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Income Tax (Earnings and Pensions) Bill


Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 3 — Qualifying companies

    441

 

Meaning of “qualifying subsidiary”

  11      (1)      A company (“the subsidiary”) is a qualifying subsidiary of a company (“the

holding company”) if the following conditions are met.

          (2)      The conditions are—

              (a)             that the holding company possesses not less than 75% of the issued

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share capital of, and not less than 75% of the voting power in, the

subsidiary;

              (b)             that the holding company would—

                    (i)                   in the event of a winding up of the subsidiary, or

                    (ii)                  in any other circumstances,

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                              be beneficially entitled to receive not less than 75% of the assets of the

subsidiary which would then be available for distribution to the

shareholders of the subsidiary;

              (c)             that the holding company is beneficially entitled to not less than 75%

of any profits of the subsidiary which are available for distribution to

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the shareholders of the subsidiary;

              (d)             that no person other than the holding company has control of the

subsidiary; and

              (e)             that no arrangements are in existence by virtue of which the

conditions in paragraphs (a) to (d) would cease to be met.

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          (3)      In sub-paragraph (2) any reference to the holding company is to be read as

a reference to—

              (a)             the holding company by itself,

              (b)             the holding company and one or more other subsidiaries of the

holding company, or

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              (c)             one or more other subsidiaries of the holding company.

          (4)      Sub-paragraph (5) applies at a time when the subsidiary or another

company is being wound up.

          (5)      The subsidiary is not to be regarded as having ceased, on account of the

winding up, to be a company in relation to which the conditions in sub-

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paragraph (2) are met if—

              (a)             the conditions in that sub-paragraph would be met apart from the

winding up, and

              (b)             the winding up is for commercial reasons and is not part of a scheme

or arrangement the main purpose (or one of the main purposes) of

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which is the avoidance of tax.

          (6)      Sub-paragraph (7) applies at a time when arrangements are in existence for

the disposal by—

              (a)             the holding company, or

              (b)             another subsidiary of the holding company,

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                   of all of its interest in the subsidiary.

          (7)      The subsidiary is not to be regarded as having ceased, on account of those

arrangements, to be a company in relation to which the conditions in sub-

paragraph (2) are met if the disposal is to be for commercial reasons and is

not to be part of a scheme or arrangement the main purpose (or one of the

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main purposes) of which is the avoidance of tax.

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 3 — Qualifying companies

    442

 

The gross assets requirement

  12      (1)      The gross assets requirement in the case of a single company is that the value

of the company’s gross assets does not exceed £30 million.

          (2)      The gross assets requirement in the case of a parent company is that the

value of the group assets does not exceed £30 million.

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          (3)      The “value of the group assets” means the aggregate of the values of the

gross assets of each of the members of the group, disregarding any that

consist in rights against, or shares in or securities of, another member of the

group.

The trading activities requirement: single company

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  13      (1)      The trading activities requirement in the case of a single company is that the

company—

              (a)             disregarding any purposes within sub-paragraph (2), exists wholly

for the purpose of carrying on one or more qualifying trades, and

              (b)             is carrying on a qualifying trade or preparing to do so.

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          (2)      The purposes referred to in sub-paragraph (1)(a) are—

              (a)             the holding and managing of property used by the company for one

or more qualifying trades carried on by it, and

              (b)             any purposes having no significant effect (other than in relation to

incidental matters) on the extent of the company’s activities.

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          (3)      This paragraph is supplemented by paragraph 15 (meaning of “qualifying

trade”) read with paragraphs 16 to 23 (excluded activities).

The trading activities requirement: parent company

  14      (1)      The trading activities requirement in the case of a parent company is that—

              (a)             at least one group company—

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                    (i)                   disregarding any purposes within sub-paragraph (4), exists

wholly for the purpose of carrying on one or more qualifying

trades, and

                    (ii)                  is carrying on a qualifying trade or preparing to do so, and

              (b)             the business of the group does not consist (either wholly or as to a

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substantial part) in the carrying on of non-qualifying activities

          (2)      The “business of the group” means what would be the business of the group

if the activities of the group companies taken together were regarded as one

business.

