Introduction Details of Schedule 11 Part 1 Chapter 4
60.Chapter 4, sections 257M to 257MV, describe the eligibility conditions relating to the social enterprises.
61.New section 257M requires an enterprise to be a social enterprise as defined in section 257J(2) throughout the shorter applicable period mentioned in section 257KC.  There is no requirement for it to be the same type of social enterprise throughout.
62.New section 257MA sets a limit on the amount of tax-advantaged investment which an enterprise or its qualifying subsidiary may receive in a rolling three year period.  This limit is imposed by the need to comply with the European Commission’s regulations on de minimis State aid, which restrict such aid to an amount not exceeding €200,000 in a three year period.  The guidelines also require de minimis aid to be transparent (i.e. ascertainable) at the point at which it is given.  As it is not possible to determine at the time of investment what tax reliefs may actually be claimed, the limit is therefore calculated by reference to the aggregate of the maximum amount of SI tax relief under Part 5B ITA and the maximum amount of capital gains tax relief under Schedule 8B Taxation of Chargeable Gains Act which an investment would be capable of attracting, rather than by reference to amounts of tax relief ultimately claimed.
63.New section 257MB grants a power for Treasury to amend by order the enterprise size and investment limits, or other matters needed in connection with an application for State aid approval.
64.New section 257MC sets out the limits that apply to the value of an enterprise’s gross assets before and after an investment. The limits are £15m immediately before investment and £16m immediately after. The requirement differentiates between a singleton enterprise and one which is the parent of a group.  Where the latter is the case, it is the value of the group assets which has to be taken into account.
65.Subsection (3) provides that for this purpose, no account is taken of any assets which consist in rights against another member of the group, or any shares in, or securities of, another such group member.
66.Section 257MC mirrors an equivalent provision in the Enterprise Investment Scheme legislation, at section 186 ITA. HMRC has published a Statement of Practice SP2/06 in relation to that provision, indicating that ordinarily the value of a company's assets will be determined by reference to the values shown on its balance sheets as explained in the Statement. It is anticipated that similar considerations are likely to apply for this new relief, subject to that Statement of Practice still being in existence.
67.New section 257MD provides that when the investment is made, none of the enterprise’s shares, stocks, debentures or other securities may be listed on a recognised stock exchange or other designated exchange as defined, and there must be no arrangements in place for that to happen. This restriction applies in respect of all such instruments issued by the enterprise, not only those in respect of which tax relief may be claimed.
68.New section 257ME contains two tests, each of which must be met for the duration of the shorter applicable period. Both tests rely on the definition of “control” to be found at section 257T, which in turn relies on the definition at sections 450 and 451 of the Corporation Tax Act 2010, modified to take account of charitable trusts.  Both tests also rely on the definition of “connection” in section 993 ITA, which applies by virtue of section 1021 ITA.
69.The first test, at subsection (1), prevents an enterprise from qualifying if it controls (either on its own or together with any person connected with it) any company which is not a qualifying subsidiary. “Qualifying subsidiary” for this purpose is as defined at              section 257MU.
70.The second test, at subsection (2), prevents an enterprise from qualifying if it is either a 51% subsidiary of another company, or is under the control of another company (or another company and any person connected with that company) without being a 51% subsidiary of that company.
71.New section 257MF provides that any subsidiary which the enterprise has during the shorter applicable period, must be a qualifying subsidiary.  The definition of “qualifying subsidiary” for this purpose is to be found at section 257MU.
72.New section 257MG requires that if the enterprise has a subsidiary whose business consists wholly or mainly of holding or managing land, or property deriving its value directly or indirectly from land, that subsidiary (termed a ‘property managing subsidiary’) must be a qualifying 90% subsidiary of the company. The legislation does not define what is meant by “property deriving its value …indirectly from land”, but examples might include the enterprise having shareholdings in a company deriving its value directly or indirectly from land; having any interest in settled property deriving its value directly or indirectly from land; or having any option, consent or embargo affecting the disposition of land. For the definition of ‘qualifying 90% subsidiary’ see section 257MV.
