597A Entrepreneur Relief

Summary

Section 597A, inserted by Section 45, Finance (No 2) Act 2013 and further amended by Section 51, Finance Act 2014, introduced a relief for individual entrepreneurs who, in the period 1 January 2014 to 31 December 2018 reinvest the proceeds of disposals of assets made on or after 1 January 2010 in chargeable business assets in new business ventures. The relief is granted in the form of a tax credit against any capital gains tax liability arising on the ultimate disposal of the chargeable business assets more than 3 years after they were acquired. The section provides for a continuation of the relief where the proceeds of the disposal of those chargeable business assets are in turn reinvested in further new business ventures. [This relief has been replaced by a revised relief which applies to disposals of chargeable business assets made on or after 1 January 2016.]

Details

Definitions

(1) Subsection (1) contains definitions used in the section.

“chargeable business asset” is defined to include assets used wholly for the purposes of a new business carried on by an individual or new ordinary shares issued on after the 1st of January 2014 in a qualifying company over which the shareholder has control and in which the shareholder is a full-time working director. There is a minimum investment requirement of €10,000. In the case of investment through a company each shareholder must own not less than 15% of the shares in the qualifying company carrying on the new business (or in a holding company which owns 100% of the ordinary share capital of a qualifying company carrying on new business) and must be a full-time working director in the qualifying company. The definition of chargeable business assets excludes assets that are held as passive investments.

“full-time working director”, in relation to a qualifying company, is a standard definition to ensure that the relief is confined to genuine business persons. It means a director required to devote substantially the whole of his or her time to the service of the company in a managerial or technical capacity.

“holding company” means a company, that is not listed on the official list of any stock exchange, whose business consists wholly of holding shares in a qualifying company.

(2) “Initial risk finance investment” is defined as meaning the funding of the qualifying enterprise for the purpose of new business. The total funding must not exceed €15 million; it must be provided within 6 months of the commencement of the new business and can include equity or investment or both (investment in this context includes loan investment). Essentially, an investor can invest an amount (not less than €10,000) equal to the consideration received on a disposal (made on or after 1 January 2010) of a chargeable asset, (after deducting any capital gains tax paid), up to the maximum of €15 million.

(3) “new business” is defined to mean relevant trading activities carried on –

1. by a new qualifying enterprise that were not, prior to 1 January 2014, carried on by that qualifying enterprise or by any person connected (within the meaning of section 10) with that qualifying enterprise, or
2. by an existing qualifying enterprise that were not, prior to 1 January 2014, carried on by that qualifying enterprise or by any person connected (within the meaning of section 10) with that qualifying enterprise.

The definition excludes products, goods or services that are substantially the same as products, goods or services previously provided by any individual claiming relief under this section or by any person connected with that individual.

“qualifying company” is defined as meaning a company that is a qualifying enterprise and which is not listed on the official list of any stock exchange at the time of making the initial risk finance investment;

“qualifying enterprise” is defined as meaning an enterprise which at the time of making the initial risk finance investment is a micro, small or medium-sized enterprise, as defined in Article 2 of the Annex to the Commission Recommendation of 6 May 2003

and which –

1. has not been carrying on any trade or profession, or
2. has been carrying on a trade or profession for less than 7 years.

“relevant trading activities” is given the same meaning as in section 488 and included farming within the meaning of section 655.

Subsection (2) is the relieving provision. It provides for relief to an individual, who has paid capital gains tax on the disposal, on or after 1 January 2010, of a chargeable asset and invests, as an initial risk finance investment, the proceeds of that disposal (not being less than €10,000 net of any CGT paid) in acquiring chargeable business assets, on or after 1 January 2014 and on or before 31 December 2018, which are used in a new business.

The relief is given on a subsequent disposal of those chargeable business assets (after a minimum period of 3 years) and takes the form of a tax credit equal to the lower of the capital gains tax paid on or after 1 January 2010 on the disposal of a chargeable asset (or a proportionate amount where less than the full amount is reinvested) or 50% of the capital gains tax that would otherwise be payable on the disposal of the chargeable business assets.

Where less than the full proceeds of a disposal on which capital gains tax has been paid are reinvested, only that proportion of the capital gains tax relative to the amount reinvested will qualify for relief.

Subsection (3) provides that if the individual further reinvests the proceeds of the disposal of the chargeable business assets as an initial risk finance investment in further new chargeable business assets, the relief can also be claimed on any capital gains tax payable on a subsequent disposal of those chargeable business assets.

Subsection (4) recognises that there may, as part of any disposal of chargeable business assets, be genuine commercial reasons for them to be transferred to a wholly owned company of the owners followed immediately by the disposal of the shares in that company to the person making the acquisition. Subsection (4) provides that where this happens the relief provided for by subsection (2) or (3), as appropriate, will apply to the disposal of the shares in the company to which the chargeable business asset was transferred as it would have applied if the chargeable business asset had been disposed of directly to the person making the acquisition.

Subsection (5) is an anti-avoidance provision. It provides that relief under the section will not be available, if a transfer of a chargeable business asset to a wholly owned company (as provided for in subsection (4)) is an arrangement or part of an arrangement the main purpose or one of the main purposes of which is to secure a tax advantage within the meaning of section 546A of the Taxes Consolidation Act 1997.

[Note: Section 546A defines “tax advantage” as meaning –

(a) relief or increased relief from tax,

(b) repayment or increased repayment of tax,

(c) the avoidance or reduction of a charge to tax or an assessment to tax,

(d) the avoidance of a possible assessment to tax.]

Relevant Date: Finance Act 2019