Finance Act 2000 (c. 17)

(The document as of February, 2008)

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(a) immediately before the third anniversary of the issue date; or

(b) where the money raised by the issuance of the shares is employed wholly or mainly for the purposes of one or more qualifying trades that, on the issue date, were not being carried on--

(i) by the issuing company, or

(ii) if it is a parent company, by that company or any of its qualifying subsidiaries,

immediately before the third anniversary of the trading date.

(2) For this purpose "the trading date" means--

(a) the date on which the issuing company or one of its qualifying subsidiaries begins to carry on the qualifying trade to which sub-paragraph (1)(b) refers, or

(b) if there is more than one such trade, the latest date on which the issuing company or one of its qualifying subsidiaries begins to carry on such a trade.

Part II The investing company

Introduction

4 The investing company is a qualifying investing company in relation to the relevant shares if the requirements of this Part are met as to--

(a) no material interest (see paragraph 5);

(b) no reciprocal arrangements (see paragraph 6);

(d) non-financial activities (see paragraph 10);

(e) the shares being a chargeable asset (see paragraph 13); and

(f) no tax avoidance (see paragraph 14).

The "no material interest" requirement

5 The investing company must not, at any time during the qualification period relating to the shares, have a material interest in the issuing company.

The "no reciprocal arrangements" requirement

6 (1) The investing company must not subscribe for the relevant shares as part of any arrangements which provide for any other person to subscribe for shares in a related company.

(2) For this purpose--

(a) arrangements shall be disregarded to the extent that they provide for the issuing company to subscribe for shares in any of its qualifying subsidiaries, and

(b) "a related company" means a company in which the investing company, or any other person who is a party to the arrangements, has a material interest.

(3) In sub-paragraph (2)(a) the reference to qualifying subsidiaries of the issuing company is not restricted to companies that were such subsidiaries at the time the arrangements were made.

Meaning of "material interest"

7 (1) For the purposes of paragraphs 5 and 6 a person has a material interest in a company if he (whether alone or together with any person connected with him) directly or indirectly possesses or is entitled to acquire more than 30% of--

(a) the ordinary share capital of the company or any subsidiary, or

(b) the voting power in the company or any subsidiary.

(2) For the purposes of sub-paragraph (1) "ordinary share capital", in relation to a company, means--

(a) all of the issued share capital (by whatever name called) of the company, other than capital comprising relevant preference shares, and

(b) all of the loan capital of the company that comprises debt which carries (directly or indirectly) any right to conversion into, or to the acquisition of, shares within paragraph (a) (or that would be within that paragraph if issued).

(3) For the purposes of sub-paragraph (2)(b) the loan capital of a company shall be treated as including any debt incurred by the company--

(a) for any money borrowed or capital assets acquired by the company,

(b) for any right to receive income created in favour of the company, or

(c) for consideration the value of which to the company was (at the time when the debt was incurred) substantially less than the amount of the debt (including any premium on it).

This is subject to sub-paragraph (4).

(4) For the purposes of sub-paragraph (3) a debt which--

(a) is incurred by a company or any subsidiary by overdrawing an account with a person carrying on the business of banking, and

(b) arises in the ordinary course of that business,

shall not be treated as loan capital of the company.

(5) For the purposes of sub-paragraph (1)--

(a) a person is treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire, and

(b) there are attributed to a person any rights or powers of any other person who is an associate of his.

(6) For the purposes of this paragraph a company is a subsidiary of another company if it is a 51% subsidiary of that company.

The "no control" requirement

8 (1) The investing company must not, at any time during the qualification period relating to those shares, control the issuing company.

(2) For this purpose the question whether the investing company controls the issuing company shall be determined in accordance with section 416(2) to (6) of the Taxes Act 1988 with the following modifications.

(3) The first modification is that, in determining whether the investing company controls the issuing company, there shall be disregarded--

(a) its or any other person's possession of, or entitlement to acquire, relevant preference shares of the issuing company; and

(b) its or any other person's possession of, or entitlement to acquire, rights as a loan creditor of the issuing company.

(4) For the purposes of sub-paragraph (3) a person is a "loan creditor" of a company if the person is a creditor in respect of the loan capital of that company (within the meaning of paragraph 7(3)).

(5) The second modification is that in determining whether the conditions of section 416(2) of that Act are satisfied there shall be attributed to the investing company (to the extent that it would not otherwise be the case) any rights or powers in the issuing company, or any of its subsidiaries, that are held by--

(a) any person connected with the investing company; or

(b) any person who is--

(i) a director of the investing company, or of any company connected with that company, or

(ii) a relative of such a director.

For this purpose "relative" means husband or wife, parent or remoter forebear or child or remoter issue.

