Finance Act 1998 (c. 36) (c. 36)

(The document as of February, 2008)

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Withdrawal of relief

20 (1) In subsection (1A) of section 307 of the Taxes Act 1988--

(a) for the words "section 289(1)(b) or (c)" there shall be substituted the words "section 289(1)(b), (ba) or (c)"; and

(b) after the words "section 310" there shall be inserted the words "or paragraph 16(2) or (4) of Schedule 5B to the 1992 Act".

(2) After subsection (1B) of that section there shall be inserted the following subsection--

" (1C) Where any issue has been determined on an appeal brought by virtue of paragraph 1A(6) of Schedule 5B to the 1992 Act (appeal against notice that shares never have been, or have ceased to be, eligible shares), the determination shall be conclusive for the purposes of any appeal brought by virtue of subsection (1B) above on which that issue arises. "

(3) In subsection (4) of that section, for the words "ordinary shares" there shall be substituted the words "eligible shares".

(4) In subsection (6)(b) of that section, for the words "section 291" there shall be substituted the words "section 289(1)(ba), 291".

Application to subsidiaries

21 In subsection (2) of section 308 of the Taxes Act 1988, for the words "90 per cent.", in each place where they occur, there shall be substituted the words "75 per cent.".

Information

22 (1) In subsection (1) of section 310 of the Taxes Act 1988, for the words "299A, 300 or 304" there shall be substituted the words "299A or 300".

(2) In subsection (2) of that section--

(a) for the words "289(1)(c) or (6), 293, 297" there shall be substituted the words "289(1)(ba) or (c), 293"; and

(b) the words "or payment" shall cease to have effect.

(3) In subsection (7) of that section, for the words "300, 301 and 303(3)" there shall be substituted the words "300 and 303(3)".

(4) After subsection (9) of that section there shall be inserted the following subsection--

" (9A) References in this section to withdrawal of relief include its reduction. "

(5) This paragraph has effect in relation to events occurring on or after 6th April 1998.

Interpretation of Chapter III

23 (1) In subsection (1) of section 312 of the Taxes Act 1988--

(a) the definition of "new consideration" shall cease to have effect; and

(b) for the definitions of "research and development" and "relief" there shall be substituted the following definitions--

"research and development" means any activity which is intended to result in a patentable invention (within the meaning of the [1977 c. 37.] Patents Act 1977) or in a computer program;

"the seven year period" has the meaning given by section 291(6); " .

(2) In subsection (1A) of that section, the words "(disregarding section 289B(5))" shall cease to have effect.

(3) In subsection (1B)(c) of that section, the words "dealt in on the Unlisted Securities Market or" shall cease to have effect.

(4) In subsection (2) of that section, for the words "sections 291 to 291B" there shall be substituted the words "section 291, section 291A(1), (4) and (5) and section 291B".

(5) After subsection (4) of that section there shall be inserted the following subsections--

" (4A) In this Chapter references (however expressed) to an issue of eligible shares in any company are to any eligible shares in the company that are of the same class and are issued on the same day.

(4B) For the purposes of this Chapter 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. "

(6) In subsection (7) of that section, for the words "section 289(2)(c)" there shall be substituted the words "subsection (2)(c) of section 289".

Part II EIS relief against chargeable gains

24 (1) In subsections (1) and (2) of section 150A of the [1992 c. 12.] Taxation of Chargeable Gains Act 1992 (enterprise investment schemes), the word "eligible" shall cease to have effect.

(2) In subsection (4)(a) of that section, for the words "issued to a person at different times a disposal relates" there shall be substituted the words "acquired by an individual at different times a disposal relates to".

(3) In subsection (5) of that section, for the words "Sections 104, 105 and 107" there shall be substituted the words "Sections 104, 105 and 106A".

(4) For subsection (6) of that section there shall be substituted the following subsections--

" (6) Where an individual holds shares which form part of the ordinary share capital of a company and include shares of more than one of the following kinds, namely--

(a) shares to which relief is attributable and to which subsection (6A) below applies,

(b) shares to which relief is attributable and to which that subsection does not apply, and

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 shares falling within paragraph (a), (b) or (c) above (so that shares of each kind are treated as a separate holding of original shares and identified with a separate new holding).

(6A) This subsection applies to any shares if--

(a) expenditure on the shares has been set under Schedule 5B to this Act against the whole or part of any gain; and

(b) in relation to the shares there has been no chargeable event for the purposes of that Schedule. "

(5) In subsection (8A)(a) of that section, the word "preferential", in the second place where it occurs, shall cease to have effect.

