Overview
597.This Chapter sets out the conditions to be met if the issuing company is to be a qualifying company in relation to the relevant shares.
Section 180: Overview of Chapter
598.This section summarises the conditions to be met and indicates where further detail can be found. It is based on sections 289(1)(ba) and 293(1) of ICTA but there is no equivalent provision in ICTA that draws these conditions together.
599.Where there are shared provisions, the order matches Chapter 4 of Part 6, “qualifying holdings” in the venture capital trust scheme (VCT), as far as possible.
Section 181: The trading requirement
600.This section sets out the trading requirement which the issuing company must meet throughout period B. It is based on section 293(2), (3A) to (3F) and (8A) of ICTA.
601.The nature of the requirement is set out in subsection (2). The requirement can be met in one or other of two ways. Either the issuing company must exist essentially for the purpose of carrying on one or more qualifying trades during period B, or it can be a parent company of a group that carries on qualifying activities. It can alternate between these two conditions providing that at all times within period B it meets one or other of them.
602.The meaning of “qualifying trade” is explained in section 189. “Parent company”, “group” and “group company” are defined in section 257(1). Only part of section 293(3A) of ICTA appears in this section: it is in subsection (4). The requirements in section 293(3A)(a) and (b) of ICTA are covered respectively by the definition of “parent company” in section 257(1) and by section 187.
603.Subsections (3) and (7) provide that certain requirements can be met in relation to a company that is not part of the group at the time the shares are issued. See Change 42 in Annex 1.
604.The provision for property used for R&D in subsection (6)(d) has been extended. See Change 41 in Annex 1.
605.The words “capable of” have been omitted in subsection (8), rewriting the definitions of “incidental purposes” and of “mainly trading subsidiary” in sections 293(2)(a) and 293(3F)(a) of ICTA. The intention is to make the definitions simpler to interpret. In practice the test will not change.
606.The label “non-qualifying activities” in subsection (2)(b) is defined in subsection (8). Paragraph (a) of that definition refers to excluded activities. These are listed in section 192. Section 194 provides a let-out for certain leasing of ships from being treated as a non-qualifying activity.
607.The way that subsection (8) interprets non-qualifying activities means that no distinction is made between the let-out in section 194(4), derived from section 297(6)(a) to (d) of ICTA, and the let-out in section 194(7), derived from the final words of section 297(6) of that Act. This contrasts with section 293(3C)(b) of ICTA. See Change 43 in Annex 1.
Section 182: Ceasing to meet trading requirement because of administration or receivership
608.This section provides an exception to section 181 in the cases specified. It is based on section 293(4A) to (6) and (8A) of ICTA.
609.The cases specified relate to administration or receivership carried out for commercial reasons and which do not have tax avoidance as a main purpose.
610.The meanings of “in administration” and “in receivership” are provided by section 252.
Section 183: The issuing company to carry on the qualifying business activity requirement
611.This section requires that, subject to the rules in the section, during period B it is only the issuing company or a qualifying 90% subsidiary of the issuing company that carries on the qualifying business activity for which money was raised by the share issue. It is based on section 289(1A) to (1E) and (8) and section 312(1) of ICTA.
612.Section 289(1)(ba) of ICTA, stating that the requirements of section 289(1A) of that Act must be met, is not reproduced explicitly. Instead it is implicit in section 180(b), as part of the list of the requirements in relation to the issuing company.
Section 184: The unquoted status requirement
613.This section requires that when the relevant shares are issued:
the issuing company is unquoted; and
no arrangements as are mentioned in the section are in existence.
It is based on sections 293(1A), (1B) and (8A) and 312(1), (1B), (1C) and (1E) of ICTA.
614.The words in brackets in section 293(1) of ICTA “whether it is resident in the United Kingdom or elsewhere” have not been rewritten. The words do not add anything to the tests in section 179 (meaning of “qualifying business activity”).
615.The definition of unquoted company in section 312 of ICTA is set out in this section, rather than in Chapter 8, since this is the only mention of unquoted status in the EIS provisions.
616.Section 312(1D) of ICTA is not rewritten in this Part. It concerns orders made by the Commissioners for Her Majesty’s Revenue and Customs and is covered by section 1014 which is based on section 828 of ICTA.
617.FA 2001 removed the requirement that the issuing company remain unquoted throughout the relevant period. Following that change, section 312(1E) of ICTA has little or no practical significance, but in exceptional circumstances this provision could still apply in relation to the “arrangements” in section 293(1B) of ICTA, (rewritten in subsection (1)(b) and (c)). Section 312(1E) has therefore been rewritten in subsection (6).
618.“Arrangements” are defined in section 257(1).
Section 185: The control and independence requirement
619.This section is based on section 293(8) and (8A) of ICTA. It broadly requires that throughout period B:
any company that the issuing company (on its own or together with connected persons) controls is a qualifying subsidiary of the issuing company
the issuing company is not a 51% subsidiary of or controlled by another company (on its own or together with connected persons); and
there are no arrangements which could lead the issuing company to fail either of these tests.
620.Section 293(3) of ICTA has not been rewritten. The definition of “a qualifying subsidiary of another company” is contained in section 191.
621.In subsection (1)(a) the words “of the issuing company” have been added after “a qualifying subsidiary”. See Change 44 in Annex 1.
622.“Control” in subsection (2)(a) is defined in section 995. The meaning of “control” in subsection (1)(a) is different and is given by section 257(3).
Section 186: The gross assets requirement
623.This section sets out the limits that apply to the value of a company’s gross assets before and after a share issue. It is based on section 293(6A) to (6C) of ICTA.