Relevant preference shares

9 (1) In paragraphs 7 (meaning of "material interest") and 8 (the "no control" requirement) "relevant preference shares" means shares which--

(a) do not for the time being carry voting rights;

(b) are issued wholly for new consideration;

(c) do not carry any right either to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities; and

(d) do not carry any right to dividends other than dividends which--

(i) fall within sub-paragraph (2) or (3);

(ii) are not to any extent dependent on the results of the company's business or any part of it or on the value of any of the company's assets; and

(iii) together with any sum paid on a redemption, represent no more than a reasonable commercial return on the consideration for which the shares were issued.

In paragraph (b) "new consideration" has the meaning given by section 254 of the Taxes Act 1988.

(2) Dividends fall within this sub-paragraph if they are of a fixed amount or at a fixed rate per cent of the nominal value of the shares.

This includes dividends where the amount or rate may be changed to another fixed amount or fixed rate in a manner determined under the terms of issue of the shares.

(3) Dividends fall within this sub-paragraph if they are of a rate per cent of the nominal value of the shares and the rate fluctuates in accordance with--

(a) a standard published rate of interest,

(b) a rate of tax,

(c) the retail prices index, or any similar general index of prices which is published by the government, or by an agent of the government, of the country or territory in whose currency the shares are denominated, or

(d) a published index of prices of shares quoted in the official list of a recognised stock exchange.

(4) For the purposes of sub-paragraph (1)(d)(ii) dividends shall not be treated as being to any extent dependent on the results of the company's business (or any part of it) or on the value of any of the company's assets by reason only of the fact that the amount or rate of the dividends--

(a) reduces in the event of the results of the business (or part) improving or the value of any of the company's assets increasing, or

(b) increases in the event of the results of the business (or part) deteriorating or the value of any of the company's assets diminishing.

(5) Dividends are not prevented from falling within sub-paragraph (2) or (3) by the fact that the shares carry no rights at all to dividends for a period or periods determined under the terms of issue of the shares.

The non-financial activities requirement

10 (1) Throughout the qualification period relating to the relevant shares the investing company must fall within sub-paragraph (2) or (3).

(2) The company falls within this sub-paragraph at any time when it--

(a) is a single company, and

(b) disregarding any incidental purposes, exists wholly for the purpose of carrying on one or more non-financial trades.

(3) The company falls within this sub-paragraph at any time when--

(a) it is a group company,

(b) the group is a non-financial trading group, and

(4) This sub-paragraph applies where the company--

(a) disregarding any incidental purposes, exists wholly for the purpose of carrying on one or more--

(i) non-financial trades, or

(ii) businesses other than trades; or

(b) is the parent company of the group.

(5) For the purposes of determining whether the company falls within sub-paragraph (2)(b) or (4)(a), the purposes for which the company exists shall be disregarded to the extent that they consist in the carrying on of the following activities--

(a) in the case of a single company, the holding and managing of property used by the company for one or more non-financial trades carried on by it,

(b) in the case of a group company, any activities within paragraph 12(3)(a) or (b), and

(c) in any case, the holding of shares to which investment relief is attributable, unless the holding of such shares amounts to a substantial part of the company's business.

(6) In this paragraph "incidental purposes" means purposes having no significant effect (other than in relation to incidental matters) on the extent of the company's activities.

Meaning of "non-financial trade"

11 (1) A trade is a "non-financial trade" if--

(a) it is conducted on a commercial basis and with a view to the realisation of profits, and

(b) it does not consist wholly or as to a substantial part in the carrying on of financial activities.

(2) For this purpose "financial activities" includes--

(a) banking, or money-lending, carried on by a bank, building society or other person;

(b) debt-factoring, finance-leasing or hire-purchase financing;

(d) dealing in shares, securities, currency, debts or other assets of a financial nature; and

(e) dealing in commodity or financial futures or options.

Meaning of "non-financial trading group"

12 (1) A group is a "non-financial trading group" unless the business of the group consists wholly or as to a substantial part in the carrying on of one or more of the following--

(a) trades other than non-financial trades;

(b) businesses which are not trades.

(2) The business of the group means what would be the business of the group if the activities of the group companies taken together were regarded as one business.

(3) For this purpose activities of a group company shall be disregarded to the extent that they consist in--

(a) the holding of shares in or securities of, or the making of loans to, another group company;

(b) the holding and managing of property used by a group company for the purposes of one or more non-financial trades carried on by a group company; or

(c) the holding of shares to which investment relief is attributable, unless the holding of such shares amounts to a substantial part of the company's business.