73.New section 257MH requires that at the time of investment, either the enterprise or the group of which it is a parent, as appropriate, must have fewer than 500 full-time equivalent employees. Part-time employees are to be included on any basis which is “just and reasonable”.  For the purpose of this section, the term “employee” includes directors, but not employees who are on maternity or paternity leave or students who are on vocational training.
74.New section 257MI provides that neither the enterprise, nor any of its qualifying 90% social subsidiaries, may be a member of a partnership at any time during the shorter applicable period. “Partnership” for this purpose will include a limited liability partnership, by virtue of section 863(2) Income Tax (Trading and Other Income) Act 2005.
75.New section 257MJ describes what is termed the “trading requirement”.  Despite the title, this is not a requirement that the enterprise must either be trading at time of investment or must trade for any specified period of time.  Rather, it is a requirement as to the nature of the activities of the enterprise or of the group of which it is a parent.  It must be met throughout the shorter applicable period.
76.The trading requirement does not apply to a social enterprise which is an accredited social impact contractor.  It is anticipated that the social impact contract will constitute a trading contract, so that by the time a social impact contractor comes to apply for accreditation for such a contract, it will already be trading and the separate requirement at section 257MJ will not be needed.
77.Subsection (2) provides that the trading requirement can be met in one or other of three ways, depending on whether the enterprise is a single entity or whether it is the parent of a group. A social enterprise which is neither a parent company nor a charity will not qualify if it carries on any activities other in the course of a trade, or in the course of preparing to carry on a trade) The carrying on of investment activities would therefore disqualify a single social enterprise. A single entity will also not qualify if “excluded activities” (as listed in section 257MQ) form a substantial part of the trade.  In this context, activities carried on for “incidental” purposes which would have no significant effect on the company’s activities as a whole, are ignored.
78.A single enterprise which is a charity is treated for the purpose of this section as fulfilling this condition, although charities will by their nature carry on a range of activities in order to fulfil their charitable purpose.
79.An enterprise which is the parent company of a group will fulfil the condition if the business of the group as a whole does not substantially involve non-qualifying activities. Subsection (7) defines “non-qualifying activities” for this purpose as excluded activities (see section 257MQ), or activities (other than carried on by a charity) which are carried on otherwise than in the course of a trade.
80.Subsection (3) treats an enterprise as a parent company if it intends that one or more companies will become its qualifying subsidiaries to carry on one or more trades which qualify for the purpose of Part 5B.  Once it ceases to have this intention, however, it is no longer to be regarded as a parent company for the purpose of this section.
81.To enable a determination of whether the parent company of a group meets the trading condition as outlined above, subsection (4) provides that it is the business of the whole group taken together which is to be considered.
82.Subsection (5) provides that incidental activities carried on by a subsidiary which otherwise exists wholly to carry on a qualifying trade, are to be ignored.
83.Subsection (6) provides that the following types of activity are ignored altogether:
	Holding shares in a qualifying subsidiary.
	Making loans to a subsidiary, and making loans to the parent company.
	Holding and managing property used by any group company for the purpose of one or more qualifying trades.
84.A company which goes into administration or receivership may fail the trading requirement at section 257MJ. New section 257MK provides that that will not be the case because of anything done as a result of the company being in administration or receivership providing that the entry into administration or receivership, and any subsequent actions, are undertaken for genuine commercial purposes and not for reasons of tax avoidance.        Section 257TB explains further what is meant by a company going into administration or receivership.
85.New section 257ML provides that the enterprise must be party to the relevant investment for the purpose of raising money for a “funded purpose”.
86.Subsection (1) provides that a funded purpose can be either a qualifying trade carried on at the time of investment by the enterprise or a qualifying 90% social subsidiary; or activities preparatory to a qualifying trade which the enterprise intends will be carried on either by the enterprise itself, or by a 90% social subsidiary.  If it relates to the preparatory activities, then the relevant trade must begin within two years of the date of the investment.
87.This section is disapplied for enterprises which are accredited social impact contractors.
88.New section 257MM imposes requirements on the enterprise as to how it uses the monies raised by the investment, and as to a minimum period of trading.
