Finance Act 1998

In section 30(1) of the Taxes Act 1988 (expenditure on sea walls)—

• (a) for “for the purposes of sections 25, 28 and 31" substitute “ for the purpose of computing the profits of any Schedule A business carried on in relation to those premises ”; and

• (b) for “in respect of dilapidation attributable to the year" substitute “ as an expense of the business for that year ”.

12

Section 31 of the Taxes Act 1988 (provisions supplementary to sections 25 to 30) shall cease to have effect.

13

Section 33 of the Taxes Act 1988 (agricultural land: allowance for excess expenditure on management) shall cease to have effect.

14

Sections 33A and 33B of the Taxes Act 1988 (connected persons) shall cease to have effect.

15

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16

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17

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18

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19

For the heading before section 40 of the Taxes Act 1988 substitute “ Supplementary provisions ”.

20

• (1) Section 40 of the Taxes Act 1988 (tax treatment of receipts and outgoings on sale of land) is amended as follows.

• (2) In subsection (1) for “become receivable or payable on his behalf" substitute “ been received or paid by him ”.

• (3) In subsection (3)(b), for the words from “had become receivable" to the end substitute “ had been received or paid directly by him immediately before the time to which the apportionment is made ”.

• (4) After subsection (4) insert—

(4A) An amount deemed under this section to have been received or paid shall be taken into account in computing the profits of the Schedule A business in question for the period in which it is treated as received or paid.

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• (5) Omit subsection (5).

21

Section 41 of the Taxes Act 1988 (relief for rent not paid, etc.) shall cease to have effect.

22

In section 42A of the Taxes Act 1988 (non-residents and their representatives), omit subsection (8).

23

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24

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25

After section 70 of the Taxes Act 1988 (corporation tax: basis of assessment, etc.) insert—

(70A) (1) This section applies where a company is chargeable to corporation tax under Case V of Schedule D in respect of income which— (a) arises from a business carried on for the exploitation, as a source of rents or other receipts, of any estate, interest or rights in or over land outside the United Kingdom, and (b) is not income to which section 70(2) applies (income from a trade or vocation). (2) The provisions of Schedule A apply to determine whether income falls within subsection (1)(a) above as they would apply to determine whether the income fell within paragraph 1(1) of that Schedule if— (a) the land in question were in the United Kingdom, or (b) a caravan or houseboat which is to be used at a location outside the United Kingdom were to be used at a location in the United Kingdom. (3) Any provision of the Taxes Acts which deems there to be a Schedule A business in the case of land in the United Kingdom applies where the corresponding circumstances arise with respect to land outside the United Kingdom so as to deem there to be a business within subsection (1)(a) above. (4) All businesses and transactions carried on or entered into by a particular company or partnership, so far as they are businesses or transactions the income from which is chargeable to tax under Case V of Schedule D in accordance with this section, are treated for the purposes of the charge to tax under Case V as, or as entered into in the course of carrying on, a single business (an “overseas property business"). (5) The income from an overseas property business shall be computed for the purposes of Case V of Schedule D in accordance with the rules applicable to the computation of the profits of a Schedule A business. Those rules apply separately in relation to— (a) an overseas property business, and (b) any actual Schedule A business of the company chargeable, as if each were the only Schedule A business carried on by that company. (6) Sections 503 and 504 of this Act and section 29 of the 1990 Act (provisions relating to furnished holiday accommodation) do not apply to the profits or losses of an overseas property business. (7) Where under this section rules expressed by reference to domestic concepts of law apply in relation to land outside the United Kingdom, they shall be interpreted so as to produce the result that most closely corresponds with the result produced for Schedule A purposes in relation to land in the United Kingdom.

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Part II — Treatment of losses

26

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27

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28

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29

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30

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31

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32

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Part III — Minor and consequential amendments

Taxes Management Act 1970 (c. 9)

33

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Income and Corporation Taxes Act 1988 (c.1)

34

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35

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36

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37

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38

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39

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40

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41

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42

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43

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44

In section 787(3) of the Taxes Act 1988 (restriction of relief for payments of interest) for “section 403(7)" substitute “ section 83(2)(b) of the Finance Act 1996 (claim to treat non-trading deficit as eligible for group relief) ”.

45

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46

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Capital Allowances Act 1990 (c.1)

47

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48

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49

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50

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51

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52

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53

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54

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55

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56

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57

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58

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59

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60

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61

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Taxation of Chargeable Gains Act 1992 (c.12)

62

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63

• (1) Schedule 8 to the Taxation of Chargeable Gains Act 1992 (leases) is amended as follows.