624.The requirement differentiates between a “single company” and a “parent company”. Both these terms are defined in section 257(1).
625.Section 293(6D) of ICTA has not been rewritten as a separate provision. The term the “company’s group” and the reference to “in relation to any time” are not needed given the definitions in section 257(1) and the way in which this section as a whole is drafted.
626.Subsection (3)(b) sets out more clearly what is meant in relation to a group of companies by the words “aggregate value at that time of the gross assets” in section 293(6B)(b) of ICTA. Similar wording is used in paragraph 12(3) of Schedule 5 to ITEPA (enterprise management incentives).
Section 187: The qualifying subsidiaries requirement
627.This section requires that during period B any subsidiary of the issuing company must be a qualifying subsidiary. It is based on sections 293(3A) and 308(1) and (5A) of ICTA.
Section 188: The property managing subsidiaries requirement
628.This section requires that any property managing subsidiary of the issuing company must also be its qualifying 90% subsidiary. It is based on section 293(6ZA) to (6ZC) and (8A) of ICTA.
629.In section 293(6ZC) of ICTA “land” and “property deriving its value from land” take the meaning in section 776 of ICTA. Subsection (3), applying for the purposes of subsection (2) of the rewritten section, provides the definition of “property deriving its value from land”. “Land” itself is not defined in this Act and instead relies on the definition in Schedule 1 to the Interpretation Act 1978. See the commentary on section 772.
Section 189: Meaning of “qualifying trade”
630.This section gives the meaning of “qualifying trade”. It is based on sections 297(2) and (8) and 298(3) and (5) of ICTA.
631.The wording of subsection (1)(b) is more compact than section 297(2) of ICTA. The comparable wording is that the trade must not “consist of one or more of the following activities if that activity amounts, or those activities when taken together amount, to a substantial part of the trade”.
632.Excluded activities referred to in this subsection are set out in section 192.
633.Subsection (2) excepts references to a trade in certain sections in this Chapter from the extended meaning of “trade” in section 989, based on the definition in section 832(1) of ICTA.
Section 190: Meaning of “qualifying 90% subsidiary”
634.This section gives the meaning of “qualifying 90% subsidiary”. It is based on section 289(9) to (13) of ICTA.
Section 191: Meaning of “qualifying subsidiary”
635.This section defines “qualifying subsidiary”. It is based on section 308(2) to (4) and (5B) of ICTA.
636.The term “51% subsidiary” in subsection (2)(a), which is based on section 308(2)(ca) of ICTA, takes its meaning from the definition in section 989. The definition provides a signpost to section 838 of ICTA. Section 308(5B) of ICTA, which applies section 838(2) to (10) to section 308(2)(ca), has not been rewritten as it is unnecessary.
Section 192: Meaning of “excluded activities”
637.This section gives the meaning of “excluded activities”. It is based on section 297(2) of ICTA.
638.The meaning of excluded activities is needed to determine whether a trade is a qualifying trade and the extent to which the business of a group includes non-qualifying activities.
639.Subsection (2) indicates where further detail can be found on certain of the activities listed in subsection (1).
Section 193: Excluded activities: wholesale and retail distribution
640.This section supplements section 192(1)(b). It is based on section 297(3) of ICTA.
641.Subsection (2) makes it clear that there are two sets of determinants, one set establishing what is a trade of wholesale and retail distribution and the other what is an ordinary trade of wholesale and retail distribution.
642.The words “or exposed” before “for sale” have been added in subsection (4). This is intended to reflect the normal description of a trade of retail distribution in United Kingdom statute law.
643.Subsection (5)(b) refers to “the trader” rather than “the company” which is referred to in section 297(3)(c)(ii) of ICTA. See Change 45 in Annex 1.
Section 194: Excluded activities: leasing of ships
644.This section supplements section 192(1)(d). It is based on sections 297(6) and (7) and 298(5) of ICTA.
645.Subsection (2) takes paragraph 18(2) of Schedule 5 to ITEPA (enterprise management incentives) as its model. This additional material, which is not in the source legislation, makes it clear that the requirements of subsection (4) do not have to be met in relation to offshore installations and pleasure craft.
646.Change 43 applies for the purposes of subsection (7). See the commentary on section 181.
Section 195: Excluded activities: receipt of royalties and licence fees
647.This section supplements section 192(1)(e). It is based on section 297(4) to (5C) of ICTA.
Section 196: Excluded activities: property development
648.This section supplements section 192(1)(g). It is based on section 298(5), (5B) and (5C) of ICTA.
Section 197: Excluded activities: hotels and comparable establishments
649.This section supplements section 192(1)(j). It is based on sections 297(3A) and 298(5A) of ICTA.
Section 198: Excluded activities: nursing homes and residential care homes
650.This section supplements section 192(1)(k). It is based on sections 297(3A) and 298(5) of ICTA.
Section 199: Excluded activities: provision of services or facilities for another business
651.This section treats the provision of services or facilities as excluded activities if:
the services or facilities are provided to businesses which themselves consist largely of excluded activities; and
the specified control requirements exist.
It is based on sections 297(2) and 298(1) to (3) of ICTA.
652.The section is written in terms of a business. As a consequence, the way in which the definition of a trade in section 298(3) of ICTA, governing sections 297 and 298, is applied within those sections has been simplified. See Change 46 in Annex 1.
Section 200: Power to amend by Treasury order
653.This section allows the Treasury to make orders amending the provisions mentioned in the section. It is based on section 298(4) of ICTA.
