Part 4: Income tax, corporation tax and capital gains tax Section 25 and Schedule 5: Enterprise investment scheme Details of the section and Schedule 5
Section 25 introduces Schedule 5.
	Paragraph 1 of the Schedule introduces the amendments to the EIS rules in Part 5 of the Income Tax Act (ITA) 2007. All references are to ITA 2007.
	Paragraph 2 inserts new paragraph (aa) in subsection (1) of, and new subsection (1A) in, section 157. Paragraph (aa) sets the date after which the EIS will cease to apply to new investments, unless the legislation is renewed. The date may be changed by regulations made by the Treasury.
	Paragraph 3 makes provision in section 162 for new section 164A
	Paragraph 4 inserts, new section 164A.
	Section 164A introduces a requirement for an individual who claims tax relief under EIS to be independent from the company and hold no other shares in the company at the time the individual invests in the company. The only exception is if the existing shares are a risk finance investment or the shares are 'founder shares' and:
	the individual holds shares in the company, all of which were issued to the individual when the company was founded; or
	the shares were acquired when a pre-formed dormant company was bought 'off the shelf'.
	Section 164A(2) provides that the same rules apply to shareholdings of the individual in companies that are members of the same group as the issuing company at the time the shares are issued.
	Section 164A(3) defines a "risk finance investment" as a share or shares subscribed for under the EIS, the SEIS or the Social Investment Tax Relief (SITR) rules, for which the company submits a compliance statement to HM Revenue & Customs under section 205, 257ED or 257PB respectively. Note that this definition is more restricted than a "relevant investment" under section 173A, as amended by paragraph 7, which includes loans made under SITR.
	Paragraph 5 amends section 166 to take account of provisions in new section 252A(12) (see paragraph 19 of the Schedule).
	Paragraph 6 makes a number of minor consequential changes to section 172 by inserting new paragraphs (aaa), (aab) and (ca) and omitting paragraph (ab).
	Paragraph 7 makes a number of changes to section 173A, which limits the amount of state aids investments (referred to as "relevant investments") a company may receive each year to £5 million.
	Paragraph 7(2) substitutes new subsection (2) and inserts new subsections (2A) and (2B).
	Subsection (2) specifies the relevant investments that are to be taken into account for determining if the annual investment limit is breached. As well as taking into account the relevant investments made in the issuing company in the year, the rules bring into account any other relevant investments the company's subsidiaries have received or used in the year. These relevant investments are:
	Relevant investments in a company before it became a 51% subsidiary of the issuing company
	Relevant investments in a company where the money was used by a subsidiary of that company, and that subsidiary company subsequently became a subsidiary of the issuing company
	Investments in a relevant transferred trade (defined in new subsection (2B)).
	However if a subsidiary left the group before the end of the year, any relevant investments made in it after it left the group are not taken into account.
	Subsection (2A) provides that where only part of a relevant investment is used by a relevant transferred trade - for example, where the money from a relevant investment is shared between two subsidiary companies and the business of one of those companies is transferred to the issuing company - only the money used in the trade that was transferred counts towards the £5 million annual limit.
	Subsection (2B) defines a relevant transferred trade. Together with subsection (2)(b) it brings into the computation of the annual maximum amount any relevant investments that have been employed in a trade earlier in the year, when the trade was carried on by a different person that was not part of the same group. The purpose of counting relevant investments used for a relevant transferred trade towards the issuing company's relevant investments is to ensure the investment limit is not sidestepped by acquiring a trade without a company shell that has previously benefited from relevant investments.
	Paragraph 7(3)(a) inserts new paragraph (ba) in section 173A(3) to extend the definition of a "relevant investment" to an investment made under the SITR rules. SITR investments will therefore count towards a company’s annual maximum amount.
	Paragraph 7(3)(b) updates the reference in section 173A(3)(c) to the latest guidelines published by the European Commission in 2014 (Guidelines on State aid to promote risk finance investments).
	Paragraph 7(4) inserts new subsection (5) in section 173A to specify when an SITR investment, that is a relevant investment, is made.
	Paragraph 7(5) insertsnew subsections (6) and (7). Subsection (6) provides that a trade includes part of a trade and subsection (7) defines a trade as including any business or profession, including where the activities are preparatory to carrying out a trade.
	Paragraph 7(6) updates the heading of section 173A in accordance with the latest risk finance guidelines.
	Paragraph 8 inserts new sections 173AA and 173AB.
	Section 173AA imposes a cap of £12 million on the total amount of relevant investments a company and its subsidiaries may receive, unless the company is a knowledge-intensive company (see paragraph 19 of the Schedule), in which case the limit is £20 million.
