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Income Tax (Earnings and Pensions) Act 2003

Part 3: Qualifying companies

3474.There is a considerable overlap in this Part between EMI and the investment schemes EIS, VCT and CVS, (the Enterprise Investment Scheme, Venture Capital Trusts and the Corporate Venturing Scheme).

Paragraph 8: Qualifying companies: introduction

3475.This paragraph is introductory and derives from paragraph 12 of Schedule 14 to FA 2000.

Paragraph 9: The independence requirement

3476.In order to qualify under EMI, a company must not be under the control of another company. This paragraph sets out the criteria for this independence requirement and derives from paragraph 13 of Schedule 14 to FA 2000.

Paragraph 10: The qualifying subsidiaries requirement

3477.This paragraph stipulates that if a company controls other companies, all the companies that it controls must be “qualifying subsidiaries”, as defined in paragraph 11 of this Schedule. This requirement derives from paragraph 14 of Schedule 14 to FA 2000.

Paragraph 11: Meaning of “qualifying subsidiary”

3478.This paragraph derives from paragraph 15 of Schedule 14 to FA 2000.

3479.This paragraph sets out the conditions that must be met if a company is to be a qualifying subsidiary of the company that controls it. The parent company cannot have ownership of less than 75% of a subsidiary.

3480.Sub-paragraph (3) extends the reference to “holding company” in sub-paragraph (2). See Change 174 in Annex 1.

3481.The paragraph also sets out how this requirement applies to particular circumstances such as when a subsidiary company is being wound up.

Paragraph 12: The gross assets requirement

3482.This paragraph sets out the gross assets test that a company must satisfy in order to qualify under EMI. It derives from paragraph 16 of Schedule 14 to FA 2000.

3483.The wording of this gross assets test is very brief. Inland Revenue Statement of Practice  2/00 expands upon it, explaining that gross assets are all the assets shown in a company’s balance sheet without any deductions for liabilities, and providing information about the application of United Kingdom accounting practice and which balance sheets should be used.

3484.The test in sub-paragraph (3) makes it clear that the computation requires the addition of the value of the gross assets of each member of the group.

Paragraph 13: The trading activities requirement: single company

3485.This paragraph specifies that a single company can only qualify under EMI if it is carrying on (or preparing to carry on) a qualifying trade, and that must be the only purpose for the company’s existence, aside from any incidental purpose. The paragraph also makes it clear that the holding and managing of property for the purposes of a qualifying trade may be disregarded. Sub-paragraph (3) includes signposts to the definition of “qualifying trade” in paragraph 15 of this Schedule and to the provisions regarding excluded activities in paragraphs 16 to 23 of this Schedule.

3486.The paragraph derives from paragraph 17(1), (4) and (7) of Schedule 14 to FA 2000.

Paragraph 14: The trading activities requirement: parent company

3487.This paragraph derives from the remainder of paragraph 17 of Schedule 14 to FA 2000. It contains the detail of the trading activities requirement for a parent company, which looks at the business of the whole group.

3488.The way “non-qualifying activities” is defined in paragraph 14(5)(c) has enabled the provisions in paragraphs 18 and 19 of this Schedule to be expressed in a positive way.

Paragraph 15: Meaning of “qualifying trade”

3489.This paragraph provides the definition of a qualifying trade as:

  • being carried on wholly or mainly in the United Kingdom;

  • being carried on with a view to making profits; and

  • not including (to any substantial degree) any excluded activities.

3490.The paragraph also explains to what extent research and development activities may be included.

3491.The material derives from paragraph 18 of Schedule 14 to FA 2000.

Paragraph 16: Excluded activities

3492.This paragraph lists the various activities that are excluded activities for the purposes of EMI. Some of these activities are described more fully in subsequent paragraphs of this Schedule, and this paragraph includes signposts to those subsequent explanatory provisions. It derives from paragraph 19 of Schedule 14 to FA 2000.