          (3)      For the purpose of determining the business of a group, activities of a group

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company are to be disregarded to the extent that they consist in—

              (a)             the holding of shares in or securities of, or the making of loans to,

another group company,

              (b)             the holding and managing of property used by a group company for

the purposes of one or more qualifying trades carried on by a group

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company, or

              (c)             incidental activities of a company which meets the trading activities

requirement for a single company (see paragraph 13).

          (4)      The purposes referred to in sub-paragraph (1)(a)(i) are—

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 3 — Qualifying companies

    443

 

              (a)             the carrying on of any activities within sub-paragraph (3), and

              (b)             any purposes having no significant effect (other than in relation to

incidental matters) on the extent of the company’s activities.

          (5)      In this paragraph—

              (a)             “group company” means any member of the group;

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              (b)             “incidental activities” means activities carried on in pursuance of

purposes having no significant effect (other than in relation to

incidental matters) on the extent of the company’s activities;

              (c)             “non-qualifying activities” means—

                    (i)                   excluded activities, or

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                    (ii)                  activities carried on otherwise than in the course of a trade.

          (6)      This paragraph is supplemented by paragraph 15 (meaning of “qualifying

trade”) read with paragraphs 16 to 23 (excluded activities).

Meaning of “qualifying trade”

  15      (1)      A trade is a qualifying trade if—

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              (a)             it is carried on wholly or mainly in the United Kingdom,

              (b)             it is conducted on a commercial basis and with a view to the

realisation of profits, and

              (c)             it does not consist (either wholly or as to a substantial part) in the

carrying on of excluded activities.

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          (2)      The carrying on of activities of research and development from which it is

intended that a connected qualifying trade will be derived or benefit counts

as the carrying on of a qualifying trade.

          (3)      But preparing to carry on such activities does not count as preparing to carry

on a qualifying trade.

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          (4)      In sub-paragraph (2) “connected qualifying trade” means a qualifying trade

carried on—

              (a)             by the company carrying on the activities of research and

development, or

              (b)             if that company is a member of a group, by any other member of the

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group.

Excluded activities

  16       The following are excluded activities—

              (a)             dealing in land, in commodities or futures or in shares, securities or

other financial instruments;

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              (b)             dealing in goods otherwise than in the course of an ordinary trade of

wholesale or retail distribution (see also paragraph 17);

              (c)             banking, insurance, money-lending, debt-factoring, hire-purchase

financing or other financial activities;

              (d)             leasing, including letting ships on charter or other assets on hire (see

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also paragraph 18);

              (e)             receiving royalties or licence fees (see also paragraph 19);

              (f)             providing legal or accountancy services;

              (g)             property development (see also paragraph 20);

              (h)             farming or market gardening;

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Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 3 — Qualifying companies

    444

 

              (i)             holding, managing or occupying woodlands, any other forestry

activities or timber production;

              (j)             operating or managing hotels or comparable establishments, or

managing property used as a hotel or comparable establishment (see

also paragraph 21);

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              (k)             operating or managing nursing homes or residential care homes, or

managing property used as a nursing home or residential care home

(see also paragraph 22);

              (l)             any activities which are excluded activities under paragraph 23.

Excluded activities: wholesale and retail distribution

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  17      (1)      This paragraph supplements paragraph 16(b).

          (2)      A trade of wholesale distribution is one in which the goods are offered for

sale and sold to persons—

              (a)             for resale by them, or

              (b)             for processing and resale by them,

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                   to members of the general public for their use or consumption.

          (3)      A trade of retail distribution is one in which the goods are offered for sale

and sold to members of the general public for their use or consumption.

          (4)      A trade is not an ordinary trade of wholesale or retail distribution if—

              (a)             it consists, to a substantial extent—

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                    (i)                   in dealing in goods of a kind which are collected or held as an

investment, or

                    (ii)                  in that activity and any other excluded activity taken

together, and

              (b)             a substantial proportion of those goods are held by the company for

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a period which is significantly longer than the period for which a

vendor would reasonably be expected to hold them while

endeavouring to dispose of them at their market value.

