Chapter 3: General requirements
Overview
572.This Chapter sets out conditions for the general requirements that need to be met in relation to the relevant shares.
Section 172: Overview of Chapter
573.This section lists the various conditions that are contained in this Chapter and where further detail can be found. It is new.
Section 173: The shares requirement
574.This section sets out the conditions that the relevant shares must satisfy. It is based on section 289(1), (7), (8) and (8A) of ICTA.
575.The shares (apart from bonus shares) have to be fully paid up in cash at the time they are issued. Bonus shares are defined in section 257.
576.Subsection (2) provides in effect that the shares must also be full-risk ordinary shares throughout period B. The label “eligible shares” which appears in section 289(7) of ICTA is no longer used. Instead of references to “eligible shares”, there are now references elsewhere in this Part to shares which meet the requirements of this subsection.
577.There are several instances in ICTA where the reference to eligible shares adds nothing to the meaning. The word eligible has been omitted in the Part where this is the case, and if identification of the shares in question is needed, an alternative such as “the relevant shares” has been used.
578.Similarly the term “new ordinary shares” has not been reproduced. As EIS relief depends on subscribing for shares that are issued to the investor, it is not necessary to describe the shares as “new”. This approach mirrors that in paragraph 35 of Schedule 15 to FA 2000 (corporate venturing scheme).
Section 174: The purpose of the issue requirement
579.This section sets out the condition concerning the purpose for which the share issue raises money. It is based on section 289(1) of ICTA.
Section 175: The use of the money raised requirement
580.This section sets out the requirements for the employment of the money raised by the issue of relevant shares. It is based on section 289(1), (3) and (3A) of ICTA.
581.Subsection (1) contains a reference to bonus shares which are defined in section 257(1). Such shares do not need to meet the tests of this section. This enables for example section 201(4) (attribution of EIS relief to shares) to work. As a result, under section 201(4)(b) this Part applies as if the “original issue” of shares included “corresponding bonus shares”.
582.Section 257(5) explains when shares are treated as being of the same class.
Section 176: The minimum period requirement
583.This section requires that the companies mentioned in subsection (2) must carry on the qualifying business activity for a certain period of time. It is based on section 289A(6) to (8A) of ICTA.
584.Subsection (1) makes the requirements of this section a condition of eligibility for EIS relief instead of, as in section 289A(6) of ICTA, a condition for claiming the relief. See Change 40 in Annex 1.
585.Subsections (2) and (3) refer to “at or after the time of the issue” to make more obvious the fact that the period in question may end after the share issue has occurred.
Section 177: The no pre-arranged exits requirement
586.This section denies relief if certain arrangements exist in connection with the issue of shares. It is based on section 299B of ICTA.
587.The words in brackets in subsection (1)(c) “in terms of value” are not in section 299B(1)(c), although they do appear in paragraph 37(1) of Schedule 15 to FA 2000 (corporate venturing scheme). Introducing the words here is intended to clarify what is meant by “a substantial amount” in this context.
Section 178: The no tax avoidance requirement
588.This section requires that there be commercial reasons for the issue of the relevant shares and that a main purpose is not tax avoidance. It is based on section 289(6) of ICTA.
589.There is a complementary requirement in respect of the subscription for the shares in Chapter 2.
590.To be consistent with related legislation, for example, in paragraph 14 of Schedule 15 to FA 2000 (corporate venturing scheme), this section refers to “commercial reasons” rather than “commercial purposes”.
Section 179: Meaning of “qualifying business activity”
591.This section says what “qualifying business activity” means. It is based on section 289(2), (3A) and (8) of ICTA.
592.For EIS relief to be available, the share issue must raise money for the purpose of a qualifying business activity. (See section 174.)
593.In subsection (1) a qualifying business activity is explained by reference to activity A and activity B. The requirement is that these activities are carried out by the company or a qualifying 90% subsidiary.
594.The phrase “or preparing to carry on and then carrying on” in subsection (2)(b) is intended to be clearer than the phrase “preparing to carry on, or carrying on,” in section 289(2)(a)(ii) of ICTA. Each is concerned with money being raised both for the preparations for a trade and the subsequent carrying on of that trade.
595.Subsections (4) and (5) extend the cases in which R&D activities can be treated as a qualifying business activity. See Change 41 in Annex 1.
596.Subsection (7) enables certain requirements to be met in relation to a company that is not a qualifying 90% subsidiary at the time the shares are issued. See Change 42 in Annex 1.
