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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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Share loss relief: individual and corporate claimants: individual claimants: type of company invested in: qualifying trading company: condition A: the trading requirement: how the requirement has changed over time

The trading requirement at ITA07/S137 was previously at ICTA88/S292 and was adopted (with modifications) for Share Loss Relief purposes by section 576(4A).

The trading requirement has been amended several times over the years and which version is relevant to a case will be determined by the date on which the shares in question were issued. ITA07/SCH2/PARA40 modifies section 137 in various ways in order to reflect these amendments. This guidance explains the amendments in terms of the ITA07, so it relates to disposals on or after 6 April 2007. For disposals before 6 April 2007 the relevant statute was ICTA88/S293 as it applied at the time of the disposal.

In relation to shares issued before 6 April 2007 the trading requirement is modified in three ways.

  1. Section 137 subsection (2) is omitted. This is the provision which allows you to look at other companies which the issuing company intends should become its qualifying subsidiaries, and to treat the issuing company as the parent company of a notional group which includes those other companies. So where shares were issued before 6 April 2007 the question of whether a company meets the trading requirement is to be addressed by reference to the company’s own activities (or those of its actual subsidiaries if it is a parent company) and not by reference to the activities of proposed subsidiaries.
  2. Section 137(5)(d) is omitted. This is the provision which allows you to ignore the holding and management of property used by group companies for research and development when determining the business of a group. So where shares were issued before 6 April 2007 such activities are to be taken into account in deciding the business of the group.
  3. Section 137(6) is omitted. This is the provision which allows the activities given in subsection (5) to be ignored when they are carried on by any company which will be a group company at any time after the share issue.

In relation to shares issued before 6 April 2000 a different definition of ‘research and development’ applies. Rather than adopting the definition at ITA07/S1006, the term was more narrowly defined as ‘any activity which is intended to result in a patentable invention … or a computer program’.

In relation to shares issued before 6 April 1998 section 137 does not apply at all. The corresponding requirement was simply that the company be a ‘trading company’ or the holding company of a trading group. ‘Trading company’ was defined at FA1980/S12(and later at ICTA88/S576) and excluded companies whose trades broadly corresponded to what are now known as excluded activities (see VCM3000+). If you require advice on this early form of the trading requirement please make a submission to Capital Gains: Technical in Solihull. Your submission should identify the date of issue of the shares involved and include such evidence as may be available of the activities of the company or (if relevant) of its subsidiaries.