          (5)      In determining whether a trade carried on by any person (“P”) is an ordinary

trade of wholesale or retail distribution, consideration must be given to the

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extent to which it has the following features—

              (a)             the goods are bought by P in quantities larger than those in which P

sells them;

              (b)             the goods are bought and sold by P in different markets;

              (c)             P employs staff and incurs expenses in the trade in addition—

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                    (i)                   to the cost of the goods, and

                    (ii)                  in the case of a trade carried on by a company, to any

remuneration paid to any person connected with it;

              (d)             there are purchases or sales from or to persons who are connected

with P;

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              (e)             purchases are matched with forward sales or vice versa;

              (f)             the goods are held by P for longer than is normal for goods of the

kind in question;

              (g)             the trade is carried on otherwise than at a place or places commonly

used for wholesale or retail trade;

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              (h)             P does not take physical possession of the goods.

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 3 — Qualifying companies

    445

 

          (6)      The features in sub-paragraph (5)(a) to (c) are indications that the trade is

such an ordinary trade.

          (7)      Those in sub-paragraph (5)(d) to (h) are indications to the contrary.

Excluded activities: leasing of certain ships

  18      (1)      This paragraph supplements paragraph 16(d) so far as it relates to the

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leasing of ships other than oil rigs or pleasure craft.

          (2)      In the following provisions “ship” accordingly means a ship other than an

oil rig or a pleasure craft.

          (3)      If the requirements of sub-paragraph (4) are met, a trade is not to be

regarded as consisting in the carrying on of excluded activities within

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paragraph 16(d) as a result only of its consisting in the letting of ships on

charter.

          (4)      The requirements of this sub-paragraph are that—

              (a)             every ship let on charter by the company carrying on the trade is

beneficially owned by the company;

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              (b)             every ship beneficially owned by the company is registered in the

United Kingdom;

              (c)             the company is solely responsible for arranging the marketing of the

services of its ships; and

              (d)             the conditions mentioned in sub-paragraph (5) are satisfied in

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relation to every letting of a ship on charter by the company.

          (5)      The conditions are that—

              (a)             the letting is for a period not exceeding 12 months and no provision

is made at any time (in the charterparty or otherwise) for extending

it beyond that period otherwise than at the option of the charterer;

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              (b)             during the period of the letting there is no provision in force (as a

result of being contained in the charterparty or otherwise) for the

grant of a new letting to end, otherwise than at the option of the

charterer, more than 12 months after that provision is made;

              (c)             the letting is by way of a bargain made at arm’s length between the

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company and a person who is not connected with it;

              (d)             under the terms of the charter the company is responsible as

principal—

                    (i)                   for taking, throughout the period of the charter, management

decisions in relation to the ship, other than those of a kind

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generally regarded by persons engaged in trade of the kind

in question as matters of husbandry, and

                    (ii)                  for defraying all expenses in connection with the ship

throughout that period, or substantially all such expenses,

other than those directly incidental to a particular voyage or

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to the employment of the ship during that period; and

              (e)             no arrangements exist as a result of which a person other than the

company may be appointed to be responsible for the matters

mentioned in paragraph (d) on behalf of the company.

          (6)      If in the case of a letting by the company carrying on the trade (“the letting

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company”) the charterer is also a company and—

              (a)             the charterer is a qualifying subsidiary of the letting company, or

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 3 — Qualifying companies

    446

 

              (b)             the letting company is a qualifying subsidiary of the charterer, or

              (c)             both companies are qualifying subsidiaries of a third company,

                            sub-paragraph (5) has effect with the omission of paragraph (c).

          (7)      Where any of the requirements in sub-paragraph (4) is not met in relation to

any lettings, the trade is not, as a result, to be treated as consisting in the

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carrying on of excluded activities if those lettings and any other excluded

activities do not, taken together, amount to a substantial part of the trade.

          (8)      In this paragraph—

               “oil rig” means any ship which is an offshore installation for the

purposes of the Mineral Workings (Offshore Installations) Act 1971

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(c. 61); and

               “pleasure craft” means any ship of a kind primarily used for sport or

recreation.