• (2) In paragraph 5 (exclusion of premiums taxed under Schedule A, etc.)—

• (a) in sub-paragraphs (1) and (2), for “income tax has become chargeable under section 34 of the Taxes Act on any amount" substitute “ any amount is brought into account by virtue of section 34 of the Taxes Act as a receipt of a Schedule A business (within the meaning of that Act) ”; and

• (b) in sub-paragraph (3), for “income tax has become chargeable under section 36 of the Taxes Act (sale of land with right of re-conveyance) on any amount" substitute “ any amount is brought into account by virtue of section 36 of the Taxes Act (sale of land with right of re-conveyance) as a receipt of a Schedule A business (within the meaning of that Act) ”.

• (3) In paragraph 6(2), for the words from “on which tax is paid" onwards substitute “ brought into account by virtue of section 35 of the Taxes Act (charge on assignment of a lease granted at an undervalue) as a receipt of a Schedule A business (within the meaning of that Act) ”.

• (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (5) For paragraph 7A substitute—

(7A) References in paragraphs 5 to 7 above to an amount brought into account as a receipt of a Schedule A business include references to an amount brought into account as a receipt of an overseas property business.

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Finance Act 1996 (c. 8)

64

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Part IV — Transitional provisions for corporation tax

Introduction

65

• (1) This Part of this Schedule makes provision with respect to the application of the provisions of Parts I to III of this Schedule for corporation tax purposes.

• (2) In this Part of this Schedule—

• “before commencement” and “after commencement” mean, respectively, before 1st April 1998 and on or after that date; and

• “the new rules” means the provisions of the Tax Acts relating to Schedule A taxation or, as the case may be, to the taxation under Case V of Schedule D of income from land outside the United Kingdom, as they have effect after commencement.

Receipts and expenses not to be counted twice

66

• (1) To the extent that receipts or expenses have been taken into account before commencement, they shall not be taken into account again under the new rules after commencement.

• (2) Nothing in section 43 of the Finance Act 1989 (computation of profits: effect of delayed payment of emoluments) shall be construed as affecting the rule in sub-paragraph (1) above.

Receipts and expenses not to be left out of account

67

To the extent that receipts or expenses would under the new rules have been brought into account before commencement, and were not so brought into account, they shall be brought into account immediately after commencement.

Expenses not to be carried back to before commencement

68

Expenses which were incurred before commencement but were not taken into account before commencement shall not, by virtue of section 25(3) or 31(3) of the Taxes Act 1988, be carried back and taken into account before commencement.

Effect of transfer of underlying rights

69

If any estate, interest or rights in or over land is or are transferred from one person to another, the references in paragraphs 66 to 68 to receipts or expenses being taken into account shall be construed as references to their being taken into account in relation to either of those persons.

Bad debt relief

70

• (1) Where relief under section 41 of the Taxes Act 1988 (relief for rent, etc. not paid) has been given in respect of an amount before commencement, any receipt after commencement shall be taken into account under the new rules.

• (2) Any writing off of an amount after commencement shall be taken into account under the new rules, even where it relates to a receipt brought into account before commencement.

Meaning of “taken into account"

71

For the purposes of paragraphs 66 to 70 an amount is “taken into account” if—

• (a) it is brought into account for tax purposes, or

• (b) it would have been so brought into account if the person concerned were chargeable to tax.

Unrelieved Case VI losses

72

• (1) A loss to which this paragraph applies which a company would, apart from this Schedule, have been entitled to carry forward under section 396 of the Taxes Act 1988 (Case VI losses) shall be treated after commencement as a loss of an earlier period within section 392A or 392B of that Act and accordingly available to be set off under those provisions.

• (2) This paragraph applies to a loss sustained in a business or transaction of a kind that after commencement would be treated as carried on or entered into in the course of a Schedule A business or overseas property business carried on by the company.

Source ceasing in transitional accounting period

73

• (1) The provisions of Parts I to III of this Schedule do not apply in relation to a source which ceases in the course of a company’s transitional accounting period to be a source within the charge to tax under Schedule A or Case V or VI of Schedule D in relation to that company and any other person.

• (2) This paragraph does not apply if the company acquired the source in that accounting period or in the preceding twelve months.

Superseded provisions relating to finance leasing

74

• (1) In Schedule 12 to the Finance Act 1997 (leasing arrangements: finance leases and loans), the following provisions (which apply concepts from Case I of Schedule D in relation to rent taxed under Schedule A) shall cease to have effect in accordance with this paragraph.

• (2) Paragraphs 3(6), 6(9)(b), 8(1) to (7) and 20(b) do not apply in relation to periods of account beginning on or after 1st April 1998.

A “period of account” means a period for which accounts are made up.

• (3) Paragraph 8(8) does not apply if the time mentioned in that provision is on or after 1st April 1998.

• (4) Paragraph 8(9) does not apply if the time mentioned in paragraph (a) of that provision is on or after 1st April 1998.

