Community Investment Tax Credit

Introduction

1. The Social Investment Taskforce, chaired by Sir Ronald Cohen, reported to the Chancellor in October 2000. The report recommended a new Community Investment Tax Credit (CITC) to encourage private investment in not-for-profit and profit-seeking enterprises in disadvantaged communities.

2. Following consultation, in July 2001 the Government announced its intention to proceed with the CITC Scheme, and to make the Scheme available to both individual and corporate investors making either debt or equity investments. The Pre-Budget Report in November 2001 described a number of adjustments to the Scheme which took account of the constructive comments received from representatives from the community finance sector and from potential investors during the formal consultation period. The outcome of continuing discussions with these groups is reflected in further design changes provided for by the legislation. Although such changes add to the legislation, they are intended to make the Scheme more attractive to investors and community development finance institutions (CDFIs), and to increase its effectiveness.

Commentary on Draft Legislation

Rules and guidance for Community Development Finance Institutions (CDFI's) considering applying for accreditation on the Small Business Service website

PDF file of Finance Bill 2002 Draft Clauses: Community Investment Tax Credit

If you do not have a copy of the Adobe Acrobat Reader software which allows you download PDF files, you can obtain a free copy from the Adobe website.

Any comments on the draft legislation should be sent to:
Nick Houghton
Inland Revenue - Business Tax
Room 4W4
22 Kingsway
London WC2R 1LB

Email Nick Houghton
Tel.: 0207 438 6390

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Commentary on Draft Legislation

Clause 1

3. The Clause introduces the legislation for the Community Investment Tax Credit, provides for consequential changes and repeals to have effect, and sets the commencement provisions. The Scheme is to come into force on a day to be set by Treasury Order, with the date from which claims can be made being set in the same way. Once in force, the legislation will apply to investments made on or after 17 April 2002.

4. CDFIs accredited at any time during from 17 April 2002 to 5 April 2003 will be treated as accredited from 17 April 2002 (see paragraph 12). Therefore a qualifying investment (see paragraph 14) made at any time on or after 17 April 2002 in an organisation accredited within this period may qualify for tax relief, even though the accreditation had not been granted at the time the investment was made.

Schedule 1 (the main Schedule)

Part 1 - Introduction

5. Paragraph 1 sets out the eligibility requirements for the Scheme. Provided that the general conditions of the Scheme (Part 4) are satisfied, an individual or company which makes a qualifying investment (Part 3) in a body accredited as a community development finance institution (CDFI) (Part 2) is eligible for tax relief in respect of that investment.

6. Paragraph 2 provides that an investment is made when a person makes

• a loan to the CDFI, or
• a subscription for securities of, or shares in, the CDFI.

7. The rules for the Scheme require that certain conditions are met throughout "the five year period". This period is defined at Paragraph 3 as the period of five years beginning with the day the investment is made (the investment date).

Part 2 - Accredited CDFIs

8. Paragraph 4 sets out the basis on which a body may apply for accreditation as a CDFI, and the basic criteria for accreditation. The Paragraph provides for the Secretary of State (for Trade and Industry) to accredit a body if its principal objective is to provide finance, or finance and access to business advice, for enterprises for disadvantaged communities, and if other criteria to be set out in Treasury regulations are satisfied. The regulations may set these criteria by referring to material published by, or on behalf of, the Secretary of State. A draft of this material is being published in conjunction with the draft legislation.

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9. This Paragraph includes provision for the regulations to distinguish between "wholesale" and "retail" CDFIs, that is between those CDFIs whose objective is to finance other, generally smaller, CDFIs, and those whose aim is to lend directly to enterprises in disadvantaged areas.

10. Paragraph 5 provides for the regulations to set the terms and conditions of an accreditation. These may include information requirements, and a right to appeal against a decision to refuse accreditation. The regulations may also set out the consequences of failing to meet these terms and conditions, including withdrawal of accreditation.  

11. Paragraph 6 provides for the Secretary of State to delegate any of the functions conferred on him by Part 2 of the Schedule. The current intention is that the Small Business Investment Taskforce (SBIT), assisted by the Small Business Service, will consider applications for accreditation, and make recommendations to the Secretary of State. The SBIT is a non-departmental public body, one of whose purposes is to advise on various funding issues for businesses.

12. Paragraph 7 provides that, in general, accreditation will last for a period of three years from the day it is granted. But for a body accredited between 17 April 2002 and 5 April 2003, the period may be extended to run from 17 April 2002 to immediately before the third anniversary of the day of grant.

13. The Paragraph also provides for a CDFI to seek a new accreditation before the end of an existing period of accreditation if it so wishes. One reason for this might be where the CDFI raises the maximum permitted amount of investment (see paragraph 18 below) and wishes to raise more before the end of the existing period.

Part 3 - Qualifying investments

14. Paragraph 8 summarises the conditions to be met if an investment is to be a qualifying investment. There are separate conditions for loans, securities and shares, together with general requirements relating to possession of a valid tax relief certificate and the absence of pre-arranged protection against risk.

