ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change has no implications for the amount of tax paid, who pays it or when. It affects (in principle but not in practice) only administrative matters.
Change 48: EIS: “gross amount” of EIS relief used to determine whether maximum relief was obtained and adjustment where bonus shares issued: sections 210, 220 and 229
This change makes it explicit that the “gross amount” of EIS relief is used in determining whether the investor has obtained full relief on the amount subscribed for the relevant shares. That determination may affect the rate at which EIS relief is reduced because of matters such as a receipt of value by the investor.
In certain cases, section 299(4) of ICTA reduces the amount of value that is used to calculate the withdrawal or reduction of EIS relief that was obtained by an individual. The cases are where the claim for EIS relief resulted in the individual obtaining a tax reduction of less than the amount in respect of which relief was claimed, multiplied by the lower rate for the tax year in question.
Section 312(4)(a)(ii) of ICTA provides that for EIS the references to the reduction of relief attributable to any shares includes a reference:
“where no relief has yet been given, to the reduction of the amount which apart from the provision would be the relief.”
Section 312(4)(a)(ii) means that EIS relief can be “netted off” in an assessment if some reduction of EIS relief occurs before the assessment is final.
For example, assume the investor is eligible for EIS relief on the issue of shares for which £20,000 was subscribed and that the investor has received value of £5,000 from the issuing company. That value of £5,000 may have been received before the investor’s self-assessment (which includes a claim for EIS relief on the subscription of £20,000) is final (or even submitted). Assume also that the investor has a tax liability, ignoring the claim for EIS relief, which is greater than £20,000 multiplied by the lower rate of tax (say 20%) for the year in which the shares are issued. The investor will obtain a “net amount” of EIS relief of £3,000 in the self-assessment.
That relief is composed of a “gross amount” of relief of £4,000 (being the £20,000 subscription multiplied by 20%) less a reduction of that relief of £1,000 (being £5,000 value received multiplied by 20%). The change clarifies that it is the gross amount of £4,000 that must be considered in deciding whether the investor has had relief at the maximum rate and therefore whether section 299(4) of ICTA applies.
If it were not the case that the gross amount of relief is considered for section 299(4) of ICTA then different results could follow according to whether a receipt of value occurred before or after the investor’s self-assessment was finalised.
Different results could also follow for investors in a single issue according to the dates on which their individual self-assessments were final for the year concerned.
Finally, in the example given above the 20% rate of reduction to apply to the £5,000 receipt was found by dividing the gross relief (£4,000) by the amount in respect of which relief had been given (£20,000). There would be circularity if the rate of reduction to apply depended on some figure for net relief. That is because the rate of reduction to apply to the £5,000 must be known before one can calculate any figure for net relief.
Sections 210(3), 220(2) and 229(3) of this Act make explicit that regard is to be had to the gross amount of EIS relief in deciding whether or not to multiply value-received etc by the formula  in those sections.
For one special case, each of sections 210(4), 220(3) and 229(4) of this Act provide an exception to the subsection that it follows. That special case is where EIS relief attributable to the relevant shares is reduced and reattributed because of a bonus issue and not because of a receipt of value.
There are corresponding explicit provisions in Schedule 15 to FA 2000 (corporate venturing scheme) - at paragraphs 46(5) and (6) (disposal of shares), 52(2) and (3) (cases where maximum investment relief not obtained) and 56(7) and (8) (value received by other persons).
This change aligns the enterprise investment scheme more closely with the corporate venturing scheme. It will prevent future contentions that regard should be had to something other than the gross amount of EIS relief.