Requirement as to shares being a chargeable asset

13 (1) The investing company is not a qualifying investing company in relation to the relevant shares unless the shares are a chargeable asset of the company immediately after they are issued to it.

(2) For this purpose an asset is a chargeable asset of that company at any time if, on a disposal at that time, a gain accruing to the company would be a chargeable gain.

(3) In this paragraph "asset" has the same meaning as in the 1992 Act.

Requirement as to no tax avoidance

14 The relevant shares must be subscribed for by the investing company for 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.

Part III The issuing company

Introduction

15 The issuing company is a qualifying issuing company in relation to the relevant shares if the requirements of this Part are met as to--

(a) unquoted status (see paragraph 16);

(b) independence (see paragraph 17);

(d) partnerships and joint ventures (see paragraph 19);

(e) qualifying subsidiaries (see paragraph 20);

(f) gross assets (see paragraph 22); and

(g) trading activities (see paragraph 23).

The "unquoted status" requirement

16 (1) The unquoted status requirement is that, at the time the relevant shares are issued, none of the issuing company's shares, debentures or other securities is (and there are no arrangements in existence for any of them to be)--

(a) listed on a recognised stock exchange,

(b) listed on a designated exchange in a country outside the United Kingdom, or

This is subject to sub-paragraph (3).

(2) The unquoted status requirement applies whether or not the company is resident in the United Kingdom.

(3) The unquoted status requirement is treated as not met if at the time the relevant shares are issued--

(a) arrangements are in existence for the issuing company to become a subsidiary of another company ("the new company") by virtue of an exchange of shares, or shares and securities, in relation to which paragraph 83 (certain exchanges resulting in acquisition of share capital by new company) applies, and

(b) arrangements have been made with a view to any of the new company's shares, debentures or other securities being listed or dealt in as mentioned in paragraph (a), (b) or (c) of sub-paragraph (1).

(4) For the purposes of sub-paragraph (1) "designated" means designated by an order ("a designation order") made for the purposes of subsection (1B) of section 312 of the Taxes Act 1988 (definition of "unquoted company" for the purposes of EIS).

(5) Where the issuing company meets the unquoted status requirement when the relevant shares are issued, it shall not cease to meet it by virtue of--

(a) any designation order, or

(b) any order under section 841 of the Taxes Act 1988 (designation of exchange as "recognised stock exchange"),

made after that time.

The independence requirement

17 (1) The independence requirement is that--

(a) the issuing company is not, at any time during the qualification period relating to the relevant shares--

(i) a 51% subsidiary of another company, or

(ii) under the control of another company (or of another company and any other person connected with that other company), without being a 51% subsidiary of that other company, and

(b) no arrangements are in existence at any time during that period by virtue of which the company could become such a subsidiary or fall under such control (whether during that period or otherwise).

(2) For the purposes of sub-paragraph (1)(b) arrangements with a view to such an exchange of shares, or shares and securities, as is mentioned in paragraph 83(1) (certain exchanges resulting in acquisition of share capital by new company) shall be disregarded.

(3) In this paragraph "control" has the meaning given by section 840 of the Taxes Act 1988.

The "individual-owners" requirement

18 (1) The "individual-owners" requirement is that, throughout the qualification period relating to the relevant shares, at least 20% of the ordinary share capital of the issuing company is beneficially owned by one or more independent individuals.

(2) For the purposes of sub-paragraph (1) "independent individual" means an individual who is not, at any time during that period when he holds ordinary shares in the issuing company--

(a) a director or employee of--

(i) the investing company, or

(ii) any company connected with that company, or

(b) a relative of such a director or employee.

For this purpose "relative" means husband or wife, parent or remoter forebear or child or remoter issue.

(3) Where part of the ordinary share capital of the issuing company forms part of the estate of a deceased person who immediately before his death--

(a) was the beneficial owner of the shares in question, and

(b) was an independent individual for the purposes of sub-paragraph (1),

the shares in question shall, by virtue of this sub-paragraph, continue to be treated as beneficially owned by an independent individual for the purposes of sub-paragraph (1) until such time as they cease to form part of the deceased's estate.

The partnerships and joint ventures requirement

19 (1) The requirement as to partnerships and joint ventures is that neither the issuing company nor any of its qualifying subsidiaries is at any time during the qualification period relating to the relevant shares--

(a) a member of a partnership falling within sub-paragraph (2), or

(b) a party to a joint venture falling within sub-paragraph (3).

(2) A partnership of which the issuing company, or any of its qualifying subsidiaries, is a member falls within this paragraph at any time when--

(a) the relevant trade is being carried on, or to be carried on, by the partners in partnership,

(b) the other partners include at least one other company, and

(c) the same person (or persons) are the beneficial owner (or owners) of more than 75% of the issued share capital or the ordinary share capital of both--

(i) the issuing company, and

(ii) at least one of the other partners.

