ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small. Change 20: Share loss relief and community investment tax relief: omit the words “for full consideration”: sections 131 and 361
This change deletes the words “for full consideration” which qualify “by way of a bargain made at arm’s length”. It removes words which are not in practice applied to impose any additional requirement and creates consistency, for individuals, between the provisions relating to withdrawal or reduction of EIS relief, VCT relief and CITR.
There are three places in the Tax Acts where the words “by way of a bargain made at arm’s length” are qualified by the words “for full consideration”. These are:
	for both income tax and corporation tax:section 575(1)(a) of ICTA (relief for losses on unquoted shares in trading companies); andparagraph 29(4)(a) of Schedule 16 to FA 2002 (community investment tax relief);
	and for corporation tax only:paragraph 46(2)(a) of Schedule 15 to FA 2000 (the corporate venturing scheme).
Paragraph 46(2)(a) of Schedule 15 to FA 2000 is also applied for the purposes of paragraph 67 of that Schedule by paragraph 67(3).
Section 575(1)(a) of ICTA and paragraph 67 of Schedule 15 to FA 2000 are concerned with the circumstances in which an allowable loss incurred on a disposal of shares may be claimed as a relief in calculating taxable income for income tax or corporation tax purposes.
The phrase “for full consideration” has not caused practical difficulty in relation to claims for relief by individuals under section 574 of ICTA or by companies under section 573 of that Act or paragraph 67 of Schedule 15 to FA 2000.
Case law (Berry v Warnett (1982), 55 TC 92 HL(17) and Bullivant Holdings Limited v CIR (1998), 71 TC 22 ChD18) confirms that a bargain may be made at arm’s length if a full and fair price is paid. Whether the price is full and fair is to be determined by reference to the circumstances of the disposal and it is clear that the price paid may be full and fair notwithstanding that it is substantially below open market value.
If the words “for full consideration” mean no more than that a full and fair price is paid in the circumstances of the disposal, the words are otiose. If they have independent meaning, this may require that the price paid is not less than market value, if market value is greater than the amount which is a full and fair price in the circumstances of the disposal. But in practice no such requirement is imposed.
Accordingly the words “for full consideration” have been omitted from section 131(3)(a) in rewriting section 575(1) of ICTA for income tax purposes.
Paragraph 29 of Schedule 16 to FA 2002 and paragraph 46 of Schedule 15 to FA 2000 are concerned with the withdrawal or reduction of tax relief previously obtained. These paragraphs contrast with the only other provisions in the Tax Acts dealing with the withdrawal or reduction of investment reliefs. In those provisions, the words “by way of a bargain made at arm’s length” appear without any qualification.
The provisions in the source legislation and the sections where they are rewritten in this Act are:
	section 299(1)(a) and (b) of ICTA (withdrawal or reduction of EIS relief), rewritten as section 209(2) and (3); and
	paragraph 3(2) and (3) of Schedule 15B to ICTA (withdrawal or reduction of VCT relief), rewritten as section 266(2)and (3).
In practice, the provisions for the withdrawal or reduction of CITR are operated on the same basis as the similar provisions relating to EIS relief and VCT relief - see paragraph 7020 of HMRC’s Community Investment Tax Relief Manual (CITM 7020). Omitting the words “for full consideration” from section 361(4)(a) brings the text of all three rewritten income tax provisions into line.