2007 (c. 11), Sch. 16 para. 5(2) (with Sch. 16 para. 5(5)(6))

The requirements U.K.

173 The shares requirement U.K.

(1) The relevant shares must meet—

(a) the requirements of subsection (2), and

(b) unless they are bonus shares, the requirements of subsection (3).

(2) Shares meet the requirements of this subsection if they are ordinary shares which do not, at any time during period B, carry—

(a) any present or future preferential right to dividends or to a company's assets on its winding up, or

(b) any present or future right to be redeemed.

(3) Shares meet the requirements of this subsection if they—

(a) are subscribed for wholly in cash, and

(b) are fully paid up at the time they are issued.

(4) Shares are not fully paid up for the purposes of subsection (3)(b) if there is any undertaking to pay cash to any person at a future date in respect of the acquisition of the shares.

[F2 173A The maximum amount raised annually through risk capital schemes requirement U.K.

(1) The total amount of relevant investments made in the issuing company in the year ending with the date the relevant shares are issued must not exceed £2 million.

(2) In subsection (1), the reference to relevant investments made in the issuing company includes relevant investments made in any company that is, or has at any time in the year mentioned there been, a subsidiary of the issuing company (whether or not it was such a subsidiary when the investment was made).

(3) A “relevant investment” is made in a company if—

(a) an investment (of any kind) in the company is made by a VCT , or

(b) the company issues shares (money having been subscribed for them), and (at any time) the company provides—

(i) a compliance statement under section 205, or

(ii) a compliance statement under paragraph 42 of Schedule 15 to FA 2000 (corporate venturing scheme),

in respect of the shares.

(4) An investment within subsection (3)(b) is regarded as made when the shares are issued.]

Textual Amendments

F2 S. 173A inserted (19.7.2007) by Finance Act 2007 (c. 11), Sch. 16 para. 5(3) (with Sch. 16 para. 5(5)(6)8)

Modifications etc. (not altering text)

C1 S. 173A(3)(4) applied by 1992 c. 12, Sch. 5B para. 1(6) (as inserted (19.7.2007) by Finance Act 2007 (c. 11), Sch. 16 para. 7(2)(b))

174 The purpose of the issue requirement U.K.

The relevant shares (other than any of them which are bonus shares) must be issued in order to raise money for the purpose of a qualifying business activity.

175 The use of the money raised requirement U.K.

(1) The requirement of this section is that—

(a) at least 80% of the money raised by the issue of—

(i) the relevant shares (other than any of them which are bonus shares), and

(ii) all other shares (if any) in the company of the same class which meet the requirements of section 173(2) and are issued on the same day,

is employed wholly for the purpose of the qualifying business activity for which it was raised not later than the time mentioned in subsection (3), and

(b) all of the money so raised is employed wholly for that purpose not later than 12 months after that time.

(2) The requirements in subsection (1)(a) and (b) do not fail to be met merely because an amount of money which is not significant is employed for another purpose.

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

(a) the end of the period of 12 months beginning with the issue of the shares, or

(b) in the case of money raised only for the purpose of an activity to which section 179(2) applies, the end of the period of 12 months beginning with—

(i) the issue of the shares, or

(ii) if later, the time when the company or a qualifying 90% subsidiary of the company begins to carry on the qualifying trade.

(4) In determining for the purposes of subsection (3)(b) when a qualifying trade is begun to be carried on by a qualifying 90% subsidiary of a company, any carrying on by it of the trade before it became such a subsidiary is ignored.

176 The minimum period requirement U.K.

(1) The issue of shares which includes the relevant shares must meet—

(a) the requirement of subsection (2) in a case where the money raised by an issue of shares is raised wholly for the purpose of a qualifying business activity falling within section 179(2),

(b) the requirement of subsection (3) in a case where the money raised by an issue of shares is raised wholly or partly for the purpose of a qualifying business activity falling within section 179(4).

(2) The requirement is that—

(a) the trade concerned must have been carried on for a period of at least 4 months ending at or after the time of the issue, and

(b) throughout that period—

(i) the trade must have been carried on by the issuing company or a qualifying 90% subsidiary of that company, and

(ii) the trade must not have been carried on by any other person.

(3) The requirement is that—

(a) the research and development concerned must have been carried on for a period of at least 4 months ending at or after the time of the issue, and

(b) throughout that period—

(i) the research and development must have been carried on by the issuing company or a qualifying 90% subsidiary of that company, and

(ii) the research and development must not have been carried on by any other person.

(4) If—

(a) merely because of the issuing company or any other company being wound up, or dissolved without winding up—

(i) the trade is carried on as mentioned in subsection (2), or

(ii) the research and development is carried on as mentioned in subsection (3),

for a period shorter than 4 months, and

(b) the winding up or dissolution—

(i) is for genuine commercial reasons, and

(ii) is not part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax,

subsection (2) or, as the case may be, (3) has effect as if it referred to that shorter period.