(3) A joint venture to which the issuing company, or any of its qualifying subsidiaries, is a party falls within this paragraph at any time when--

(a) the relevant trade is being carried on, or to be carried on, by that party in its capacity as a party to the joint venture,

(b) the other parties include at least one other company, and

(c) the same person (or persons) are the beneficial owner (or owners) of more than 75% of the issued share capital or the ordinary share capital of both--

(i) the issuing company, and

(ii) at least one of the other parties.

(4) For the purposes of sub-paragraphs (2) and (3)--

(a) "the relevant trade" means any trade by reference to which the trading activities requirement is met in respect of the issuing company in relation to the relevant shares; and

(b) there shall be attributed to any person any issued share capital or ordinary share capital held by any other person who is an associate of his.

The qualifying subsidiaries requirement

20 (1) The issuing company is not a qualifying issuing company in relation to the relevant shares if, at any time during the qualification period relating to those shares, it has a subsidiary which is not a qualifying subsidiary.

(2) For this purpose--

(a) "subsidiary" means any company which the company controls, either on its own or together with any person connected with it; and

(b) the question whether a person controls a company shall be determined in accordance with section 416(2) to (6) of the Taxes Act 1988.

Meaning of "qualifying subsidiary"

21 (1) A company ("the subsidiary") is a qualifying subsidiary of another company ("the relevant company") if the following conditions are met.

(2) The conditions are that--

(a) the relevant company or another of its subsidiaries possesses not less than 75% of the issued share capital of, and not less than 75% of the voting power in, the subsidiary;

(b) the relevant company or another of its subsidiaries would--

(i) in the event of a winding up of the subsidiary, or

(ii) in any other circumstances,

be beneficially entitled to receive not less than 75% of the assets of the subsidiary which would then be available for distribution to the shareholders of the subsidiary;

(c) the relevant company or another of its subsidiaries is beneficially entitled to not less than 75% of any profits of the subsidiary which are available for distribution to the shareholders of the subsidiary;

(d) no person other than the relevant company or another of its subsidiaries has control of the subsidiary within the meaning of section 840 of the Taxes Act 1988; and

(e) no arrangements are in existence by virtue of which the conditions in paragraphs (a) to (d) would cease to be met.

(3) The subsidiary shall not be regarded as ceasing to be a company in relation to which the conditions in sub-paragraph (2) are met by reason only of--

(a) anything done as a consequence of the subsidiary, or any other company, being in administration or receivership, or

(b) the subsidiary, or any other company, being wound up or dissolved without winding up,

if sub-paragraph (4) applies.

(4) This paragraph applies where--

(a) in a case within sub-paragraph (3)(a)--

(i) the making of the order within paragraph (a) or, as the case may be, (b) of paragraph 102(4) (administration orders and orders for appointment of receiver etc.), and

(ii) everything done as a consequence of the company being in administration or receivership, or

(b) in a case within sub-paragraph (3)(b), the winding up or dissolution,

is for commercial reasons and is not part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

(5) The subsidiary shall not be regarded, at any time when arrangements are in existence for the disposal by the relevant company or (as the case may be) by another subsidiary of that company of all its interest in the subsidiary in question, as having ceased on that account to be a qualifying subsidiary if the disposal is to be for commercial reasons and not part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax.

The gross assets requirement

22 (1) The gross assets requirement in the case of a single company is that the value of the company's gross assets--

(a) does not exceed £15 million immediately before the issue of the relevant shares, and

(b) does not exceed £16 million immediately afterwards.

(2) The gross assets requirement in the case of a parent company is that the consolidated value of the group assets--

(a) does not exceed £15 million immediately before the issue of the relevant shares, and

(b) does not exceed £16 million immediately afterwards.

(3) The consolidated value of the group assets means the aggregate value of the gross assets of the group, disregarding any that consist in rights against, or shares in or securities of, another group company.

The trading activities requirement

23 (1) The issuing company is not a qualifying issuing company in relation to the relevant shares unless it meets the trading activities requirement throughout the qualification period relating to those shares.

(2) The trading activities requirement in the case of a single company is that the company--

(a) disregarding any incidental purposes, exists wholly for the purpose of carrying on one or more qualifying trades, and

(b) is carrying on a qualifying trade or preparing to do so.

(3) The trading activities requirement in the case of a parent company is that--

(a) the business of the group does not consist wholly or as to a substantial part in the carrying on of non-qualifying activities, and

(b) at least one group company--

(i) disregarding any incidental purposes, exists wholly for the purpose of carrying on one or more qualifying trades, and

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