Computation of amounts available for surrender as group relief

75

In computing under section 403 of the Taxes Act 1988 the amounts available for surrender as group relief in a company’s transitional accounting period, the amounts referable to the period before commencement shall be computed separately from the amounts referable to the period after commencement.

Meaning of “transitional accounting period"

76

For the purposes of paragraphs 73 and 75 a “transitional accounting period” means an accounting period beginning before, and ending on or after, 1st April 1998.

SCHEDULE 6

Introduction

1

The provisions of this Schedule apply in the circumstances specified in section 44(1) and (2).

Adjustment on change of accounting basis

2

• (1) The amount required by way of adjustment must be calculated (in accordance with paragraph 3) and—

• (a) if the amount is positive, it is chargeable to tax, and

• (b) if it is negative, it is allowable as a deduction in computing profits.

• (2) An amount chargeable to tax under this paragraph—

• (a) is treated as income arising on the first day of the first period of account for which the new basis is adopted, subject to paragraphs 4 and 5 (spreading of adjustment charge in certain cases and election to accelerate payment);

• (b) is chargeable to tax under Case VI of Schedule D;

• (c) in the case of an individual whose income from the trade, profession or vocation in question is—

• (i) relevant earnings within section 623(2)(c) or 644(2)(c) of the Taxes Act 1988, or

• (ii) earned income within section 833(4)(c) of that Act,

is similarly relevant earnings or earned income for the year of assessment in which it is charged to tax; and

• (d) is treated for the purposes of Chapters I and II of Part X of the Taxes Act 1988 (loss relief) as profits of the trade, profession or vocation for the chargeable period for which it is charged to tax.

• (3) An amount allowable under this paragraph as a deduction in computing profits is treated as an expense of the trade, profession or vocation in the first period for which the new basis is adopted.

Calculation of adjustment

3

• (1) The amount of the adjustment is calculated as follows.

First step

Add together any amounts representing the extent to which, comparing the two bases, profits were understated (or losses overstated) on the old basis:

• (1) Receipts which on the new basis would have been brought into account in computing the profits of a period before the change of basis, to the extent that they were not so brought into account.

• (2) Expenses which on the new basis fall to be brought into account in computing the profits of a period after the change, to the extent that they were brought into account in computing the profits of a period of account before the change of basis.

• (3) Deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis to the extent to which they are not matched by credits in respect of closing trading stock or closing work in progress in the last period of account before the change.

• Second stepThen deduct any amounts representing the extent to which, comparing the two bases, profits were overstated (or losses understated) on the old basis:Receipts which were taken into account in a period before the change, to the extent that they would not have been taken into account for such a period if the profits had been computed on the new basis.Expenses which were not taken into account in computing the profits of a period before the change, to the extent that they would have been taken into account for such a period if the profits had been computed on the new basis.Credits in respect of closing trading stock or closing work in progress in the last period of account before the change of accounting basis to the extent to which they are not matched by deductions in respect of opening trading stock or opening work in progress in the first period of account on the new basis.An amount so deducted may not be deducted again in computing the profits of a period of account.

• Third stepIn the case of a profession or vocation adopting a new accounting basis to comply with section 42 (true and fair view), a further deduction may be made by way of adjustment in respect of any change of accounting basis before 6th April 1999.The amount deductible is calculated as follows—Add together the amounts by which profits were overstated (or losses understated) by reason of the previous change of accounting basis:Receipts to the extent that by reason of the change of accounting basis they were brought into account in more than one period of account.Expenses to the extent that by reason of the change of accounting basis they were not deducted in any period of account.Credits in respect of closing trading stock or closing work in progress in the last period of account before the change of accounting basis to the extent that they were not matched by deductions in respect of opening trading stock or opening work in progress in the first period of account following the change.Then deduct the amounts by which profits were understated (or losses overstated) by reason of that change:Receipts to the extent that by reason of the change of accounting basis they were not brought into account in any period of account.Expenses to the extent that by reason of the change of accounting basis they were deducted in more than one period of account.Deductions in respect of opening trading stock or opening work in progress in the first period of account following the change of accounting basis to the extent that they were not matched by credits in respect of closing trading stock or closing work in progress in the last period of account before the change.An amount may not be so deducted if it has previously been brought into account; and it may not be deducted again on a subsequent change of accounting basis.

• (2) The references in this paragraph to items being brought into account in a period of account before the change of basis are to their being brought into account—

• (a) in computing the profits of the same trade, profession or vocation, and

• (b) in accordance with the law and practice then applicable.

For the purposes of paragraph (a) a trade, profession or vocation is not regarded as the same if section 113(1) or 337(1) of the Taxes Act 1988 applies (deemed discontinuance on change of persons carrying on trade, profession or vocation).

