Finance Bill 2002
Amendment 215 Page 447 Line 32
Amendment 216 Page 449 Line 3
Amendment 217 Page 449 Line 44
Amendment 218 Page 450 Line 37
Amendment 219 Page 451 Line 11
Amendment 220 Page 451 Line 22
Amendment 221 Page 451 Line 22
Mr Paul Boateng
215
Schedule 31, page 447, line 32, leave out to end of line 19 on page 448 and insert ?
?Meaning of 'venture capital investment partnership?
2 (1) A 'venture capital investment partnership? means a partnership in relation to which the following conditions are met.
(2) The first condition is that the sole or main purpose of the partnership is to invest in unquoted shares or securities.
This condition shall not be regarded as met unless it appears from?(a) the agreement constituting the partnership, or
(b) any prospectus issued to prospective partners,that that is the sole or main purpose of the partnership.
(3) The second condition is that the partnership does not carry on a trade.
(4) The third condition is that not less than 90% of the book value of the partnership's investments is attributable to investments that are either?(a) shares or securities that were unquoted at the time of their acquisition by the partnership, or
(b) shares that were quoted at the time of their acquisition by the partnership but which it was reasonable to believe would cease to be quoted within the next twelve months.(5) For the purposes of the third condition?
(a) the following shall be disregarded?
(i) any holding of cash, including cash deposited in a bank account or similar account but not cash acquired wholly or partly for the purpose of realising a gain on its disposal;
(ii) any holding of quoted shares or securities acquired by the partnership in exchange for unquoted shares or securities;(b) whether the 90% test is met shall be determined by reference to the values shown in the partnership's accounts at the end of a period of account of the partnership.
(6) Where a partnership ceases to meet the above conditions, the company shall be treated as if the partnership had continued to be a venture capital investment partnership until the end of the period of account of the partnership during which it ceased to meet the conditions.
(7) A partnership that ceases to meet those conditions cannot qualify again as a venture capital investment partnership.
For this purpose a partnership is treated as the same partnership notwithstanding a change in membership if any person who was a member before the change remains a member.?.
Mr Paul Boateng
216
Schedule 31, page 449, line 3, leave out sub-paragraph (3).
Mr Paul Boateng
217
Schedule 31, page 449, line 44, at end insert?
?(3A) The operation of sub-paragraph (3) is not affected by the partnership having ceased to be a venture capital investment partnership before the time at which the distribution is treated as received by the company.?.
Mr Paul Boateng
218
Schedule 31, page 450, line 37, at end insert?
?Investment in other venture capital investment partnerships
8A (1) For the purposes of paragraph 2 (meaning of 'venture capital investment partnership?) an investment by way of capital contribution to another venture capital investment partnership shall be treated as an investment in unquoted shares or securities.
(2) The Treasury may by regulations make provision, in place of but corresponding to that made by paragraphs 3 to 8, in relation to gains accruing on a disposal of relevant assets by such a partnership.
(3) The regulations may make provision for any period of account to which, in accordance with paragraphs 10 to 12, this Schedule applies.?.
Mr Paul Boateng
219
Schedule 31, page 451, line 11, at end insert ?and also includes any debentures?.
Mr Paul Boateng
220
Schedule 31, page 451, line 22, at end insert?
?(3) References in this Schedule to capital contributed to a limited partnership include amounts purporting to be provided by way of loan is?
(a) the loan carries no interest
(b) all the limited partners are required to make such loans, and
(c) the loans are accounted for as partners? capital, or partners? equity in the accounts of the partnership.
Mr Paul Boateng
221
Schedule 31, page 451, line 22, at end insert?
?(4) For the purposes of this Schedule the assets of?
(a) a Scottish partnership, or
(b) a partnership under the law of any other country or territory under which assets of a partnership are regarded as held by or on behalf of the partnership as such,shall be treated as held by the members of the partnership in the proportions in which they are entitled to share in the profits of the partnership.
References in this Schedule to the company's interest in, or share of, the partnership's assets shall be construed accordingly.?.
EXPLANATORY NOTE
SUMMARY
1. The purpose of these amendments is to refine the definition of a venture capital investments partnership to allow more flexibility in the type of investments it may make and still qualify a life assurance company partner for the simplified tax treatment of capital gains given by the Schedule.
DETAILS OF THE AMENDMENTS
2. Amendments 215, 217 and 219 make a number of changes to the definition of a qualifying 'venture capital investment partnership? in paragraph 2 Schedule 7AD TCGA (inserted by Schedule 31 to the Bill). Amendment 215 inserts a new paragraph 2 which now-
- allows quoted shares to be held, so long as they become unquoted within 12 months (this allows partnerships to invest in ?public/private? situations)
- disregards quoted shares and securities where they are issued in exchange for unquoted shares
- increases the disregard for other quoted shares and securities from 5% to 10%
- requires the partnership to set out in its constitutional documents or its prospectuses that its object is investment in unquoted shares and securities
- amends the penalty for any breach of the conditions. The partnerships will no longer be treated as non-qualifying from the outset, but will be treated as non qualifying from the period of breach (and will not be allowed to re-qualify). Amendment 217 deals with a consequence of ceasing to qualify: it allows the rule deeming a distribution to operate in a period after disqualification.
- Applies to debentures which are not technically securities. Amendment 219 amends the definition of securities in paragraph 9, the general interpretation provision.
3. Amendments 216, 218 and 220 deal with ?funds of funds?. In these cases a partnership holds interests in other ?lower level? partnerships which themselves make investments in unquoted shares and securities. Where a life assurance company is a partner in a fund of funds partnership, the general rules given by paragraphs 3 to 8 of Schedule 7AD TCGA 1992 (the new Schedule inserted by Schedule 31 to the Bill) do not work well.
4. Amendment 218 inserts a new paragraph 8A into Schedule 7AD allowing the Treasury to make regulations modifying paragraphs 3 to 8 so that will work appropriately for funds of funds. The regulations may be made to have effect from the date on which the Schedule as a whole starts to apply. Amendments 216 and 220 move a definition of ?capital contribution? which is used in paragraph 8A so that it appears in the general interpretation provision of paragraph 9.
5. Amendment 221 makes it clear that references to a partner's share in or interest in the assets of the partnership work appropriately where the partnership is formed under the law of Scotland, or any other territory where partnership law is like that of Scotland.
6. In Scotland, a partner has no direct interest in the assets of the partnership: instead, the partner has an interest in the partnership as such.
BACKGROUND
7. The proposal to which Schedule 31 gives effect originated from Paul Myners? recommendations in his Review of Institutional Investments, all of which were accepted by the Government. One of Myners? findings was that the burden of the current rules has a significant inhibitory effect on the use of such investment vehicles by life insurance companies. The Schedule is intended to reduce this burden.
8. The Schedule was devised in consultation with the insurance industry and others. Since the Bill was published, the industry has suggested that some of their members investing in venture capital through limited partnerships would, because of the type of investments that are made (particularly in the USA), find it difficult to qualify. The amendments included here have also been discussed and agreed with the industry.