I beg to move amendment 13, in schedule 8, page 101, line 4, leave out from beginning to is in line 5 and insert
A1 Schedule 5B to TCGA 1992 (enterprise investment scheme: re-investment) is amended as follows.
A2 (1) Paragraph 1(2) (application of Schedule) is amended as follows.
(2) For paragraphs (g) and (h) substitute and
(g) all of the money raised by the issue of the shares (other than any of them which are bonus shares) is, no later than the time mentioned in section 175(3) of ITA 2007, employed wholly for the purpose of that activity,.
(3) In the words following the paragraphs, for conditions in paragraphs (g) and (h) above do substitute condition in paragraph (g) above does.
A3 (1) Paragraph 1A (failure of conditions of application) is amended as follows.
(2) In sub-paragraph (4)
(a) omit or (h), and
(b) for sub-paragraph (4A) below substitute section 175(3) of ITA 2007.
(3) Omit sub-paragraph (4A).
1 (1) Paragraph 9 (other reconstructions and amalgamations).
The tax-based venture capital schemesthe enterprise investment scheme, venture capital trusts and the corporate venturing schemeall contribute to the Governments policy of improving the ability of small companies to secure longer-term support through equity investments. Such investments help small companies to grow and invest in their business, so that they are well placed to take advantage of business opportunities. Encouraging investment is even more important in the light of the economic challenges that we now face. Investment in the future is crucial if the UK is to emerge from the recession with a stronger, more prosperous economy.
At Budget 2008, the Chancellor lunched a public consultation on the enterprise investment scheme to investigate how the rules and processes that govern the scheme could be improved or simplified. As a result of representations made during that consultation, schedule 8 introduces four changes.
On the enterprise investment scheme, the schedule relaxes the time limits in relation to the employment of money invested; removes the link to other shares of the same class issued at the same time as qualifying shares; extends the period for carry-back of relief and allows the full amount subscribed for to be carried back, subject to the annual investment limit; and corrects an anomaly regarding the capital gains position of investors in the event of a share-for-share exchange. On the corporate venturing and venture capital trusts schemes, the schedule relaxes the time limits in relation to the employment of money by companies receiving investment. All four changes simplify the rules of the schemes and remove current restrictions. The Government amendments merely make minor changes.
I beg to move amendment 27, in schedule 8, page 101, line 12, at end insert
(1B) The individual may elect for section 135 or section 136 not to apply in respect of the shares..
The amendment is straightforward. It would reinstate reliefs that were there in the first place. It also seeks to address an iniquity in paragraph 9 of schedule 5B to the Tax and Capital Gains Act 1992. The Government propose to apply sections 135 and 136 of the 1992 Act to shares to which deferral relief is attributable. Thus, when an EIS company is acquired in a share-for-share exchange, the gain that arises on the EIS deferral relief shares is not taxed, but held over against the shares received in the exchange. The deferred gain falls back into charge to tax, as would be expected. Previously, sections 135 and 136 of the 1992 Act were excluded from applying, such that an investor would have to pay tax on the deferred gain and the deferral relief shares at a time when they would have received no cash out of which to pay the tax, because they had received shares and not cash on disposal.
However, the changes that the Government propose have the effect of preventing a claim for loss relief, which was previously available, if the deferral relief shares stood at a loss against the subscription price at the time of the share-for-share exchange. That loss could be relieved against the deferral gain, which falls into charge to capital gains tax or against income by making a claim under section 131 of the Income Taxes Act 2007. In general in tax law, it is a principle that the taxpayer should not have to pay tax on a gain at a time when they have no cash to pay the tax. Under the Bill, if amendment 27 is not made, the investor will have a deferred gain falling into charge to tax when they have no cash at their disposal out of which to pay the tax and they will not be able to reduce that liability by any loss on the shares.
I think that I have proposed a fairly straightforward change, to reinstate a relief that existed before the Government proposed their amendments.
It may be helpful if I explain briefly the problem that we were trying to address in paragraph 1 of schedule 8, before setting out why amendment 27 is unnecessary and undesirable.
Under the enterprise investment scheme, an investor may take the proceeds from the sale of an asset and invest them in shares. Any capital gains tax payable on gains from those proceeds is then deferred, but not cancelled. If the shares are exchanged for new shares, the deferred gain is brought back into charge. That was always intended. However, capital gains tax can also arise on the exchanged shares at the same time as the deferred gain comes into charge, which was not intended. That would happen for an EIS shareholder but not for a non-EIS shareholder exchanging their shares. The result could be a gain with tax to pay or a loss that could be set against other gains or against income. Therefore, EIS shareholders could be placed at either an advantage or a disadvantage compared with other shareholders.
The hon. Gentleman seems to be concerned that if a loss cannot be crystallised immediately, it is gone forever, but that is not the case. I hope that I can reassure him by saying that any loss arising from subsequent disposal of the new shares received in the exchange will be able to be set against other gains. I hope that the hon. Gentleman will agree that what I suspect was the reason for the amendment in the first place is actually mitigated by the current arrangements.
Allowing enterprise investment scheme investors to choose to disapply a part of the tax rules, which amendment 27 would do, would be unfair to other investors, to whom the relevant sections of the 1992 Actsections 135 and 136would apply. However, it would create a fundamentally wrong tax position, with the investor able to opt out of paying tax on a gain, but able to opt in to obtaining relief on a loss.
I ask the hon. Gentleman to withdraw the amendment in the hope that he is reassured that what I think is the reason why it was tabled is already covered.
5A In consequence of the amendments made by paragraphs A2, A3 and 1A, omit
(a) in FA 2001, in Schedule 15, paragraphs 26 to 28,
(b) in FA 2004, in Schedule 18, paragraph 13(1)(f), and
(c) in ITA 2007, in Schedule 1, paragraph 345(2)(b), (3)(a) and (13)(b)..
Amendment 16, in schedule 8, page 102, line 20, at end insert
5B The amendments made by paragraphs A2, A3, 1A, 3, 4 and 5A have effect in relation to shares issued on or after 22 April 2009..
Amendment 17, in schedule 8, page 102, line 32, leave out paragraph 8.(Angela Eagle.)