Spreading of adjustment charge in certain cases

4

• (1) This paragraph provides for the spreading of the adjustment charge in certain cases where an individual—

• (a) has been entitled to compute the profits of a profession or vocation on a basis that does not comply with section 42 of this Act (true and fair view), or would not have complied with that section if it had been in force, and

• (b) changes to an accounting basis that does comply with that section.

• (2) The cases in which this paragraph applies are where a change of basis is made to comply with that section—

• (a) on that section coming into effect in relation to periods of account beginning after 6th April 1999, or

• (b) on the exemption given by section 43 of this Act (barristers and advocates in early years of practice) coming to an end or ceasing to apply.

• (3) Where this paragraph applies the adjustment charge is spread over ten years of assessment, as follows.

• (4) In each of the nine years of assessment beginning with that in which the whole amount would otherwise be chargeable to tax, an amount equal to whichever is the less of—

• (a) one-tenth of the amount of the adjustment charge, and

• (b) 10 per cent. of the profits of the profession or vocation for that year of assessment,

is treated as arising and chargeable to tax.

For the purposes of paragraph (b) the profits of the profession or vocation means the profits as computed for the purposes of Case II of Schedule D, leaving out of account any allowances or charges under the the Capital Allowances Act .

• (5) In the tenth year of assessment the balance of the adjustment charge is treated as arising and chargeable to tax.

• (6) If before the whole of the adjustment charge has been charged to tax the profession or vocation—

• (a) is permanently discontinued, or

• (b) is treated as permanently discontinued under section 113(1) of the Taxes Act 1988 (change of persons carrying on profession or vocation),

the preceding provisions of this paragraph continue to apply, but with the omission of the alternative limit in sub-paragraph (4)(b) by reference to profits of the profession or vocation.

• (7) This paragraph has effect subject to any election under paragraph 5.

Election to accelerate payment of adjustment charge

5

• (1) A person who under paragraph 4 is chargeable to tax for a year of assessment on an amount representing part of an adjustment charge may elect that the amount treated as income arising in that year of assessment should be increased.

• (2) The election must be made—

• (a) by notice in writing,

• (b) to an officer of the Board,

• (c) before the 31st January following the year of assessment in question.

• (3) The election must specify the amount to be treated as income arising in the year of assessment, which may be any amount up to the whole of the adjustment charge so far as not previously charged to tax.

• (4) Where an election has been made, paragraph 4 applies in relation to any subsequent year of assessment as if the original amount of the adjustment charge were reduced by the additional amount treated as arising in the year for which the election was made.

Application of provisions to partnerships

6

• (1) In the case of a trade, profession or vocation carried on in partnership, the amount of any adjustment under this Schedule shall be computed—

• (a) for income tax purposes, as if the partnership were an individual resident in the United Kingdom, and

• (b) for corporation tax purposes, as if the partnership were a company resident in the United Kingdom.

• (2) Subject to the following provisions of this paragraph, each partner’s share of any amount chargeable to tax under paragraph 2 shall be determined according to the profit-sharing arrangements for the twelve months ending immediately before the date on which the new accounting basis was adopted.

• (3) If paragraph 4 applies (spreading of adjustment charge in certain cases), then, subject to sub-paragraph (4) below—

• (a) each partner’s share of the amount chargeable in any year of assessment shall be determined—

• (i) for the first year of assessment, according to the profit-sharing arrangements for the twelve months ending immediately before the date on which the new accounting basis was adopted, and

• (ii) for any subsequent year of assessment, according to the profit-sharing arrangements for the twelve months immediately preceding the anniversary in that year of that date; and

• (b) any election under paragraph 5 (election for accelerated payment) in relation to a year of assessment must be made jointly by all the persons who have been members of the partnership in the relevant twelve month period.

• (4) If paragraph 4(6) applies (effect of discontinuance of profession or vocation), then—

• (a) each partner’s share of any amount chargeable on or after the discontinuance is determined as follows—

• (i) if the discontinuance occurs on the date on which the new accounting basis was adopted, according to the profit-sharing arrangements for the twelve months ending immediately before that date;

• (ii) if the discontinuance occurs after that date but before the first anniversary of that date, according to the profit-sharing arrangements for the period between that date and the date of discontinuance;

• (iii) if the discontinuance occurs after the first anniversary of the date on which the new accounting basis was adopted, according to the profit-sharing arrangements for the period between the immediately preceding anniversary of that date and the date of discontinuance; and

• (b) any election under paragraph 5 after the discontinuance must be made by each former partner separately.