89.Subsection (1) provides that the monies raised by the investment must be employed wholly for the funded purpose (see section 257ML) within 28 months of the date of the investment. Insignificant uses of the money for other purposes are ignored, by virtue of subsection (4).  The period of 28 months is reduced to 24 months in the case of an accredited social impact contractor.
90.Subsection (2) provides that the relevant qualifying trade must have been carried on for a period of at least 4 months by either the investee enterprise, or a 90% social subsidiary.  This subsection works in conjunction with section 257PB(3) to ensure that an enterprise is not eligible to submit a compliance statement to HMRC until it has completed at least 4 months of trading activity. Subsection (5) and (6) act to ensure that this requirement will still be regarded as having been met if either the enterprise or a qualifying subsidiary is wound up or dissolved, or put into administration or receivership before the end of the 4 month period, providing that such events occur for genuine commercial purposes and not for reasons of tax avoidance. These subsections are disapplied in the case of an accredited social impact contractor.
91.Subsection (3) provides that employing money on the acquisition of shares or stock in a company does not of itself amount to employing the money for the purposes of the funded purpose.  This restriction should not prevent the money being used to acquire shares in a subsidiary company, providing that after the share issue the subsidiary is a qualifying 90% social subsidiary (see section 257MV) and that subsidiary then goes on to use the money for a funded purpose carried on by it (which will exclude the acquisition of shares or stock in another company).  This section is disapplied in the case of an accredited social impact contractor.
92.New section 257MN provides that at no time during the shorter applicable period must relevant preparation work or the relevant qualifying trade be carried on by someone other the investee enterprise or one of its 90% social subsidiaries. This section is disapplied in the case of an accredited social impact contractor.
93.Subsection (2) provides that this rule does not act to deny relief where an existing trade is carried on by another company and making of the investment is preparatory to the carrying of a qualifying trade by the investee enterprise or one of its 90% social subsidiaries.
94.Subsections (3) to (5) further provide that this rule does not act to deny relief in cases in where the investee enterprise (or any other company) goes into liquidation, administration or receivership provided that these actions are entered into and carried out for genuine commercial reasons.
95.New section 257MP explains what is meant by “qualifying trade” for the purpose of Part 5B.
96.Subsection (1) says that for a trade to be a qualifying trade, it must be conducted on a commercial basis and with a view to the realisation of profits. In addition, the trade must not consist wholly or as to a substantial part in the carrying on of ‘excluded activities’ as defined in section 257MQ.
97.Subsection (2) provides that what the company does must come within the ordinary meaning of ‘trade’; that is, it must not count as a trade merely because of the extension of the meaning of that word in section 989 ITA to include ‘any venture in the nature of trade’.
98.New section 257MQ provides a list of activities which are “excluded”. This list is needed to determine whether a trade is a qualifying trade and the extent to which the business of a group includes non-qualifying activities.
99.Some activities are necessarily excluded in order to comply with the European Commission’s regulations on de minimis State aid.  These include fishery and aquacultural production activities as listed in Council Regulation (EC) No 104/2000; the primary production of agricultural products as listed at Annex 1 to the Treaty on the Functioning of the European Union (which includes both livestock and crops as well as the production of alcohol from plants and fruit); and road freight haulage.
100.In addition to the exclusions made for State aid purposes, the following are also listed in subsection (1) as excluded:  dealing in certain types of assets and commodities; certain financial activities; property development; certain subsidised generation or export of electricity; and the provision of certain services to another enterprise in common ownership where that enterprise’s trade is excluded.
101.Subsection (2) provides that lending money to a social enterprise is not “excluded”. “Social enterprise” for this purpose bears the same meaning as in section 257J.
102.New section 257MR supplements section 257MQ(1)(c) by explaining what is meant by “property development”.
103.Subsection (1) explains that property development for this purpose is defined as the development of land in which the enterprise has, or has had, an interest, with the object of realising a gain from the disposal of the land when developed.
104.Subsection (2) provides that for this purpose, ‘interest in land’ is defined in the legislation as any estate, interest or right over land including any right affecting the use or disposition of land; or any right to obtain such an estate, interest or right from another person, which is conditional upon the other person’s ability to grant it.