(6) After subsection (8C) of that section there shall be inserted the following subsection--

" (8D) Where shares to which relief is attributable are exchanged for other shares in circumstances such that section 304A of the Taxes Act (acquisition of share capital by new company) applies--

(a) subsection (8) above shall not have effect to disapply section 135; and

(b) subsections (2)(b), (3) and (4) of section 304A of the Taxes Act, and subsection (5) of that section so far as relating to section 306(2) of that Act, shall apply for the purposes of this section as they apply for the purposes of Chapter III of Part VII of that Act. "

(7) After subsection (10) of that section there shall be inserted the following subsection--

" (10A) In this section--

"ordinary share capital" has the same meaning as in the Taxes Act;
"ordinary shares", in relation to a company, means shares forming part of its ordinary share capital. "

(8) In this paragraph--

(a) sub-paragraphs (1) to (3) have effect in relation to disposals made on or after 6th April 1998;

(b) sub-paragraph (4) has effect in relation to reorganisations taking effect on or after that date;

(c) sub-paragraph (5) has effect in relation to new shares (within the meaning of section 150A(8A) of the [1992 c. 12.] Taxation of Chargeable Gains Act 1992) issued on or after that date;

(d) sub-paragraph (6) has effect in relation to new shares (within the meaning of section 304A of the Taxes Act 1988) issued on or after that date; and

(e) sub-paragraph (7) has effect in relation to events occurring on or after that date.

25 (1) In subsection (1) of section 150B of that Act (enterprise investment scheme: reduction of relief), the word "eligible" shall cease to have effect.

(2) This paragraph has effect in relation to disposals made on or after 6th April 1998.

Part III EIS deferral of chargeable gains

Preliminary

26 Schedule 5B to the [1992 c. 12.] Taxation of Chargeable Gains Act 1992 (enterprise investment scheme: re-investment) shall be amended in accordance with the following provisions of this Part.

Application of Schedule

27 (1) In sub-paragraph (1)(b) of paragraph 1, after the words "in accordance with" there shall be inserted the words "section 164F or 164FA,".

(2) For sub-paragraphs (2) and (3) of that paragraph there shall be substituted the following sub-paragraphs--

" (2) The investor makes a qualifying investment for the purposes of this Schedule if--

(a) eligible shares in a company for which he has subscribed wholly in cash are issued to him at a qualifying time and, where that time is before the accrual time, the shares are still held by the investor at the accrual time,

(b) the company is a qualifying company in relation to the shares,

(c) at the time when they are issued the shares are fully paid up (disregarding for this purpose any undertaking to pay cash to the company at a future date),

(d) the shares are subscribed for, and issued, for bona fide commercial purposes and not as part of arrangements the main purpose or one of the main purposes of which is the avoidance of tax,

(e) the requirements of section 289(1A) of the Taxes Act are satisfied in relation to the company,

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

(g) the money raised by the issue is employed not later than the time mentioned in section 289(3) of the Taxes Act wholly for the purpose of that activity,

and for the purposes of this Schedule, the condition in paragraph (g) 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.

(3) In sub-paragraph (2) above "a qualifying time", in relation to any shares subscribed for by the investor, means--

(a) any time in the period beginning one year before and ending three years after the accrual time, or

(b) any such time before the beginning of that period or after it ends as the Board may by notice allow. "

Failure of conditions of application

28 After that paragraph there shall be inserted the following paragraph--

" Failure of conditions of application

1A (1) If the condition in sub-paragraph (2)(b) of paragraph 1 above is not satisfied in consequence of an event occurring after the issue of eligible shares, the shares shall be treated for the purposes of this Schedule as ceasing to be eligible shares on the date of the event.

(2) If the condition in sub-paragraph (2)(e) of that paragraph is not satisfied in consequence of an event occurring after the issue of eligible shares, the shares shall be treated for the purposes of this Schedule as ceasing to be eligible shares on the date of the event.

(3) If the condition in sub-paragraph (2)(f) of that paragraph is not satisfied in relation to an issue of eligible shares, the shares shall be treated for the purposes of this Schedule as never having been eligible shares.

(4) If the condition in sub-paragraph (2)(g) of that paragraph is not satisfied in relation to an issue of eligible shares, the shares shall be treated for the purposes of this Schedule--

(a) if the claim under this Schedule is made after the time mentioned in section 289(3) of the Taxes Act, as never having been eligible shares; and

(b) if that claim is made before that time, as ceasing to be eligible shares at that time.