Paragraph 17: Excluded activities: wholesale and retail distribution

3493.This is an interpretative paragraph which draws the boundary around what may be considered as a wholesale or retail distribution activity. It derives from paragraph 20 of Schedule 14 to FA 2000.

Paragraph 18: Excluded activities: leasing of certain ships

3494.This derives from paragraph 21 of Schedule 14 to FA 2000.

3495.One of the excluded activities listed in paragraph 16 of this Schedule is leasing (including letting ships on charter). This paragraph relaxes this exclusion in specified circumstances. This material derives from paragraph 21 of Schedule 14 to FA 2000. A qualifying trade can include certain kinds of short-term ship leasing, provided that the conditions set out in this paragraph are met. This relaxation does not apply to oil rigs or pleasure craft, the leasing of which remains an excluded activity.

3496.The additional material in sub-paragraph (2) makes it clear that the requirements of sub-paragraph (4) do not have to be met in relation to oil rigs and pleasure craft.

3497.An error in sub-paragraph (4) of paragraph 21 of Schedule 14 to FA 2000 has been corrected. This part of the rule in Schedule 14 is unworkable in that it is not possible for both the owner and the charterer to be subsidiaries of the company carrying on the trade, which has necessarily to be the owner of the ship.

3498.Sub-paragraph (6) is modelled on the approach taken in section 297(7) of ICTA (the Enterprise Investment Scheme). See Change 175 in Annex 1.

Paragraph 19: Excluded activities: receipt of royalties or licence fees

3499.Another excluded activity listed in paragraph 16 of this Schedule is the receipt of royalties or licence fees. Paragraph 19, which derives from paragraph 22 of Schedule 14 to FA 2000, relaxes this line somewhat and allows a qualifying trade to include the receipt of royalties or licence fees in respect of certain intangible assets as described in this paragraph.

3500.Alterations to paragraph 14 of this Schedule have enabled this provision to be expressed positively.

3501.The reference to “normal accounting practice” has been replaced by “generally accepted accounting practice” in sub-paragraph (7). This is in line with the definition in section 103(1) of FA 2002.

Paragraph 20: Excluded activities: property development

3502.This is an interpretative paragraph, which draws the boundary around what may be considered as property development, one of the excluded activities listed in paragraph 16 of this Schedule. It derives from paragraph 23 of Schedule 14 to FA 2000.

Paragraph 21: Excluded activities: hotels and comparable establishments

3503.One of the excluded activities listed in paragraph 16 of this Schedule is the operation or management of a hotel or comparable establishment (or the management of property used as such). Paragraph 21,which derives from paragraph 24 of Schedule 14 to FA 2000, supplements the rule in paragraph 16.

Paragraph 22: Excluded activities: nursing homes and residential care homes

3504.Another excluded activity listed in paragraph 16 of this Schedule is the operation of a nursing home or a residential care home establishment (or the management of property used as such). Paragraph 22, which derives from paragraph 25 of Schedule 14 to FA 2000, supplements the rule in paragraph 16.

Paragraph 23: Excluded activities: provision of facilities for another business

3505.This paragraph adds to the list of excluded activities given in paragraph 16 of this Schedule, the provision of services to a business carried on by someone else. The exclusion applies if the business receiving the services consists largely of excluded activities (from the paragraph 16 list) and the person with a controlling interest in that business also has a controlling interest in the company providing the services. This material derives from paragraph 26 of Schedule 14 to FA 2000.

3506.To achieve the connection with excluded activities, in paragraph 26(1)(a) of Schedule 14 to FA 2000 there is a reference back to the term in paragraph 19(1) of Schedule 14. A problem with this is that in theory this could encompass activities, described as such in paragraph 19(1), but then “carved out” of this general exclusion (eg certain leasing of ships). It has been made clear that the excluded activities referred to in sub-paragraph (2)(a) are those activities after the “carve out” of those which can qualify (such as the leasing of ships in paragraph 18).

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