• (5) For the purposes of this paragraph—

• (a) “profit-sharing arrangements” means the rights of the partners to share in the profits of the trade, profession or vocation for the period in question; and

• (b) references to the date on which a new accounting basis was adopted are to the first day of the first period of account for which the new basis was adopted.

• (6) The provisions of section 111 of the Taxes Act 1988 (general provisions as to taxation of partnerships), except subsection (1) (partnership not to be treated as separate entity), do not apply to the extent that the preceding provisions of this paragraph apply.

Liability of personal representatives in case of death of person chargeable

7

In the case of the death of a person who, if he had not died, would have been chargeable to tax under paragraph 4 on an amount representing part of an adjustment charge—

• (a) the tax which would have been so chargeable shall be assessed and charged on his personal representatives and shall be a debt due from and payable out of his estate, and

• (b) his personal representatives may make any election under paragraph 5 which he might have made.

Interpretation

8

In this Schedule—

• “adjustment charge” means a charge under paragraph 2 above; and

• “period of account” means any period for which accounts of the trade, profession or vocation are drawn up.

SCHEDULE 7

The following are the provisions of the Taxes Acts in which the amendments specified in section 46(3) are to be made.

1

In the Taxes Act 1988: sections ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... , ... ... ... ... ... ... ... . . . ... . . . 568(1), 570(1), ... ... ... ... ... ... ... Schedule 21, paragraph 6(1)(b) and (3) (twice).

2

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3

In the Finance Act 1989: sections 67(2)(a) ... ... .

4

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5

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6

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7

In the Taxation of Chargeable Gains Act 1992: sections 39(1) (in the first place) and (2) (in both places), 41(4) and (5) and 164L(8) (twice).

8

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9

In the Finance Act 1994: Schedule 24, paragraph 12(2).

10

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11

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12

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SCHEDULE 8

Introductory

1

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Application of deductions to public departments Et ceteralaetc

2

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Conditions for exemption of partnerships

3

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Conditions of exemption for companies

4

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Commencement of paragraphs 3 and 4

5

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Powers to make regulations

6

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Transitional provision for commencement of 1995 Act amendments

7

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SCHEDULE 9

Part I — Schedule 11 to the Taxes Act 1988

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Part II — Consequential amendments

Income and Corporation Taxes Act 1988 (c.1)

1

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2

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3

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4

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Finance Act 1995 (c.4)

5

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SCHEDULE 10

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SCHEDULE 11

Application of Schedule

1

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Rule for determining section 171(4) limit

2

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Meaning of related scheme

3

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Meaning of “relevant anniversary"

4

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General interpretation

5

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SCHEDULE 12

New exclusions for the enterprise investment scheme

1

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Definition of excluded activities for the enterprise investment scheme

2

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New exclusions for VCTs

3

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Definition of excluded activities for VCTs

4

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Commencement

5

• (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SCHEDULE 13

Part I — EIS income tax relief

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1

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2

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3

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4

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5

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6

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7

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8

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9

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10

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11

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12

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13

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14

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15

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16

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17

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18

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19

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20

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21

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22

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23

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Part II — EIS relief against chargeable gains

24

• (1) In subsections (1) and (2) of section 150A of the Taxation of Chargeable Gains Act 1992 (enterprise investment schemes), the word “eligible" shall cease to have effect.

• (2) In subsection (4)(a) of that section, for the words “issued to a person at different times a disposal relates" there shall be substituted the words “ acquired by an individual at different times a disposal relates to ”.

• (3) In subsection (5) of that section, for the words “Sections 104, 105 and 107" there shall be substituted the words “ Sections 104, 105 and 106A ”.

• (4) For subsection (6) of that section there shall be substituted the following subsections—

(6) Where an individual holds shares which form part of the ordinary share capital of a company and include shares of more than one of the following kinds, namely— (a) shares to which relief is attributable and to which subsection (6A) below applies, (b) shares to which relief is attributable and to which that subsection does not apply, and (c) shares to which relief is not attributable, then, if there is within the meaning of section 126 a reorganisation affecting those shares, section 127 shall apply (subject to the following provisions of this section) separately to shares falling within paragraph (a), (b) or (c) above (so that shares of each kind are treated as a separate holding of original shares and identified with a separate new holding). (6A) This subsection applies to any shares if— (a) expenditure on the shares has been set under Schedule 5B to this Act against the whole or part of any gain; and (b) in relation to the shares there has been no chargeable event for the purposes of that Schedule.

• (5) In subsection (8A)(a) of that section, the word “preferential", in the second place where it occurs, shall cease to have effect.

• (6) After subsection (8C) of that section there shall be inserted the following subsection—

(8D) Where shares to which relief is attributable are exchanged for other shares in circumstances such that section 304A of the Taxes Act (acquisition of share capital by new company) applies— (a) subsection (8) above shall not have effect to disapply section 135; and (b) subsections (2)(b), (3) and (4) of section 304A of the Taxes Act, and subsection (5) of that section so far as relating to section 306(2) of that Act, shall apply for the purposes of this section as they apply for the purposes of Chapter III of Part VII of that Act.