(5) None of the preceding sub-paragraphs applies unless--

(a) the company has given notice under paragraph 16(2) or (4) below or section 310(2) of the Taxes Act; or

(b) an inspector has given notice to the company stating that, by reason of the matter mentioned in that sub-paragraph, the shares should, in his opinion, be treated for the purposes of this Schedule as never having been or, as the case may be, as ceasing to be eligible shares.

(6) The giving of notice by an inspector under sub-paragraph (5) 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.

(7) Where any issue has been determined on an appeal brought by virtue of section 307(1B) of the Taxes Act (appeal against notice that relief was not due), the determination shall be conclusive for the purposes of any appeal brought by virtue of sub-paragraph (6) above on which that issue arises. "

Postponement of original gain

29 In sub-paragraph (3) of paragraph 2, for paragraph (a) there shall be substituted the following paragraph--

" (a) the investor's qualifying expenditure on any relevant shares is the amount subscribed by him for the shares; and " .

Chargeable events

30 (1) In sub-paragraph (1) of paragraph 3--

(a) in paragraphs (c) and (d), for the words "the first relevant period" there shall be substituted the words "the five year period"; and

(b) for paragraphs (e) and (f) there shall be substituted the words " or

(e) those shares cease (or are treated for the purposes of this Schedule as ceasing) to be eligible shares. "

(2) Sub-paragraph (2) of that paragraph shall cease to have effect.

(3) After sub-paragraph (5) of that paragraph there shall be inserted the following sub-paragraph--

" (6) Any reference in the following provisions of this Schedule to a chargeable event falling within a particular paragraph of sub-paragraph (1) above is a reference to a chargeable event arising for the purposes of this Schedule by virtue of that paragraph. "

Gains accruing on chargeable event

31 (1) For sub-paragraphs (2) to (4) of paragraph 4 there shall be substituted the following sub-paragraphs--

" (2) Any question for the purposes of capital gains tax as to whether any shares to which a disposal (including a disposal within marriage) relates are shares to which deferral relief is attributable shall be determined in accordance with sub-paragraphs (3) and (4) below.

(3) Where shares of any class in a company have been acquired by an individual on different days, any disposal by him of shares of that class shall be treated as relating to those acquired on an earlier day rather than to those acquired on a later day.

(4) Where shares of any class in a company have been acquired by an individual on the same day, any of those shares disposed of by him shall be treated as disposed of in the following order, namely--

(a) first any to which neither deferral relief nor relief under Chapter III of Part VII of the Taxes Act is attributable;

(b) next any to which deferral relief, but not relief under that Chapter, is attributable;

(d) finally any to which both deferral relief and relief under that Chapter are attributable.

(4A) The following, namely--

(a) any shares to which deferral relief, but not relief under Chapter III of Part VII of the Taxes Act, is attributable and which were disposed of to an individual by a disposal within marriage, and

(b) any shares to which relief under that Chapter is attributable and which were transferred to an individual as mentioned in section 304 of that Act,

shall be treated for the purposes of sub-paragraphs (3) and (4) above as acquired by him on the day on which they were issued.

(4B) Chapter I of Part IV of this Act has effect subject to sub-paragraphs (2) to (4A) above.

(4C) Sections 104, 105 and 106A shall not apply to shares to which deferral relief, but not relief under Chapter III of Part VII of the Taxes Act, is attributable. "

(2) In sub-paragraph (5)(b) of that paragraph, for the words "the assumptions for which sub-paragraph (3) above provides" there shall be substituted the words "sub-paragraphs (3) to (4A) above".

(3) This paragraph has effect in relation to disposals made on or after 6th April 1998.

Persons to whom gain accrues

32 In sub-paragraph (1) of paragraph 5, for paragraphs (c) and (d) there shall be substituted the words " or

(c) to the person who holds the shares in question when they cease (or are treated for the purposes of this Schedule as ceasing) to be eligible shares. "

Claims

33 For paragraph 6 there shall be substituted the following paragraph--

" Claims

6 (1) Subject to sub-paragraph (2) below, section 306 of the Taxes Act shall apply in relation to a claim under this Schedule in respect of relevant shares as it applies in relation to a claim for relief under Chapter III of Part VII of that Act in respect of eligible shares.

