Introduction Enterprise Investment Scheme
2.Paragraphs 1-5 of the Schedule make changes to Schedule 5B of the Taxation of Chargeable Gains Act 1992 (TCGA), which governs the deferral of capital gains under EIS
3.Paragraph 2 amends paragraph 1(2) of Schedule 5B. Currently 80 per cent of money raised by a share issue has to be employed by the company in a qualifying activity within 12 months of the issue of shares (or the time the trade commences, whichever is later) and the balance within a further 12 months. The paragraph replaces this rule with a condition that all the money must be employed within two years of the date of the issue (or commencement of trade if this is later).
4.In addition, the paragraph completely removes the conditions relating to employment of money raised from non-qualifying shares issued on the same day as qualifying shares.
5.Paragraph 3 makes changes to paragraph 1A of Schedule 5B (which deals with failures of the conditions), reflecting the new simplified conditions.
6.Paragraphs 4 corrects an anomaly concerning EIS reinvestment relief which can arise on the occasion of a share for share exchange.
7.Normally, share for share exchanges are not treated as a disposal of the old shares for taxation purposes. But where EIS deferral relief was attributable to the old shares, the rules in Schedule 5B prevent the share for share rules from applying, to ensure that the exchange is a chargeable event bringing the deferred gain back into charge.
8.However, this means that there is a disposal of the old shares for tax purposes, so that, in addition to the deferred gain being brought back into charge, a taxable gain can arise in relation to the old shares. As a result of the changes made by paragraph 4, on the occasion of a share for share exchange qualifying under sections 135 and 136 of TCGA, any deferred gain will be brought back into charge as before but no gain or loss will be brought into charge in respect of the disposal of the shares that form the subject of the exchange.
9.Sub-paragraph (2) amends paragraph 9(1) Schedule 5B to TCGA and inserts a new sub-paragraph (1A) in paragraph 9 of Schedule 5B to TCGA, so it can no longer disapply sections 135 and 136 of TCGA generally but can only disapply sections 135 and 136 for the purposes of the application of paragraphs 3 and 4 of Schedule 5B (which provide for the deferred gain under EIS to be brought back into charge).
10.Sub-paragraphs (3) and (4) make consequential amendments to other parts of paragraph 9 of Schedule 5B to TCGA to ensure that the existing provisions in paragraph 9 governing when sections 135 and 136 are disapplied operate in relation to the more limited scope of the effect of the disapplication provided for in new sub-paragraph (1A).
11.Paragraph 6 amends section 158 of the Income Tax Act 2007 (ITA) to remove the restrictions on investments in one year being relieved against income of the preceding earlier year (“carry-back”).
12.In particular, paragraph 6(2) removes the limitation that only the costs of shares purchased before 6 October may be carried back, and paragraph 6(3) removes the £50,000 limit on the amount that may be carried back, and the rule restricting carry-back to half of shares issued. Thus the only remaining restriction on carrying back relief is the overriding investment limit for any year.
13.Paragraph 7 amends section 175 of ITA. Currently 80 per cent of money raised by a share issue has to be employed by the company in a qualifying activity within 12 months of the issue of shares (or the time the trade commences, whichever is later) and the balance within a further 12 months. The paragraph replaces this rule with a simple condition that all the money must be employed within two years of the date of the issue (or commencement of trade if this is later).
14.In addition, the paragraph completely removes the conditions relating to employment of money raised from non-qualifying shares issued on the same day as qualifying shares.