Excluded activities: receipt of royalties or licence fees

  19      (1)      This paragraph supplements paragraph 16(e) (receipt of royalties or licence

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fees).

          (2)      If the requirement of sub-paragraph (3) is met, a trade is not to be regarded

as consisting in the carrying of excluded activities within paragraph 16(e) as

a result only of its consisting to a substantial extent in the receiving of

royalties or licence fees.

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          (3)      The requirement of this sub-paragraph is that the royalties or licence fees (or

all of them except for a part that is not substantial in terms of value) are

attributable to the exploitation of relevant intangible assets.

          (4)      For this purpose a “relevant intangible asset” is an intangible asset the

whole or greater part of which (in terms of value) has been created—

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              (a)             by the company carrying on the trade, or

              (b)             by a company which, for the whole of the period during which it

created the asset, was—

                    (i)                   the parent company of the company carrying on the trade, or

                    (ii)                  a qualifying subsidiary of that parent company.

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          (5)      In the case of an intangible asset which is intellectual property, any reference

in sub-paragraph (4) to the creation of the asset by a company is to its

creation in circumstances in which the right to exploit it vests in the

company (either alone or jointly with others).

          (6)      In sub-paragraph (5) “intellectual property” means—

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              (a)             any patent, trade mark, registered design, copyright, design right,

performer’s right or plant breeder’s right; or

              (b)             any rights under the law of a country or territory outside the United

Kingdom which correspond or are similar to those falling within

paragraph (a).

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          (7)      In this paragraph “intangible asset” means any asset which falls to be treated

as an intangible asset in accordance with generally accepted accounting

practice.

Excluded activities: property development

  20      (1)      This paragraph supplements paragraph 16(g).

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Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 3 — Qualifying companies

    447

 

          (2)      “Property development” means the development of land—

              (a)             by a company which has, or at any time has had, an interest in the

land, and

              (b)             with the sole or main object of realising a gain from the disposal of

an interest in the land when it is developed.

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          (3)      For this purpose “interest in land” means—

              (a)             any estate, interest or right in or over land, including any right

affecting the use or disposition of land, or

              (b)             any right to obtain such an estate, interest or right from another

which is conditional on the other’s ability to grant it.

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          (4)      References in this paragraph to an interest in land do not, however,

include—

              (a)             the interest of a creditor (other than a creditor in respect of a

rentcharge) whose debt is secured by way of mortgage, an

agreement for a mortgage or a charge of any kind over land, or

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              (b)             in the case of land in Scotland, the interest of a creditor in a charge or

security of any kind over land.

Excluded activities: hotels and comparable establishments

  21      (1)      This paragraph supplements paragraph 16(j).

          (2)      A “comparable establishment” means a guest house, hostel or other

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establishment offering overnight accommodation.

          (3)      An establishment offers overnight accommodation if the main purpose of

maintaining it is the provision of facilities for such accommodation (with or

without catering services).

          (4)      The activities of a person are not to be taken to fall within paragraph 16(j)

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unless that person has an estate or interest in, or is in occupation of, the hotel

or comparable establishment in question.

Excluded activities: nursing homes and residential care homes

  22      (1)      This paragraph supplements paragraph 16(k).

          (2)      “Nursing home” means an establishment that exists wholly or mainly for the

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provision of nursing care—

              (a)             for persons suffering from sickness, injury or infirmity, or

              (b)             for women who are pregnant or have given birth to children.

          (3)      “Residential care home” means an establishment that exists wholly or

mainly for the provision of residential accommodation, together with board

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and personal care, for persons in need of personal care by reason of—

              (a)             old age,

              (b)             mental or physical disability,

              (c)             past or present dependence on alcohol or drugs,

              (d)             any past illness, or

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              (e)             past or present mental disorder.

          (4)      The activities of a person are not to be taken to fall within paragraph 16(k)

unless that person has an estate or interest in, or is in occupation of, the

nursing home or residential care home in question.

 

 

 
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