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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: qualifying subsidiaries requirement: how the requirement has changed over time

Shares issued on or after 17 March 2004

The definition of ‘qualifying subsidiary’ at VCM13130 applies in respect of shares issued on or after 17 March 2004. ITA07/S191 governs disposals on or after 6 April 2007: disposals before that date were governed by the same conditions as enacted by ICTA88/S308. No significance is attached to the change from ‘bona fide’ to ‘genuine’ commercial reasons wrought by the enactment of ITA 2007.

Shares issued on or after 6 April 1998 and before 17 March 2004

The current definition was introduced by Finance Act 2004. For shares issued on or after 6 April 1998 and before 17 March 2004 a radically different definition applied. The main differences are that the principal or parent company must have a 75% interest in the subsidiary, rather than the subsidiary be a 51% subsidiary, and the definition specifies the period throughout which the conditions must be met (as it applied to later issues of shares, the definition at ITA07/S191 does not specify any period during which it must be met: that is done by Condition B of the four conditions for a company to be qualifying trading company, which demands that the requirements of Condition A, including the qualifying subsidiaries requirement, are met for a given time.)

The 75% interest test must be satisfied in each of four ways:

  1. the relevant company or another of its subsidiaries must own at least 75% of the issued share capital of the subsidiary;
  2. the relevant company or another of its subsidiaries must own at least 75% of the voting power in the subsidiary;
  3. the relevant company or another of its subsidiaries would be beneficially entitled to at least 75% of the assets of the subsidiary available for distribution to its equity holders in the event of its winding up or in any other circumstances;
  4. the relevant company or another of its subsidiaries must be beneficially entitled to at least 75% of any profits of the subsidiary which are available for distribution to its equity holders.

Contrast this with the 51% subsidiary requirement, which refers only to ownership of ordinary share capital. When you are checking whether a company was a qualifying company and the shares in question were issued before 17 March 2004 you must apply the qualifying subsidiaries requirement using the 75% holding and entitlement criteria at ICTA88/S308(2)(a)-(c) rather than the 51% subsidiary criterion at section 308(2)(ca). ITA07/S191 (meaning of ‘qualifying subsidiary’) is modified by ITA07/SCH2/PARA51 with this effect.

The requirements that no person other than the principal company or another of its subsidiaries should control the subsidiary, and that there be no arrangements under which any of these conditions could cease to be met, are the same.

The pre-17 March 2004 definition of qualifying subsidiary may still be relevant to disposals of shares after ITA 2007 came into effect, and so ITA07/SCH2/PARA51 modifies section 191 so as effectively to apply the old rules to shares issues before 17 March 2004.

As it applies to shares issued before 17 March 2004, ITA07/S191 demands not only that these conditions be met at an instant in time (so that a company is a qualifying subsidiary at that time) but also that they continue to be met after that time up until ‘the time that is relevant for the purposes of section 134(2)’. If that further demand is met, the company will be a qualifying subsidiary for the purposes of Share Loss Relief, without reference to any specific time. Section 134(2) sets down the four requirements of Condition A for a company to be a qualifying trading company, and ‘the time that is relevant’ is either the date of disposal of the shares on which Share Loss Relief is claimed or (subject to other conditions) a time not more than three years before that date. For guidance on the conditions under which an earlier date is admissible, see VCM74990.

The exception to debarment from qualifying subsidiary status on account of the subsidiary or any other company being wound up or dissolved without winding up (item 1 on the list at VCM74930) is slightly different in relation to shares issued before 17 March 2004. It applies only to the winding up or dissolution of the subsidiary or the relevant (parent) company, not to ‘any other company’. The winding up or dissolution has to be for genuine commercial reasons and must not form part of a scheme or arrangements with a main purpose of tax avoidance, but there is a further condition for the carve-out to apply: any net assets of the subsidiary or the relevant company must be distributed to its members before the time that is relevant for section 134(2) (see above) or, in the case of a winding-up, the end of three years from commencement of the winding up (if this is later than the time relevant for section 134(2).

The administration or receivership carve-out does not apply to shares issued before 17 March 2004.

The ‘arrangements for disposal’ carve-out (item 3 on the list at VCM74930) does not apply to shares issued before 17 March 2004. Instead, ITA07/S191(5) is modified to refer to an actual disposal within the period that is relevant for the purposes of section 134(3). Section 134(3) sets down Condition B, the second condition for a company to be a qualifying trading company. It demands that the four requirements of Condition A be met for a specified period of time: see VCM75000 for guidance on Condition B.

For the purposes of ITA07/S191 as it applies to shares issued before 17 March 2004, questions of whether a person is an equity holder of a subsidiary and the percentage of assets of a subsidiary to which an equity holder would be entitled are to be determined as they are for group relief purposes. That is to say, ICTA88/SCH18/PARA(1) and PARA(3)will be in point for accounting periods ending before 1 April 2010 and CTA10/PT5/CHP6 will be in point for later accounting periods.

Shares issued before 6 April 1998

For shares issued before 6 April 1998 the qualifying trading subsidiaries requirement does not apply. A simpler set of conditions for a company to be a qualifying trading company applies to these shares: see VCM74330.