105.Subsection (3) makes it clear that references to an interest in land for this purpose do not include mortgage creditors or (in Scotland) the interest of a creditor in a charge or security of any kind over land.
106.New section 257MS supplements section 257MQ(1)(e) to exclude the generation or export of electricity in respect of which any person (whether the enterprise undertaking the generation or export or any other person) receives a feed-in tariff under a UK government scheme to encourage small-scale low-carbon generation of electricity or a financial incentive granted under a similar overseas scheme.
107.New section 257MT supplements section 257MQ(1)(h). Together these sections explain that providing services or facilities for any business comprising a trade, profession or vocation carried on by another person (other than the parent of the company) is an excluded activity, where that other business consists to a substantial extent of any activities listed in section 257MQ as excluded, and a controlling interest in that other business is held by a person who also has a controlling interest in the business carried on by the company.
108.Subsection (2) defines a controlling interest in a business as follows. A person has a controlling interest in a business if, in the case of a business carried on by a company, he controls the company, or the company is a close company and he (or an associate of his) is both a director of it and the beneficial owner of, or able directly or through the medium of other companies (or by any other indirect means) to control, more than 30% of its ordinary share capital, or he owns at least one-half of the business by reference to the tests of ownership set out in sections 941 and 942 CTA 2010.
109.Subsection (3) provides that in the case of a business carried on other than by a company, a person is regarded as having a controlling interest in that business if he is entitled to not less than half of the assets used for, or the income arising from, the business.
110.Subsection (4) provides that for these purposes, the rights or powers of any person's associate count as that person’s rights and powers.
111.New section 257MU explains what is meant by a “qualifying subsidiary” of an enterprise for the purpose of the sections of Part 5B which use that term.
112.Subsection (1) provides that a company is a qualifying subsidiary if it is a 51% subsidiary of the investee company. The meaning of 51% subsidiary is the same as that given in CTA10/S1154. That is, the investee company must directly or indirectly hold more than 50% of the ordinary share capital. In addition in order to be a qualifying subsidiary, no other person other than the company issuing the shares, or one of its subsidiaries, must control the subsidiary, and there must be no arrangements by virtue of which these requirements could cease to be met. ‘Control’ for this purpose has the meaning given at section 257TD.
113.Subsections (2) and (3) provide that these conditions are not to be regarded as ceasing to be satisfied by reason only of a winding-up or dissolution of the subsidiary or its parent, or of the subsidiary or its parent going into receivership, or of a disposal of the shares in the subsidiary, provided in all cases that this occurs for genuine commercial reasons and not as part of a scheme or arrangement for the avoidance of tax.
114.New section 257MV explains what is meant by a “90% social subsidiary” of an enterprise.
115.Subsection (1) provides that, for a subsidiary to be a 90% social subsidiary, the following must apply:
	The subsidiary must be a social enterprise.
	The parent enterprise must own at least 90% of the subsidiary’s issued share capital and voting rights.
	The parent enterprise must be beneficially entitled to at least 90% of the assets available for distribution to equity holders of the subsidiary.
	The parent enterprise must be beneficially entitled to at least 90% of any profits of the subsidiary which would be available for distribution to equity holders. “Equity holder” is to be given the same meaning as in Chapter 6 of Part 5 of CTA 2010, as explained at subsection (8) and (9).
	In addition, no person other than the parent enterprise must have control of the subsidiary, and there must be no arrangements by virtue of which any of the above conditions would cease to be met.
116.Subsections (2) to (4) provide that a company is still to be treated as a 90% social subsidiary if it is held indirectly via a company which is a qualifying 100% subsidiary of the relevant company, (based on similar considerations to those above).
117.Subsections (5) and (6) provide that the winding up of a subsidiary, or the subsidiary entering into or being in administration or receivership, do not prevent this test from being regarded as met providing that those events take place for genuine commercial reasons and not for the purposes of tax avoidance.
118.Subsection (7) provides that arrangements for the disposal of the subsidiary do not prevent this test from being regarded as met, providing that the disposal is for genuine commercial reasons and not for the purposes of tax avoidance.