(2) That section, as it so applies, shall have effect as if--

(a) any reference to the conditions for the relief were a reference to the conditions for the application of this Schedule;

(b) in subsection (1), the words "(or treated by section 289B(5) as so issued)" were omitted; and

Reorganisations and reconstructions

34 After paragraph 6 there shall be inserted the following paragraphs--

" Reorganisations

7 (1) Where an individual holds shares which form part of the ordinary share capital of a company and include shares of more than one of the following kinds, namely--

(a) shares to which deferral relief and relief under Chapter III of Part VII of the Taxes Act are attributable,

(b) shares to which deferral relief but not relief under that Chapter is attributable, and

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 paragraph) separately to shares falling within paragraph (a), (b) or (c) above (so that shares of each kind are treated as a separate holding of original shares and identified with a separate new holding).

(2) 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, the existing holding or the allotted shares are shares to which deferral relief is attributable,

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

Acquisition of share capital by new company

8 (1) This paragraph applies where--

(a) a company ("the new company") in which the only issued shares are subscriber shares acquires all the shares ("old shares") in another company ("the old company");

(b) the consideration for the old shares consists wholly of the issue of shares ("new shares") in the new company;

(d) new shares of each description are issued to the holders of old shares of the corresponding description in respect of and in proportion to their holdings;

(e) at some time before the issue of the new shares--

(i) the old company issued eligible shares; and

(ii) a certificate in relation to those eligible shares was issued by that company for the purposes of subsection (2) of section 306 of the Taxes Act (as applied by paragraph 6 above) and in accordance with that section (as so applied); and

(f) by virtue of section 127 as applied by section 135(3), the exchange of shares is not treated as involving a disposal of the old shares or an acquisition of the new shares.

(2) For the purposes of this Schedule, deferral relief attributable to any old shares shall be attributable instead to the new shares for which they are exchanged.

(3) Where, in the case of any new shares held by an individual to which deferral relief becomes so attributable, the old shares for which they are exchanged were subscribed for by and issued to the individual, this Schedule shall have effect as if--

(a) the new shares had been subscribed for by him at the time when, and for the amount for which, the old shares were subscribed for by him;

(b) the new shares had been issued to him by the new company at the time when the old shares were issued to him by the old company; and

(4) Where, in the case of any new shares held by an individual to which deferral relief becomes so attributable, the old shares for which they are exchanged were acquired by the individual on a disposal within marriage, this Schedule shall have effect as if--

(a) the new shares had been subscribed for at the time when, and for the amount for which, the old shares were subscribed for;

(b) the new shares had been issued by the new company at the time when the old shares were issued by the old company; and

(5) Where deferral relief becomes so attributable to any new shares--

(a) this Schedule shall have effect as if anything which, under paragraph 1A(5) above, paragraph 16 below or section 306(2) of the Taxes Act as applied by paragraph 6 above has been done, or is required to be done, by or in relation to the old company had been done, or were required to be done, by or in relation to the new company; and

(b) any appeal brought by the old company against a notice under paragraph 1A(5)(b) may be prosecuted by the new company as if it had been brought by that company.

(6) For the purposes of this paragraph old shares and new shares are of a corresponding description if, on the assumption that they were shares in the same company, they would be of the same class and carry the same rights; and in sub-paragraph (1) above references to shares, except in the expressions "eligible shares" and "subscriber shares", include references to securities.

(7) Nothing in section 293(8) of the Taxes Act, as applied by the definition of "qualifying company" in paragraph 19(1) below, shall apply in relation to such an exchange of shares, or shares and securities, as is mentioned in sub-paragraph (1) above or arrangements with a view to such an exchange.

Other reconstructions and amalgamations

9 (1) Subject to sub-paragraphs (2) and (3) below, sections 135 and 136 shall not apply in respect of shares to which deferral relief, but not relief under Chapter III of Part VII of the Taxes Act, is attributable.

(2) Sub-paragraph (1) above shall not have effect to disapply section 135 or 136 where--

(a) the new holding consists of new ordinary shares ("the new shares") carrying no present or future preferential right to dividends or to a company's assets on its winding up and no present or future right to be redeemed,

(b) the new shares are issued after the end of the relevant period, and

(3) Sub-paragraph (1) above shall not have effect to disapply section 135 where shares to which deferral relief, but not relief under Chapter III of Part VII of the Taxes Act, is attributable are exchanged for other shares in such circumstances as are mentioned in paragraph 8(1) above.

(4) The condition is that at some time before the issue of the new shares--

(a) the company issuing them issued eligible shares, and

(b) a certificate in relation to those eligible shares was issued by the company for the purposes of subsection (2) of section 306 of the Taxes Act (as applied by paragraph 6 above) and in accordance with that section (as so applied).

