ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with current practice.
Change 59: VCT: conditions relating to value of investments: sections 278 and 285 and Schedule 2Part 8 (conditions relating to value of investments)
This change makes clear how the test in section 842AA(2)(d) of ICTA (referred to in this note as the 15% test) operates. It also makes clear how definitions in section 842 of ICTA apply for the purposes of 842AA(5) of that Act, which itself defines the value of a holding for the purposes of the tests in section 842AA(2) (b) to (d).
Section 842AA(11) of ICTA applies certain provisions of section 842 of ICTA to section 842AA and these have been included in the rewrite of section 842AA.
The opening words of section 842AA(11) are:
“The following provisions of section 842 shall apply for the purposes of this section as they apply for the purposes of that section,…”
Section 842AA(11)(a) provides that the conditions relating to the 15% test in section 842 shall apply to the equivalent test in section 842AA(2)(d):
“subsections (1A) and (2) of that section [section 842] shall apply in relation to subsection (2)(d) above (but with the omission of subsection (2)(a) of that section) as they apply in relation to subsection (1)(b) of that section.”
Section 842AA(11)(c) then further provides:
“without prejudice to their application in relation to provisions applied by paragraph (a) or (b) above, subsections (3) and (4) of that section [section 842] shall apply in relation to any reference in this section to a holding or an addition to a holding as they apply in relation to any such reference in that section.”
Section 842(3) defines a holding for the purpose of section 842(2). It states that:
““holding” means the shares or securities (whether of one class or more than one class) held in any one company.”
Section 842(3) also defines an addition to a holding and explains what happens if there is a scheme of reconstruction.
It is not clear how the definitions in section 842(3) apply to section 842AA(5). Section 842AA(5) deals with the valuation of a holding and the circumstances under which this is revalued for the purpose of the conditions in section 842AA(2)(b) to (d).
It is possible to read the definitions in section 842(3) as applying only to the 15% test in section 842AA(2)(d) since the definition is of a holding “in any one company”. Section 842AA(2)(d) refers to a holding “in any company” and there are no other examples of this sort of phraseology in section 842AA. In addition the definition in section 842 is of shares or securities (whether of one class or more than one class) while section 842AA(5) refers to a holding “of investments of the same description” and additions to such holdings. Furthermore it is not obvious how both the applied provisions in section 842 and section 842AA(5) can apply to this test given the wording of section 842AA(11)(c).
But the wording of section 842AA(11)(c) “any reference in this section to a holding or an addition to a holding” suggests that there is more than one such reference to which section 842(3) applies. In addition, if section 842(3) does not apply to section 842AA(5), there is no explicit guidance on the interpretation of an addition to a holding of investments. Also section 842AA(5) applies to all the percentage tests (the 70%, 30% and 15% tests).
In practice the provisions have been interpreted on the basis that it is necessary to establish whether or not a holding has been added to in accordance with section 842(3), when an investment of any description is added to a holding of shares or securities.
Then the rules in section 842AA(5) are applied to revalue only the holding of investments of the same description as the investment added when applying the 15% test in section 842AA(2)(d).
The sections of this Act are based on this approach and remove the possible doubt about the way in which section 842 and section 842AA of ICTA interact.
Section 277 of this Act sets out the section 842 of ICTA rules about when and how the 15% test applies. (In Part 6 of this Act the 15% test is called “the 15% holding limit condition”.)
In section 278 of this Act which rewrites section 842AA(5) of ICTA and is concerned with the way a holding is valued when there is an addition, the section 842(3)(b) and (c) and section 842(4) definitions are adapted to the terminology in section 842AA(5).
The effect of this is that the rules in section 278 apply to the 15% holding limit condition when there is an addition to investments of any description in the same way as they apply to the 70% qualifying holdings condition and the 30% eligible shares condition. A revaluation is required only of the holding of investments of that description. This is in line with interpretation and practice.
There is a transitional provision in Schedule 2 the purpose of which is to preserve the effect of section 842AA(11)(c) of ICTA on the 15% test where there is an addition to investments held by a company before 6 April 2007.