	Section 173AA operates in a similar way to amended section 173A in determining the relevant investments that are taken into account for the purposes of this condition. The relevant investments an issuing company has received include relevant investments that have been employed for the trade of a subsidiary of the issuing company (whether or not the investments were raised by the issuing company) and in any other company which used the money for a trade that was subsequently transferred to the issuing company.
	Section 173AB applies the cap on total relevant investments received by the company and its subsidiaries for three years following the date of issue of the relevant shares. The purpose of these provisions is to stop an investee company exceeding the total investment limit by using EIS money for a company or trade that it acquires after it received the relevant investment. This would happen where the new company or trade has benefited from earlier relevant investments that, together with the relevant company's relevant investments at the investment date, would breach the relevant company's investment limit.
	For example: the issuing company, A, which is not a knowledge-intensive company, has received an EIS investment of £2 million, bringing its total relevant investments to the limit of £12 million. At a later date, using other funds, company A wants to acquire company B and employ the £2 million in company B. Company B is not a knowledge-intensive company and has already received relevant investments of £12 million. The effect of section 173AB on this scenario would be that company A breaches the limit of £12 million.
	Section 173AB applies only if the issuing company uses the EIS investment in a new company or trade acquired after the shares were issued.
	If the issuing company acquires one or more companies or trades that have received relevant investments that would take the combined group over the total limit, but the EIS money is not employed in any of those companies or trades, then section 173AB has no effect.
	However, the relevant company would not be eligible to receive any future relevant investments as the limit in subsection 173AA would be breached.
	If the EIS money is used for one of the companies or trades acquired after the relevant investment was made then all of the relevant investments received by the subsidiaries acquired since the relevant investment are taken into account in determining if the limit is breached.
	Paragraph 9 repeals section 173B. The effect of this provision is to allow a company to raise funds under EIS without having to have spent 70% of any SEIS funds it has already raised. However the company cannot raise EIS funds on the same day as it raises SEIS funds.
	Paragraph 10 amends section 174 by making explicit the requirement that, to qualify for State aid, a company must use funds raised under EIS to promote the growth and development of the company or, where the company is a parent company, the group.
	Paragraph 11 amends section 175 by substituting new subsections (1ZA), (1ZB) (1ZC) and (1A) for the existing subsection (1A). The purpose of these provisions is to ensure that EIS money is used for the growth and development of the issuing company's or its subsidiaries' existing activities, and not for funding a takeover or buyout of an existing trade.
	Subsection (1ZA) prohibits a company from using money raised from an EIS investment to acquire an existing trade, or part of a trade, either by buying the company carrying on the trade or buying the trade itself, the intangible assets or goodwill of a trade.
	Subsection (1ZA) does not stop a company using money from an EIS investment to buy plant and machinery to use in its own trade (so long as there are no wider acquisitions of the assets of a trade) or commission the creation of intangible assets.
	Subsection (1ZA) also operates to prevent a company from using funds that are not relevant investments to fund the acquisition of an existing company or trade alongside EIS money. For example, a company or its subsidiaries would not be allowed to use EIS money to acquire the plant and machinery of a trade if it used money from a separate source to acquire the goodwill of that trade such that, overall, the trade was acquired.
	Subsection (1ZB) provides for the Treasury to make regulations to allow money to be used for the acquisition of certain intangible assets. This power could be used if it emerged that section 175(1ZA)(d) prevented a company from acquiring an intangible asset that was not an integral part of a trade.
	Subsection (1A) restates the provisions of the original subsection (1A) taking into account new subsections (1ZA) and (1ZB) that now precede it.
	Paragraph 12 inserts new section 175A which specifies the maximum age of a company that is permitted to receive an EIS investment. This provision targets EIS investments to earlier-stage companies, companies that need several rounds of tax-advantaged funding before the market will invest in them and companies whose activities are changing so substantially as to constitute a new business activity.
	Subsections (1) to (5) provide that an EIS investment in a company must be made before the end of that company's initial investing period unless condition A, B or C applies.
	Subsection (2) defines the initial investing period as ending a certain number of years after the company's relevant first commercial sale. The number of years is:
	10 years for knowledge-intensive companies; and
	7 years for all other companies.
	Subsection (3) specifies condition A. Condition A applies if the company has already received a relevant investment within the initial investing period which has been used for the same activities as the new investment is to be used for. This condition provides for companies that need several rounds of funding, where the initial round of funding is received before the end of the company's initial investing period.
	Subsection (4) specifies condition B. Condition B applies if the amount of the investment (and any other relevant investments received in a 30 day period that includes the date of the EIS investment in the relevant company) is at least 50% of the annual turnover of the company, averaged over the previous five years and the money raised is used for the purpose of entering a new product or geographical market. The 30 day period provides some flexibility for a company that is assembling a number of tax-advantaged investments from different investors. Condition B ensures initial risk finance investments in an older company are used only for activities that effectively constitute a new business activity, where it may be difficult to raise investment from the market. Each new business activity must satisfy the 50% turnover test in paragraph (a). A number of smaller unconnected initiatives cannot be combined in order to meet the 50% threshold.
