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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 C: unquoted status requirement

Condition C is one of the four conditions (A-D) which must be met by a company in order for it to be a qualifying trading company, and hence for its shares to be qualifying shares for Share Loss Relief purposes (assuming Enterprise Investment Scheme relief is not attributable to them). It limits the size of the company around the time the shares are issued by imposing two requirements: the gross assets requirement and the unquoted status requirement. For guidance on the gross assets requirement, see VCM75100.

The unquoted status requirement is set out at ITA07/S143 and was previously at ICTA88/S293(1A) and (1B), which was applied by ICTA88/S576(4A). It must be met at the time the shares in respect of which Share Loss Relief is claimed were issued. This is referred to as ‘the relevant time’. At the relevant time:

  • the company must be an unquoted company;
  • there must exist no arrangements for the company to cease to be an unquoted company;
  • there must exist no arrangements for the company to become a subsidiary of another, new, company as a result of a share-for-share or similar exchange to which ITA07/S145applies (‘look-through’ treatment so that the new company’s share are eligible for Share Loss Relief - see VCM75350 - VCM75370), where there are arrangements with a view to the new company ceasing to be an unquoted company.

The third condition prevents Share Loss Relief being available on a disposal of shares issued by a new quoted company where, under a pre-arranged scheme, the new company acquired qualifying shares previously issued by an unquoted company. In fact, the exclusions are more widely drawn than this: it is not necessary for the ‘arrangements’ to be carried out or to bear fruit, merely that they exist or have been made at the time the company issues its shares, in order for the unquoted status requirement (and hence Condition C) not to be met by the issuing company. Whether such arrangements existed or not will be a question of fact in any particular case, and any argument will have to be based on thorough enquiry and evidence-gathering.

The fatal ‘arrangements’ described above do not include arrangements for the issuing company to be listed on an overseas stock exchange or dealt in outside the UK if the overseas market or exchange is ‘designated’ by an order made the Commissioners of HMRC after the relevant time. This ensures that a later designation will not retrospectively prevent a company from meeting Condition C in circumstances in which it had previously met the unquoted status requirement.

‘Arrangements’ has the same meaning as for the control and independence requirement within Condition A, see VCM74900.

‘Unquoted company’ has the meaning given by ITA07/S184(2). An unquoted company is a company none of whose shares, stocks, debentures or other securities are marketed to the general public. An instrument is ‘marketed to the general public’ if it is listed on a recognised stock exchange, listed on a designated exchange outside the United Kingdom or dealt in outside the UK by some designated means.

How the unquoted status requirement has changed over time

Before ITA 2007, the unquoted status requirement was at ICTA88/S293(1A) and (1B) and S312, and was applied for the purposes of Share Loss Relief by S576(4A).

In relation to shares issued after 5 April 1998 but before 7 March 2001 and disposed of after 5 April 2007, ITA07/S143 applies in a modified form to any part of the period of ownership falling before 7 March 2001. This alternative requirement is simply that the company issuing the shares must be an unquoted company throughout the ‘relevant period’. Note that the definition refers to the company’s status during a ‘relevant period’ rather than at a ‘relevant time’. In this context, the relevant period is the period ending with the disposal of the shares and beginning with the incorporation of the company or (if later) the date one year before the issue of the shares in question). ITA07/SCH2/PARA46(2) effectively applies this alternative form of the requirement to the part of the period of ownership falling before 7 March 2001 and deems the shares in question to have been issued on or after 7 March 2001 for the purposes of applying the requirement on or after that date. So if a company was incorporated and issued shares on 10 September 1999 and the investor disposed of those shares and realised a loss on 12 April 2011 the older, simplified unquoted status requirement would have to be met throughout the period 10 September 1999 to 6 March 2001. The shares would then be treated as having been issued on or after 7 March 2001 (so the alternative requirement in Schedule 2, paragraph 46 is not in point in respect of later periods) and the ‘current’ requirement at section 143 applied on that basis.

When considering the earlier, simpler, requirement, if the company was unquoted at the time it issued the shares, and any of its shares, stocks, debentures or other securities were at that time listed on an overseas exchange or dealt in outside the UK, it does not cease to be an unquoted company merely because at a later date that overseas exchange or dealing method is designated by an order made by the Commissioners. This mirrors the current requirement and prevents shares moving out of the scope of Share Loss Relief because of certain unforeseen events.

Shares issued before 6 April 1998 are not subject to the unquoted status requirement at ITA07/S143. The applicable legislation is at ITA07/SCH2/PARA38(2). Condition C is that none of the company’s shares have been listed on a recognised stock exchange at any time in the relevant period. The relevant period is the period beginning with the time of its incorporation or, if later, the date one year before the issue of the shares in question and ending with the date of the disposal.