• (7) After subsection (10) of that section there shall be inserted the following subsection—

(10A) In this section— - “ordinary share capital” has the same meaning as in the Taxes Act; - “ordinary shares”, in relation to a company, means shares forming part of its ordinary share capital.

• (8) In this paragraph—

• (a) sub-paragraphs (1) to (3) have effect in relation to disposals made on or after 6th April 1998;

• (b) sub-paragraph (4) has effect in relation to reorganisations taking effect on or after that date;

• (c) sub-paragraph (5) has effect in relation to new shares (within the meaning of section 150A(8A) of the Taxation of Chargeable Gains Act 1992) issued on or after that date;

• (d) sub-paragraph (6) has effect in relation to new shares (within the meaning of section 304A of the Taxes Act 1988) issued on or after that date; and

• (e) sub-paragraph (7) has effect in relation to events occurring on or after that date.

25

• (1) In subsection (1) of section 150B of that Act (enterprise investment scheme: reduction of relief), the word “eligible" shall cease to have effect.

• (2) This paragraph has effect in relation to disposals made on or after 6th April 1998.

Part III — EIS deferral of chargeable gains

Preliminary

26

Schedule 5B to the Taxation of Chargeable Gains Act 1992 (enterprise investment scheme: re-investment) shall be amended in accordance with the following provisions of this Part.

Application of Schedule

27

• (1) In sub-paragraph (1)(b) of paragraph 1, after the words “in accordance with" there shall be inserted the words “ section 164F or 164FA, ”.

• (2) For sub-paragraphs (2) and (3) of that paragraph there shall be substituted the following sub-paragraphs—

(2) The investor makes a qualifying investment for the purposes of this Schedule if— (a) eligible shares in a company for which he has subscribed wholly in cash are issued to him at a qualifying time and, where that time is before the accrual time, the shares are still held by the investor at the accrual time, (b) the company is a qualifying company in relation to the shares, (c) at the time when they are issued the shares are fully paid up (disregarding for this purpose any undertaking to pay cash to the company at a future date), (d) the shares are subscribed for, and issued, for bona fide commercial purposes and not as part of arrangements the main purpose or one of the main purposes of which is the avoidance of tax, (e) the requirements of section 289(1A) of the Taxes Act are satisfied in relation to the company, (f) all the shares comprised in the issue are issued in order to raise money for the purpose of a qualifying business activity, and (g) the money raised by the issue is employed not later than the time mentioned in section 289(3) of the Taxes Act wholly for the purpose of that activity, and for the purposes of this Schedule, the condition in paragraph (g) above does not fail to be satisfied by reason only of the fact that an amount of money which is not significant is employed for another purpose. (3) In sub-paragraph (2) above “a qualifying time”, in relation to any shares subscribed for by the investor, means— (a) any time in the period beginning one year before and ending three years after the accrual time, or (b) any such time before the beginning of that period or after it ends as the Board may by notice allow.

Failure of conditions of application

28

After that paragraph there shall be inserted the following paragraph—

(1A) (1) If the condition in sub-paragraph (2)(b) of paragraph 1 above is not satisfied in consequence of an event occurring after the issue of eligible shares, the shares shall be treated for the purposes of this Schedule as ceasing to be eligible shares on the date of the event. (2) If the condition in sub-paragraph (2)(e) of that paragraph is not satisfied in consequence of an event occurring after the issue of eligible shares, the shares shall be treated for the purposes of this Schedule as ceasing to be eligible shares on the date of the event. (3) If the condition in sub-paragraph (2)(f) of that paragraph is not satisfied in relation to an issue of eligible shares, the shares shall be treated for the purposes of this Schedule as never having been eligible shares. (4) If the condition in sub-paragraph (2)(g) of that paragraph is not satisfied in relation to an issue of eligible shares, the shares shall be treated for the purposes of this Schedule— (a) if the claim under this Schedule is made after the time mentioned in section 289(3) of the Taxes Act, as never having been eligible shares; and (b) if that claim is made before that time, as ceasing to be eligible shares at that time. (5) None of the preceding sub-paragraphs applies unless— (a) the company has given notice under paragraph 16(2) or (4) below or section 310(2) of the Taxes Act; or (b) an inspector has given notice to the company stating that, by reason of the matter mentioned in that sub-paragraph, the shares should, in his opinion, be treated for the purposes of this Schedule as never having been or, as the case may be, as ceasing to be eligible shares. (6) The giving of notice by an inspector under sub-paragraph (5) above shall be taken, for the purposes of the provisions of the Management Act relating to appeals against decisions on claims, to be a decision refusing a claim made by the company. (7) Where any issue has been determined on an appeal brought by virtue of section 307(1B) of the Taxes Act (appeal against notice that relief was not due), the determination shall be conclusive for the purposes of any appeal brought by virtue of sub-paragraph (6) above on which that issue arises.

