Revenue Note for Guidance

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Revenue Note for Guidance

492 Individuals qualifying for relief

Summary

This section sets out the conditions which an individual must satisfy in order to qualify for relief.

Details

Qualifying individuals

(1) An individual qualifies for relief if he/she subscribes on his/her own behalf (except where the investment is made through an approved designated fund) for eligible shares in a qualifying company and is not at any time in the relevant period connected with the company, or with its qualifying subsidiaries.

Connected individuals

(2) An individual is connected with a qualifying company, if, at any time during the period (in this note and in the section referred to as the “relevant period”) —

  • beginning on the date of incorporation of the company and ending 3 years after the issue of the shares, or
  • where the company was incorporated more than 2 years before the date of the share issue, beginning 2 years before that date and ending 3 years after that date,

the individual or an associate of the individual is a partner of the company or, in certain circumstances, a director or employee of the qualifying company or of another company which is a partner of that company.

(3) An individual is not connected with a company by virtue only of the fact that, the individual or an associate of the individual is a director or employee of the company in which his/her investment is made or of another company which is a partner of that company unless the individual or his/her associate receives or is entitled to receive payment from the company during the relevant period. However, for this purpose certain payments are disregarded, these are —

  • (3)(a) payments or reimbursement in respect of expenses wholly, exclusively and necessarily incurred by the individual or his/her associates in the performance his/her duties as a director or employee,
  • (3)(b) interest on money (which represents no more than a reasonable commercial return) lent to either company,
  • (3)(c) dividends on investments in either company which do not exceed normal returns,
  • (3)(d) payments for the supply of goods to either company which do not exceed their market value, and
  • (3)(e) any reasonable and necessary remuneration which —
    • (3)(e)(i)(I)(II) is paid for services rendered to either company in the course of a trade or profession (other than a secretarial or managerial services or services of a kind provided by the company itself), and which is taken into account in any Schedule D, Case I or II computation of the trade or profession, or
    • (3)(e)(ii) in the case of a director or employee of either company who is not otherwise connected with either company, is paid for services rendered to the company of which he/she is a director or employee.

(4) In addition, an individual is connected with a company if he/she, or an associate of the individual, directly or indirectly possesses or is entitled to acquire any of the —

  • (4)(a) issued ordinary share capital of the qualifying company,
  • (4)(b) loan capital and issued share capital of the qualifying company, or
  • (4)(c) voting power in the qualifying company.

(5) The term “loan capital” in subsection (4)(b) includes any debt incurred by the company for —

  • (5)(a) any money borrowed or capital assets acquired by the company,
  • (5)(b) any right to receive income created in favour of the company, or
  • (5)(c) consideration whose value to the company was, at the time when the debt was incurred, substantially less than the amount of the debt, including any premium thereon.

(10) The inclusion of borrowed money in the loan capital of a company does not extend to bank overdrafts if the debt arises in the ordinary course of the bank’s business.

(6) An individual is connected with a company if he/she, or an associate of the individual, directly or indirectly possesses or is entitled to acquire such rights as would, in the event of a winding up or in any other circumstances, entitle him/her to receive any of the assets of the company available for distribution to equity holders. Whether a person is an “equity holder” is determined in accordance with section 413, and the percentage of assets to which the individual is entitled at any time is defined in accordance with section 415.

(7) An individual is connected with a qualifying company if he/she can control it in the manner set out in section 11.

Seed capital exception to “connected” rules

(8) For the purposes of subsection (4)and (6)(a) no account shall be taken of —

(8) (a) shares held by the individual in the company,

  1. (a) (i) for which the individual was entitled to relief under this part for the acquisition of the shares, and
  2. (a) (ii) the individual, or a person connected with the individual, does not at any time in the ‘specified period’ control (with the meaning of section 432) the company, or

(8) (b) Shares acquired on the formation of the company where

  1. (b) (i) the company has issued no other shares other than the shares issued on formation, and
  2. (b) (ii) the company has not commenced, or made preparations for, the carrying on of any trade or business.

Subsection 8 applies to shares issued on or after the 2nd November 2017.

Future entitlement

(9) An individual is treated as entitled to acquire anything which he/she is entitled to acquire at a future date or will at some future date be entitled to acquire. This prevents the use of options and other deferred transactions which may be used in order to prevent an individual being connected with a company. Moreover, for the purpose of this section all the rights and powers of an individual’s associate are deemed to be those of the individual.

Cross shareholdings

(11) An individual is treated as connected with a company, if the individual subscribes for shares in the company as part of an arrangement which provides for another person to subscribe for shares in another company with which that individual, or any other individual who is a party to the arrangement, is connected. Such an arrangement would exist where, for example, individual A subscribes for shares in individual B’s company and individual B, in turn subscribes for shares in individual C’s company, who completes the circle by subscribing for shares in A’s company.

Relevant Date: Finance Act 2019