ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.
Change 62: VCT: trades whose carrying on by other persons prevents the relevant holding being a qualifying holding: section 294 and Schedule 2Part 8 (the relevant company to carry on the relevant qualifying activity requirement)
This change identifies more clearly the cases in which the carrying on of trades etc by other persons prevents a relevant holding from being a qualifying holding for the purposes of Chapter 3 of Part 6 (VCT approvals). The trade etc which is later carried on by other persons must be one for which money was raised by the issue of the relevant holding.
Paragraph 6(1) of Schedule 28B to ICTA (so far as relevant) provides that (emphasis added):
“The requirements of this paragraph are that…the money raised by the issue of the relevant holding…been employed wholly for the purposes of the trade by reference to which the requirements of paragraph 3(3)…are satisfied…”
From paragraph 6(2) and (2AA) it is reasonably clear that the trade in question must either have been carried on when the relevant holding was issued or have been one for which preparations to carry it on were then being made.
There is nothing preventing the relevant company from carrying on, or preparing to carry on, more than one trade when it issues the relevant holding. In such a case, if the relevant holding is issued to raise money for one of those trades (the funded trade), that trade will be the trade and the other trade(s) (unfunded trade(s)) will not.
Paragraph 6(2AB) of Schedule 28B (so far as relevant) provides that (emphasis added):
“The requirements of this paragraph are not satisfied if…the trade by reference to which the requirements of paragraph 3(3) are satisfied, and any preparations for that trade falling within paragraph 3(3)(b)…, are carried on…by a person other than the relevant company or a relevant qualifying subsidiary of that company.”
Paragraph 6(2AB) refers to the trade for the purpose of determining if the requirements of paragraph 6 are not met. Paragraph 6(1) refers to the trade for the purpose of determining if the requirements of paragraph 6 are met. There is no explicit link between the trades referred to in each of these sub-paragraphs.
So it is arguable that, under paragraph 6(2AB), the subsequent carrying on of an unfunded trade by another person (not the relevant company or a relevant qualifying subsidiary of that company) prevents the relevant holding from satisfying paragraph 6; and that this result is unaffected by the relevant company continuing to carry on the funded trade.
But, in context, it is likely that paragraph 6(2AB) is limited to cases where the trade in question is the funded trade (the one that allowed the requirement of paragraph 6(1) to be met). That appears to be the more rational result and it is how HMRC interpret paragraph 6(2AB) of Schedule 28B to ICTA.
And a broadly similar provision in section 289(1A) of ICTA (enterprise investment scheme) looks at who is carrying on the various activities for which money has been raised by an issue of shares.
Section 294(1) of this Act rewrites paragraph 6(2AB) of Schedule 28B to ICTA on the basis that its restrictions about trades etc only apply to trades etc that allow the requirement of paragraph 6(1) of Schedule 28B to ICTA to be met. That removes the possibility of HMRC contending in future that paragraph 6(2AB) was meant to operate independently of paragraph 6(1).
Part 8 of Schedule 2 to this Act (the relevant company to carry on the relevant qualifying activity requirement) provides that this change does not apply to shares or securities issued before 6 April 2007.