(5) If—

(a) merely because of anything done as a result of the issuing company or any other company being in administration or receivership—

(i) the trade is carried on as mentioned in subsection (2), or

(ii) the research and development is carried on as mentioned in subsection (3),

for a period shorter than 4 months, and

(b) the entry into administration or receivership, and everything done as a result of the company concerned being in administration or receivership—

(i) is for genuine commercial reasons, and

(ii) is not part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax,

subsection (2) or, as the case may be, (3) has effect as if it referred to that shorter period.

177 The no pre-arranged exits requirement U.K.

(1) The issuing arrangements for the relevant shares must not include—

(a) arrangements with a view to the subsequent repurchase, exchange or other disposal of those shares or of other shares in or securities of the issuing company,

(b) arrangements for or with a view to the cessation of any trade which is being or is to be or may be carried on by the issuing company or a person connected with that company,

(c) arrangements for the disposal of, or of a substantial amount (in terms of value) of, the assets of the issuing company or of a person connected with that company, or

(d) arrangements the main purpose or one of the main purposes of which is (by means of any insurance, indemnity or guarantee or otherwise) to provide partial or complete protection for persons investing in shares in the issuing company against what would otherwise be the risks attached to making the investment.

(2) The arrangements referred to in subsection (1)(a) do not include any arrangements with a view to such an exchange of shares, or shares and securities, as is mentioned in section 247(1).

(3) The arrangements referred to in subsection (1)(b) and (c) do not include any arrangements applicable only on the winding up of a company except in a case where—

(a) the issuing arrangements include arrangements for the company to be wound up, or

(b) the arrangements are applicable on the winding up of the company otherwise than for genuine commercial reasons.

(4) The arrangements referred to in subsection (1)(d) do not include any arrangements which are confined to the provision—

(a) for the issuing company itself, or

(b) if the issuing company is a parent company that meets the trading requirement in section 181(2)(b), for the issuing company itself, for the issuing company itself and one or more of its subsidiaries or for one or more of its subsidiaries,

of any such protection against the risks arising in the course of carrying on its business as might reasonably be expected to be provided in normal commercial circumstances.

(5) In this section “the issuing arrangements” means—

(a) the arrangements under which the shares are issued to the individual, and

(b) any arrangements made before the issue of the shares to the individual in relation to or in connection with that issue.

178 The no tax avoidance requirement U.K.

The relevant shares must be issued for genuine commercial reasons, 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.

Meaning of “qualifying business activity” U.K.

179 Meaning of “qualifying business activity” U.K.

(1) In this Part “qualifying business activity”, in relation to the issuing company, means—

(a) activity A, or

(b) activity B,

if it is carried on by the company or a qualifying 90% subsidiary of the company.

This is subject to subsections (3) and (5).

(2) Activity A is—

(a) the carrying on of a qualifying trade which, on the date the relevant shares are issued, the company or a qualifying 90% subsidiary of the company is carrying on, or

(b) the activity of preparing to carry on (or preparing to carry on and then carrying on) a qualifying trade—

(i) which, on that date, is intended to be carried on wholly or mainly in the United Kingdom by the company or such a subsidiary, and

(ii) which is begun to be carried on by the company or such a subsidiary within two years after that date.

(3) But activity A is a qualifying business activity only if, at any time in period B when the qualifying trade is so carried on, the qualifying trade is carried on wholly or mainly in the United Kingdom.

(4) Activity B is the carrying on of research and development—

(a) which, on the date the relevant shares are issued, the company or a qualifying 90% subsidiary of the company is carrying on, or which the company or such a subsidiary begins to carry on immediately afterwards, and

(b) from which, on that date, it is intended—

(i) that a qualifying trade which the company or such a subsidiary will carry on wholly or mainly in the United Kingdom will be derived, or

(ii) that a qualifying trade which the company or such a subsidiary is carrying on, or will carry on, wholly or mainly in the United Kingdom will benefit.

(5) But activity B is a qualifying business activity only if, at any time in period B when—

(a) the research and development is carried on, or

(b) the qualifying trade which is derived, or which benefits or is intended to benefit, from the research and development is carried on,

the research and development or, as the case may be, the qualifying trade is carried on wholly or mainly in the United Kingdom.

(6) In determining—

(a) for the purposes of subsection (2)(b) when a qualifying trade is begun to be carried on by a qualifying 90% subsidiary of the company, or

(b) for the purposes of subsection (4)(a) when research and development is begun to be carried on by such a subsidiary,

any carrying on of the trade or, as the case may be, the research and development by it before it became such a subsidiary is ignored.

(7) References in subsection (2)(b)(i) or (4)(b) to a qualifying 90% subsidiary of the company include references to any existing or future company which will be such a subsidiary at any future time.