Postponement of original gain

29

In sub-paragraph (3) of paragraph 2, for paragraph (a) there shall be substituted the following paragraph—

(a) the investor’s qualifying expenditure on any relevant shares is the amount subscribed by him for the shares; and

.

Chargeable events

30

• (1) In sub-paragraph (1) of paragraph 3—

• (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• (b) for paragraphs (e) and (f) there shall be substituted the words

or (e) those shares cease (or are treated for the purposes of this Schedule as ceasing) to be eligible shares.

• (2) Sub-paragraph (2) of that paragraph shall cease to have effect.

• (3) After sub-paragraph (5) of that paragraph there shall be inserted the following sub-paragraph—

(6) Any reference in the following provisions of this Schedule to a chargeable event falling within a particular paragraph of sub-paragraph (1) above is a reference to a chargeable event arising for the purposes of this Schedule by virtue of that paragraph.

Gains accruing on chargeable event

31

• (1) For sub-paragraphs (2) to (4) of paragraph 4 there shall be substituted the following sub-paragraphs—

(2) Any question for the purposes of capital gains tax as to whether any shares to which a disposal (including a disposal within marriage) relates are shares to which deferral relief is attributable shall be determined in accordance with sub-paragraphs (3) and (4) below. (3) Where shares of any class in a company have been acquired by an individual on different days, any disposal by him of shares of that class shall be treated as relating to those acquired on an earlier day rather than to those acquired on a later day. (4) Where shares of any class in a company have been acquired by an individual on the same day, any of those shares disposed of by him shall be treated as disposed of in the following order, namely— (a) first any to which neither deferral relief nor relief under Chapter III of Part VII of the Taxes Act is attributable; (b) next any to which deferral relief, but not relief under that Chapter, is attributable; (c) next any to which relief under that Chapter, but not deferral relief, is attributable; and (d) finally any to which both deferral relief and relief under that Chapter are attributable. (4A) The following, namely— (a) any shares to which deferral relief, but not relief under Chapter III of Part VII of the Taxes Act, is attributable and which were disposed of to an individual by a disposal within marriage, and (b) any shares to which relief under that Chapter is attributable and which were transferred to an individual as mentioned in section 304 of that Act, shall be treated for the purposes of sub-paragraphs (3) and (4) above as acquired by him on the day on which they were issued. (4B) Chapter I of Part IV of this Act has effect subject to sub-paragraphs (2) to (4A) above. (4C) Sections 104, 105 and 106A shall not apply to shares to which deferral relief, but not relief under Chapter III of Part VII of the Taxes Act, is attributable.

• (2) In sub-paragraph (5)(b) of that paragraph, for the words “the assumptions for which sub-paragraph (3) above provides" there shall be substituted the words “ sub-paragraphs (3) to (4A) above ”.

• (3) This paragraph has effect in relation to disposals made on or after 6th April 1998.

Persons to whom gain accrues

32

In sub-paragraph (1) of paragraph 5, for paragraphs (c) and (d) there shall be substituted the words

or (c) to the person who holds the shares in question when they cease (or are treated for the purposes of this Schedule as ceasing) to be eligible shares.

Claims

33

For paragraph 6 there shall be substituted the following paragraph—

(6) (1) Subject to sub-paragraph (2) below, section 306 of the Taxes Act shall apply in relation to a claim under this Schedule in respect of relevant shares as it applies in relation to a claim for relief under Chapter III of Part VII of that Act in respect of eligible shares. (2) That section, as it so applies, shall have effect as if— (a) any reference to the conditions for the relief were a reference to the conditions for the application of this Schedule; (b) in subsection (1), the words “(or treated by section 289B(5) as so issued)" were omitted; and (c) subsections (7) to (9) were omitted.