	Subsection (5) specifies condition C. Condition C applies if the company had previously met condition B, by way of receiving risk finance investments under the EIS or from a Venture Capital Trust. The money must be used for the same activity or activities for which the money raised under condition B was used, that is to continue to support activities for entering a new product or geographical market. It cannot use the money for a new project or for its other business activities. However if the money raised under condition B was used for, say, two separate activities, the new money raised under condition C does not have to be used for both those activities. For example if one of the activities had already failed, any subsequent money raised could be used for the activity that has continued.
	Subsection (6) defines the date of a company's relevant first commercial sale. The definition is designed to identify the earliest commercial activity carried on by the relevant company or its subsidiaries at the time the money is employed. Its purpose is to ensure the age limit cannot be sidestepped by setting up or using a reasonably new company to receive relevant investments to employ in a mature trade that would not itself meet the age limits. The definition uses the earliest date of any commercial sale made by the company or any other person who has carried on any trade which is carried on by the company or its subsidiary or a partnership of which the relevant company or its subsidiary is a member, including trades transferred from other owners. The trade may or may not be, or have been, a qualifying business activity and it may or may not have benefited from a relevant investment. However the first commercial sale of a subsidiary or transferred trade acquired after the relevant shares were issued is taken into account only if money raised from the issue of the relevant shares is employed for the purposes of that company or trade.
	Subsection (7) defines "the average turnover amount" for the purposes of condition B in subsection (4) as one fifth of the "total relevant turnover". Paragraphs (a) and (b) of subsection (7) specify the five years over which the total relevant turnover is to be taken. Generally speaking, these rules allow for a company with consistent 12 month periods of account to determine its average turnover by reference to the last five complete audited accounts prior to the relevant issue.
	Subsection (7)(a) specifies that, where the end of the most recent accounts filing period falls within the 12 months before the investment was made, the 5 year period ends immediately before that accounts filing period starts.
	Subsection (7)(b) specifies that if there is no accounts filing period that ends within 12 months before the date of the investment, perhaps because the company's accounting period is more than 12 months long, the 5 year period ends on the day 12 months before the date the investment was made.
	Subsection (8) defines a number of terms used in section 175A. In particular:
	"Entering a new product or geographical market" for the purposes of condition B in subsection (4) has the same meaning as the European Commission General block exemption Regulation No 651/2014. What constitutes a new product or geographical market depends on the company's particular circumstances. The new market must be so different that outside investors would need to carry out disproportionately expensive due diligence because the company's track record in relation to its existing activities cannot be used to judge the prospects of success of what is effectively a new enterprise. This will be considered on a case by case basis. For example, a company that has operated exclusively in the south west of England may be entering a new geographical market if it started to operate in Scotland. A company that has always produced paper products but wants to move into producing food snacks would be entering a new product market.
	An undertaking's "first commercial sale" is defined by reference to the European Commission’s Guidelines on State aid to promote risk finance investments. Paragraph 52(xi) of the Guidelines defines a first commercial sale as "the first sale by an undertaking on a product or service market, excluding limited sales to test the market".
	The "total relevant turnover amount", used for the purposes of determining the average turnover amount in subsection (7), includes the turnovers over the previous five years of the issuing company and:
	where the issuing company is not a parent company at the date of issue of the shares: any 51% subsidiaries it acquires after the shares are issued for which the money raised by the issue of the shares is used; and the turnover of a transferred trade for which the money raised is used, to the extent that its turnover over the previous five years has not already been taken into account.
	where the issuing company is a parent company at the date of issue of the shares: any 51% subsidiaries it holds at the time of the date of issue and any 51% subsidiaries it acquires after the shares are issued for which the money raised by the issue of the shares is used; and the turnover of a transferred trade for which the money raised is used, to the extent that its turnover over the previous five years has not already been taken into account.
	The definition of the total relevant turnover amount is intended to ensure that, where a company depends on meeting condition B in subsection (4), all the relevant turnovers of subsidiaries and trades that have been acquired both before and after the shares were issued are taken into account. However the turnovers of subsidiaries and trades acquired after the shares were issued are included only if the subsidiary or trade uses any of the money raised by the share issue.
	Paragraph 13 amends section 186A, to specify a higher limit of 500 full time equivalent employees for knowledge-intensive companies.
	Paragraph 14 repeals section 200, which is replaced by a wider power in new section 251A (see paragraph 18 of the Schedule).