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15. Paragraph 9 sets out the conditions which must be satisfied by a loan. Broadly, these are that

• in the case of a loan made under a draw down facility, the CDFI is to receive the full amount of the loan within 18 months of the investment date,
• the loan is not capable of conversion or exchange into a loan, securities or shares which are redeemable within the five year period, and
• no person can require
• • any repayment of the amount advanced during the first two years of the five year period;
  • repayment during the third year of more than 25% of the total amount advanced; 
  • repayment before the end of the fourth year of more than 50% of that amount, or 
  • repayment before the end of the fifth year of more than 75% of that amount.

16. The Paragraph provides for these percentages to be changed by Treasury Order.

17. Paragraphs 10 and 11 set the conditions for securities and shares respectively. Broadly, both must be subscribed for wholly in cash, fully paid on the investment date, and be neither redeemable within the five year period, nor capable of conversion or exchange into a loan, securities or shares which are redeemable within that period.

18. Paragraph 12 provides for the CDFI to issue a certificate, a "tax relief certificate", in respect of an investment. A "retail" CDFI may issue tax relief certificates up to an aggregate value (defined by the Paragraph) of £10 million during its accreditation period, while the limit for any other accredited CDFI, essentially a "wholesale" CDFI is £20 million. Any certificate issued wholly or partly for amounts in excess of these limits is invalid, and there is a penalty for their fraudulent or negligent issue. The limits may be changed by Treasury order. As explained in paragraphs 26 and 28 below, an investor must hold a certificate in respect of their investment before they can claim tax relief.

19. Paragraph 13 requires that the arrangements under which the investment is made, or which are related or connected to the making of the investment must exclude arrangements with the main purpose of protecting the individual or company from investment risk. Such arrangements might typically involve the use of a guarantee or insurance. The Paragraph does not prohibit arrangements which might reasonably be expected to be provided for normal commercial reasons if the investment were made in the course of a trade, for example, the offering of property as security for a loan.

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Part 4 - General conditions

20. Part 4 establishes some general conditions which must be satisfied if an investor is to obtain tax relief in respect of an investment.

21. Paragraph 14 provides that an investor must not control the CDFI in which the investment is made. In broad terms, the test of control used is whether the investor has the power to secure that the affairs of the CDFI are conducted in accordance with his wishes.

22. Paragraph 15 requires the investor to be the sole beneficial owner of the investment when it is made, while Paragraph 16 provides that the investor must not itself be accredited as a CDFI on the investment date.

23. Paragraph 17 provides that no tax relief is available on an amount used to acquire an interest in a CDFI which is a partnership.

24. Paragraph 18 requires that the investment must not be made as part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is avoidance of tax.

Part 5 - Form of relief

25. Paragraph 19 provides, subject to the other rules of the Scheme, for individuals who are eligible investors to obtain tax relief in respect of their investment. Tax relief may be claimed for the tax year in which the investment is made, and for each of the four subsequent years. The relief takes the form of a reduction in the amount of their income tax liability for a tax year and for each year is the smaller of

• 5% of the invested amount (see paragraph 30 below) for the year, or
• the amount which reduces the investor's income tax liability for the year to nil.

26. Paragraph 19 also provides that before an individual investor can make a claim, he must have received a tax relief certificate (paragraph 18 above) in respect of the investment.

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27. The effect of Paragraph 19, together with Paragraphs 1 to 3 of Schedule 2 (consequential amendments) is that income tax relief under the Scheme will be given after taking account of

• any relief obtained on taxable gains on life assurance policies, and
• any relief obtained under the Enterprise Investment Scheme and Venture Capital Trust Scheme,
• but before deducting any other reliefs which are given in terms of tax.

28.  Paragraph 20 makes equivalent provision for eligible investors who are companies liable to corporation tax. Relief is again subject to receipt of a tax relief certificate. Subject to the other rules of the Scheme, relief may be claimed for the accounting period in which the investment is made, and for each of the following accounting periods in which the four subsequent anniversaries of that date fall. The amount of the relief for a period is the smaller of

• 5% of the invested amount (see paragraph 30 below) for the period, and 
• the amount which reduces the investor's income tax liability for the year to nil.

29. Tax relief is deducted from the liability to corporation tax after taking account of any marginal small companies' relief and investment relief obtained under the Corporate Venturing Scheme, and before deducting any double taxation relief.

30. The "invested amount" is determined by Paragraph 21, subject to the rules dealing with the receipt of value (see paragraphs 53 and 55 below). For a loan, the "invested amount" for the tax year or accounting period in which the investment date falls is the average capital balance (see paragraph 31 below) for the first year of the five year period. For subsequent tax years or accounting periods, it is the average capital balance for the period of one year beginning with the anniversary of the investment date falling in the tax year or period concerned. For the third, fourth and fifth years or periods for which relief may be claimed, the invested amount cannot exceed the average capital balance for the last six months of the second year of the five year period. This is a consequence of the requirement that where the loan offers a draw down facility, the full amount must be drawn down within 18 months of the investment date.