Reorganisations and reconstructions

34

After paragraph 6 there shall be inserted the following paragraphs—

(7) (1) Where an individual holds shares which form part of the ordinary share capital of a company and include shares of more than one of the following kinds, namely— (a) shares to which deferral relief and relief under Chapter III of Part VII of the Taxes Act are attributable, (b) shares to which deferral relief but not relief under that Chapter is attributable, and (c) shares to which deferral relief is not attributable, then, if there is within the meaning of section 126 a reorganisation affecting those shares, section 127 shall apply (subject to the following provisions of this paragraph) separately to shares falling within paragraph (a), (b) or (c) above (so that shares of each kind are treated as a separate holding of original shares and identified with a separate new holding). (2) Where— (a) an individual holds shares (“the existing holding") which form part of the ordinary share capital of a company, (b) there is, by virtue of any such allotment for payment as is mentioned in section 126(2)(a), a reorganisation affecting the existing holding, and (c) immediately following the reorganisation, the existing holding or the allotted shares are shares to which deferral relief is attributable, sections 127 to 130 shall not apply in relation to the existing holding. (8) (1) This paragraph applies where— (a) a company (“the new company") in which the only issued shares are subscriber shares acquires all the shares (“old shares") in another company (“the old company"); (b) the consideration for the old shares consists wholly of the issue of shares (“new shares") in the new company; (c) the consideration for new shares of each description consists wholly of old shares of the corresponding description; (d) new shares of each description are issued to the holders of old shares of the corresponding description in respect of and in proportion to their holdings; (e) at some time before the issue of the new shares— (i) the old company issued eligible shares; and (ii) a certificate in relation to those eligible shares was issued by that company for the purposes of subsection (2) of section 306 of the Taxes Act (as applied by paragraph 6 above) and in accordance with that section (as so applied); and (f) by virtue of section 127 as applied by section 135(3), the exchange of shares is not treated as involving a disposal of the old shares or an acquisition of the new shares. (2) For the purposes of this Schedule, deferral relief attributable to any old shares shall be attributable instead to the new shares for which they are exchanged. (3) Where, in the case of any new shares held by an individual to which deferral relief becomes so attributable, the old shares for which they are exchanged were subscribed for by and issued to the individual, this Schedule shall have effect as if— (a) the new shares had been subscribed for by him at the time when, and for the amount for which, the old shares were subscribed for by him; (b) the new shares had been issued to him by the new company at the time when the old shares were issued to him by the old company; and (c) the claim under this Schedule made in respect of the old shares had been made in respect of the new shares. (4) Where, in the case of any new shares held by an individual to which deferral relief becomes so attributable, the old shares for which they are exchanged were acquired by the individual on a disposal within marriage, this Schedule shall have effect as if— (a) the new shares had been subscribed for at the time when, and for the amount for which, the old shares were subscribed for; (b) the new shares had been issued by the new company at the time when the old shares were issued by the old company; and (c) the claim under this Schedule made in respect of the old shares had been made in respect of the new shares. (5) Where deferral relief becomes so attributable to any new shares— (a) this Schedule shall have effect as if anything which, under paragraph 1A(5) above, paragraph 16 below or section 306(2) of the Taxes Act as applied by paragraph 6 above has been done, or is required to be done, by or in relation to the old company had been done, or were required to be done, by or in relation to the new company; and (b) any appeal brought by the old company against a notice under paragraph 1A(5)(b) may be prosecuted by the new company as if it had been brought by that company. (6) For the purposes of this paragraph old shares and new shares are of a corresponding description if, on the assumption that they were shares in the same company, they would be of the same class and carry the same rights; and in sub-paragraph (1) above references to shares, except in the expressions “eligible shares” and “subscriber shares”, include references to securities. (7) Nothing in section 293(8) of the Taxes Act, as applied by the definition of “qualifying company" in paragraph 19(1) below, shall apply in relation to such an exchange of shares, or shares and securities, as is mentioned in sub-paragraph (1) above or arrangements with a view to such an exchange. (9) (1) Subject to sub-paragraphs (2) and (3) below, sections 135 and 136 shall not apply in respect of shares to which deferral relief, but not relief under Chapter III of Part VII of the Taxes Act, is attributable. (2) Sub-paragraph (1) above shall not have effect to disapply section 135 or 136 where— (a) the new holding consists of new ordinary shares (“the new shares") carrying no present or future preferential right to dividends or to a company’s assets on its winding up and no present or future right to be redeemed, (b) the new shares are issued after the end of the relevant period, and (c) the condition in sub-paragraph (4) below is satisfied. (3) Sub-paragraph (1) above shall not have effect to disapply section 135 where shares to which deferral relief, but not relief under Chapter III of Part VII of the Taxes Act, is attributable are exchanged for other shares in such circumstances as are mentioned in paragraph 8(1) above. (4) The condition is that at some time before the issue of the new shares— (a) the company issuing them issued eligible shares, and (b) a certificate in relation to those eligible shares was issued by the company for the purposes of subsection (2) of section 306 of the Taxes Act (as applied by paragraph 6 above) and in accordance with that section (as so applied). (5) In sub-paragraph (2) above “new holding” shall be construed in accordance with sections 126, 127, 135 and 136.

Anti-avoidance provisions

35

After paragraph 9 there shall be inserted the following paragraphs—