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HMRC internal manual

Venture Capital Schemes Manual

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Share loss relief: individual and corporate claimants: individual claimants: type of company invested in: qualifying trading company: condition A: control and independence requirement: description

Control

There are two limbs to this element of the requirement. Both must be satisfied. Firstly the company must not control, either on its own or together with any connected person, any company which is not its qualifying subsidiary, and secondly there must not exist any arrangements under which the company could fail to meet the first limb at any time.

Independence

There are two limbs to this element of the requirement also. Firstly, the company must neither be a 51% subsidiary of another company nor be under the control of another company (or of another company and any person connected with that other company) of which it is not a 51% subsidiary. Secondly, there must not exist any arrangements under which the company could fail to meet the first limb at any time.

How this requirement has changed over time

Shares issued before 6 April 2007

Before ITA 2007 came into effect, the control and independence requirement was at ICTA88/S293(8). One change was made in the course of rewriting the statute: in relation to shares issued before 6 April 2007 the first limb of the control element of the requirement demanded that the company should not control any company which is not a qualifying subsidiary, without limiting the demand to the company’s own qualifying subsidiaries. Thus, under the old rules, a company which controlled another company which was a qualifying subsidiary of a third, unconnected, company would meet the requirement. Under the ITA rules the controlling company would not meet the requirement because the company it controlled is not its own qualifying subsidiary.

Shares issued before 21 March 2000

The control and independence requirement at ICTA88/S293(8) was amended by FA2000/SCH17/PARA11, but the requirement as it stood before FA 2000 may still be relevant to disposals of shares governed by ITA 2007. In relation to shares issued before 21 March 2000, ITA07/SCH2/PARA42(2) effectively applies the pre-FA 2000 form of the requirement by modifying section 139. The following table summarises the two forms of the requirement.

  Before 21 March 2000 After 20 March 2000
     
Control Must not control another company  
Must not have a 51% subsidiary Must not control another company which is not a qualifying subsidiary   
  Independence Must not be under the control of another company
Must not be a 51% subsidiary of another company Must not be under the control of another company of which it is not a 51% subsidiary
Must not be a 51% subsidiary of another company

In the older form the control element of the requirement demands that the company should not control (either on its own or together with any connected person) another company or have a 51% subsidiary. Contrast this with the post-FA 2000 version of the requirement which permits the company to control another, provided that the other is a qualifying subsidiary.

A qualifying subsidiary will now always be a 51% subsidiary of the company which is subject to the requirement (ITA07/S191(2)(a)) , but in relation to shares issued on or after 6 April 1998 and before 17 March 2004 a different definition of qualifying subsidiary applied, based on 75% ownership of issued share capital and voting power: see VCM74940. The prohibition of arrangements which would cause this control requirement not to be met still applies where these older shares are involved.

In relation to shares issued before 21 March 2000 the word ‘arrangements’ is not defined for the purposes of the requirement. You should give the word its normal, broad, meaning as used in day-to-day English.

Shares issued on or after 6 April 1998 but before 21 March 2000

If shares issued on or after 6 April 1998 but before 21 March 2000 are disposed of on or after 21 March 2000 and EIS relief or relief under TCGA92/SCH5B (reinvestment relief) was attributable to them immediately before 21 March 2000 then those shares are treated as having been issued on or after 21 March 2000.

Shares issued before 6 April 1998

In relation to shares issued before 6 April 1998 section 139 and the control and independence requirement do not apply at all.