ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.
Change 63: VCT: preparing to carry on research and development (R&D) is not treated as preparing to carry on a qualifying trade: section 300 and Schedule 2Part 8 (meaning of “qualifying trade”)
This change makes it clear that preparing for R&D is not a “qualifying activity”.
Paragraph 3(3) of Schedule 28B to ICTA requires that a qualifying company must have been involved, at the time the relevant holding is issued and at all times since, in one of two activities. One is set out in paragraph 3(3)(a):
“carrying on a qualifying trade wholly or mainly in the United Kingdom.”
Paragraph 4(1)(b) of Schedule 28B provides that the carrying on of any activities of R&D is treated as the carrying on of a qualifying trade where it is intended that:
“there will be derived a trade that will comply with this paragraph.”
This means that the carrying on of any activities of R&D can meet the requirement in paragraph 3(3)(a) of Schedule 28B.
Paragraph 3(3)(b) refers to:
“preparing to carry on a qualifying trade which at the time when the relevant holding was issued was intended to be carried on wholly or mainly in the UK by a qualifying company.”
There is no explicit guidance in paragraph 3 or paragraph 4 of Schedule 28B to ICTA about preparing to carry on R&D. But it has not been considered that the deeming provision in paragraph 4(1)(b) extends to the requirement in paragraph 3(3)(b). So preparing to carry on R&D does not count as preparing to carry on a trade. This interpretation has been set out in the Venture Capital Schemes Manual.
In the enterprise investment scheme (EIS) and the corporate venturing scheme (CVS) the position is clearer. For EIS section 289(2)(b) of ICTA deals with R&D and in contrast to section 289(2)(a), which covers the carrying on of a qualifying trade, there is no mention of preparations. The VCT scheme was intended to follow EIS in this respect.
In paragraph 25(2) of Schedule 15 to FA 2000 (CVS) there is a deeming provision similar to the one in VCT. The final line states:
“But preparing to carry on such activities does not count as preparing to carry on a qualifying trade.”
In practice there is an uncertain distinction between R&D and preparation for R&D but it seems sensible to put this matter beyond doubt and to match VCT with EIS and CVS.
Section 300(2) of this Act, (which is also subject to Change 41) states:
“The carrying on of any activities of research and development from which it is intended-(a)that a trade will be derived which-(i)will be a qualifying trade, and(ii)will be carried on wholly or mainly in the United Kingdom, or(b)that a trade will benefit which-(i)is or will be a qualifying trade, and(ii)is or will be carried on wholly or mainly in the United Kingdom,is to be treated as the carrying on of a qualifying trade.”
Section 300(3) of this Act uses the same wording as that quoted from the CVS paragraph 25(2):
“But preparing to carry on such activities does not count as preparing to carry on a qualifying trade.”