	Paragraph 15 amends section 224. Its effect is to treat SEIS investors whose shares are purchased or redeemed by the company in the same way as EIS investors: provided any SEIS claimed by the investor is repaid on the redemption, the EIS relief of other investors will not be reduced. This provision applies retrospectively to redemptions of shares made on or after 6 April 2014.
	Paragraph 16 inserts new paragraph (za) in section 241(1). Section 241 requires a company to notify HM Revenue & Customs (HMRC) of breaches or potential breaches to the continuing conditions for eligibility to EIS investments. Paragraph (za) requires a company to notify HMRC of breaches to the funding limits and age limits in sections 173A, 173AA, 173AB and 175A.
	Paragraph 17 inserts new subsection (3A) in section 247. Section 247 allows shares in a new parent company, that have been exchanged for shares in a company that has raised EIS investments, to remain eligible for EIS relief as though the new parent company were the old company, provided certain conditions are met. Subsection (3A) clarifies that where such an exchange of shares occurs, certain rules for determining if the funding limit and age limit of the new parent company are breached after the shares are issued are not to be applied simply because the parent company has acquired the old company as its subsidiary.
	Paragraph 18 inserts new section 251A, which allows amendments to be made to Chapters 2 to 4 by regulations under the draft affirmative procedure. Subsection (4) specifies that the regulations may have limited retrospective effect but only where the changes are wholly relieving such that no additional tax charges can apply retrospectively.
	Paragraph 19 inserts new section 252A which defines a "knowledge-intensive company". A knowledge-intensive company is eligible for higher total investment limits under section 173AA, a longer initial investing period for the purposes of the permitted maximum age condition under section 175A and a higher number of employees under section 186A (as amended under paragraph 13 of the Schedule).
	Subsection (1) requires a knowledge–intensive company to meet one of two operating costs conditions and at least one of the innovation condition or the skilled employee condition.
	Subsections (2) and (3) specify the operating costs conditions. These conditions compare the relevant operating costs relating to research and development or innovation to the relevant operating costs of the company (or group) over a three year period. Subsection (4) determines the period over which the conditions must be applied, using the same method as applies for the test in new section 175A(7).
	Subsections (5) to (7) specify the conditions a company must meet to satisfy the innovation condition. The condition requires a company to be engaged in the creation of intellectual property which will be used for the future trade of the company (or other companies in the same group) and the activities of which will form the greater part of the company’s (or the group’s) business within 10 years of the date of issue of the shares. A company can meet the condition in one of three ways:
	By having created intellectual property within the last three years, or currently creating intellectual property; or
	By taking steps in order to create intellectual property; or
	By demonstrating through a report by an independent expert that it is reasonable to assume the company will create intellectual property in the foreseeable future.
	The innovation condition is not confined to the creation of a single item of intellectual property. Some companies may develop a range of intellectual property that, together, will form the basis of their future business.
	Subsections (8) and (9) specify the skilled employee condition. If the company relies upon meeting this condition to qualify as a knowledge-intensive company at the date of issue of the shares, it must continue to meet the condition throughout the period ending three years after the date of issue of the shares. The exception to this is where the company is in administration or receivership.
	Subsection (10) defines a number of terms used throughout the section.
	In particular, "relevant operating costs" are defined by reference to the operating costs included in the company’s profit and loss account. Where the issuing company is a member of a group at the date of issue of the shares, the operating costs are calculated by reference to the total operating costs of all companies in the group at the date of issue of the shares, excluding transactions between companies in the same group.
	Subsection (11) provides for the amounts of operating costs of a company to be apportioned as is just and reasonable in determining a company’s relevant operating costs. This provision may be necessary where subsidiary companies do not share the same accounting date as the parent company.
	Subsection (12) excludes the application of section 168 from the definition of a person who is connected with the company when determining if the person is an independent expert for the purpose of subsection (10). It means that the expert may not be connected to the company at any time.
	Paragraph 20 contains minor and consequential amendments to other Acts that flow from this new legislation.
	Paragraphs 21 to 23 provide for commencement of the provisions in this Schedule.
	Paragraph 21 provides that the provisions repealing the requirement for a company to have spent at least 70% of SEIS funds before receiving an EIS investment take effect from 6 April 2015.
	Paragraph 22 provides that the changes to section 224 on the redemption of SEIS shares take effect from 6 April 2014.
	Paragraph 23 provides that all other provisions take effect from the date of Royal Assent. Investments that are made before Royal Assent that would otherwise breach the new limits will continue to be eligible for EIS relief provided all other conditions continue to be met. Investments made before Royal Assent will however be taken into account:
	For determining if investments made on or after Royal Assent breach the investment limits condition in sections 173A, 173AA and 173AB; and
	For determining if a relevant investment meets the permitted age requirement in section 175A.