(5) In sub-paragraph (2) above "new holding" shall be construed in accordance with sections 126, 127, 135 and 136. "

Anti-avoidance provisions

35 After paragraph 9 there shall be inserted the following paragraphs--

" Re-investment in same company etc.

10 (1) An individual to whom any eligible shares in a qualifying company are issued shall not be regarded for the purposes of this Schedule as making a qualifying investment if, where the asset disposed of consisted of shares in or other securities of any company ("the initial holding"), the qualifying company--

(a) is the company in which the initial holding subsisted; or

(b) is a company that was, at the time of the disposal of the initial holding, or is, at the time of the issue of the eligible shares, a member of the same group of companies as the company in which the initial holding subsisted.

(2) Where--

(a) any eligible shares in a qualifying company ("the acquired holding") are issued to an individual,

(b) an amount of qualifying expenditure on those shares has been set under this Schedule against the whole or part of any chargeable gain (the "postponed gain"), and

he shall not be regarded in relation to the issue to him of the shares in the relevant company as making a qualifying investment for the purposes of this Schedule.

(3) For the purposes of sub-paragraph (2) above a company is a relevant company if--

(a) where that individual has disposed of any of the acquired holding, it is the company in which the acquired holding has subsisted or a company which was a member of the same group of companies as that company at any time since the acquisition of the acquired holding;

(b) it is a company in relation to the disposal of any shares in which there has been a claim under this Schedule such that, without that claim, there would have been no postponed gain in relation to the acquired holding; or

(c) it is a company which, at the time of the disposal or acquisition to which the claim relates, was a member of the same group of companies as a company falling within paragraph (b) above.

Pre-arranged exits

11 (1) Where an individual subscribes for eligible shares ("the shares") in a company, the shares shall be treated as not being eligible shares for the purposes of this Schedule if the relevant arrangements include--

(a) arrangements with a view to the subsequent repurchase, exchange or other disposal of the shares or of other shares in or securities of the same 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 company or a person connected with the company;

(c) arrangements for the disposal of, or of a substantial amount of, the assets of the company or of a person connected with the company;

(d) arrangements the main purpose of which, 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 that company against what would otherwise be the risks attached to making the investment.

(2) The arrangements referred to in sub-paragraph (1)(a) above do not include any arrangements with a view to such an exchange of shares, or shares and securities, as is mentioned in paragraph 8(1) above.

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

(a) the relevant arrangements include arrangements for the company to be wound up; or

(b) the company is wound up otherwise than for bona fide commercial reasons.

(4) The arrangements referred to in sub-paragraph (1)(d) above do not include any arrangements which are confined to the provision--

(a) for the company itself, or

(b) in the case of a company which is a parent company of a trading group, for the company itself, for the 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 it might reasonably be expected so to provide in normal commercial circumstances.

(5) The reference in sub-paragraph (4) above to the parent company of a trading group shall be construed in accordance with the provision contained for the purposes of section 293 of the Taxes Act in that section.

(6) In this paragraph "the relevant 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 him in relation to or in connection with that issue.

Put options and call options

12 (1) Sub-paragraph (2) below applies where an individual subscribes for eligible shares ("the shares") in a company and--

(a) an option, the exercise of which would bind the grantor to purchase such shares, is granted to the individual during the relevant period; or

(b) an option, the exercise of which would bind the individual to sell such shares, is granted by the individual during the relevant period.

(2) The shares to which the option relates shall be treated for the purposes of this Schedule--

(a) if the option is granted on or before the date of the issue of the shares, as never having been eligible shares; and

(b) if the option is granted after that date, as ceasing to be eligible shares on the date when the option is granted.

(3) The shares to which the option relates shall be taken to be those which, if--

(a) the option were exercised immediately after the grant, and

(b) any shares in the company acquired by the individual after the grant were disposed of immediately after being acquired,

would be treated for the purposes of this Schedule as disposed of in pursuance of the option.

(4) Nothing in this paragraph shall prejudice the operation of paragraph 11 above.

(5) An individual who acquires any eligible shares on a disposal within marriage shall be treated for the purposes of this paragraph and paragraphs 13 to 15 below as if he subscribed for those shares.

Value received by investor

13 (1) Where an individual who subscribes for eligible shares ("the shares") in a company receives any value from the company at any time in the seven year period, the shares shall be treated as follows for the purposes of this Schedule--

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