31. For the purposes of the Schedule, the average capital balance for a period is the mean of the daily balances of capital outstanding during the period.

32. For shares and securities, Paragraph 21 provides that the "invested amount" is the amount subscribed for the shares or securities by the investor.

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33. Some examples of how this works might be helpful.
Example 1- An individual investor subscribes £10,000 for shares in a CDFI which are redeemable after six years. The invested amount for each year will be £10,000, (the amount subscribed). Tax relief of £500 (5% of £10,000) may be claimed for the tax year in which the shares are issued, and for each of the four subsequent tax years.

34. Example 2- A company makes a loan of £100,000 to a CDFI on terms that provide for £10,000 to be repaid at the beginning of the third year, and at the beginning of each subsequent year until the loan is repaid. The average capital balance, and hence the invested amount, for the first and second years of the five year period is £100,000, £90,000 for the third year, £80,000 for the fourth and £70,000 for the fifth. Tax relief of £5,000 may be claimed for the accounting period in which the loan was made, and relief of £5,000, £4,500, £4,000, and £3,500 respectively for the accounting periods in which fall the four subsequent anniversaries of the investment date. If for some reason the loan was increased to £150,000 at the beginning of the fifth year, the invested amount for that year would be restricted to £100,000, (the 18-24 month average capital balance) and so the maximum relief available would be £5,000.

35. Paragraph 22 is concerned with loans. It provides that where, before the qualifying date relating to a year or period,

• the investor disposes of all or part of the loan, 
• the loan is completely repaid, or 
• loan repayments exceed the permitted balance (see paragraph 50),

then no claim may be made in respect of that tax year or accounting period. The qualifying date relating to a tax year or period is the anniversary of the investment date next occurring after the end of that year or period.

36. Example 3- An individual makes a loan of £10,000 to a CDFI on 1 January 2004 on terms that provide for the loan is to be repaid in full on 1 January 2014. On 30 September 2008 the CDFI decides to repay the investor in full. The qualifying date next occurring after the date of repayment is 1January 2009, and this is the qualifying date relating to 2007/2008. No claim can therefore be made for 2007/08.

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37. Paragraph 23 deals with shares or securities. It provides that 

• tax relief may be claimed in respect of a year or period only for shares or securities beneficially held by the investor from issue to immediately before the qualifying date relating to that year or period, and that
• no claim may be made in relation to a tax year or period if before the qualifying date for that year or period, receipts of value received in the five year period exceed the permitted limits (see paragraph 54 below).
  Qualifying date has the same meaning here as it does for Paragraph 22 of the Schedule.

38. Paragraph 24 is concerned with loss of accreditation by the CDFI. Where accreditation is lost during the first year of the five year period for an investment, no claim in respect of that investment may be made. Where accreditation is lost during a later year, no claim may be made for the year or period in which fell the last anniversary of the investment date before accreditation was lost, or for any later year or period.

39. Example 4- An individual subscribes £10,000 for shares in a CDFI on 1 June 2004. The CDFI loses its accreditation on 1 January 2007. The last anniversary of the investment before accreditation was lost was 1 June 2006. This falls in the tax year 2006/07, and so no claim may be made for this or any later year.

40. Paragraph 25 deals with accreditation of the investor (rather than of the body in which the investment is made). It makes equivalent provision to Paragraph 24, but with effect from the time which the investor becomes accredited, rather than the time the CDFI loses its accreditation.

41. Paragraph 26 provides that references in the Schedule to the tax relief attributable to any investments for a tax year or accounting period are to the reduction in the investor's tax liability for that year or period that is attributed to those investments under the rules of the Paragraph. The Paragraph provides rules for allocating tax relief between a number of different investments, the individual shares or securities comprised in an investment, and in various other circumstances. They are relevant, for example, where there is a part disposal of an investment of shares or securities.

Part 6 - Withdrawal of relief

42. Part 6 is concerned with withdrawal of tax relief.

43. Paragraph 27 provides that tax relief is to be withdrawn or reduced by making an assessment under Case VI of Schedule D for the tax year or accounting period for which it was obtained. But tax relief will not be withdrawn from an individual by reason of any event occurring after his death.

44. Paragraph 28 provides that where, within the five year period for a loan, an investor disposes of the whole of the loan (other than as a "permitted" disposal), or disposes of part of it, then any tax relief attributable to that loan, for any year or period, must be withdrawn.

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45. A disposal is "permitted" if it is

• by way of a distribution in the course of dissolving or winding up the CDFI;
• a disposal by reason of the entire loss, destruction, dissipation or extinction of the loan;
• a deemed disposal because the loan has become of negligible value, or
• made after the CDFI has ceased to be accredited.

46. Paragraph 29 deals with the disposal, within the five year period, of shares or securities in a body which has not ceased to be a CDFI before the disposal.

• if the disposal is a permitted disposal, or is made by way of a bargain made at arm's length for full consideration, then any relief for any tax year or accounting period attributable to the investment must be reduced by 5% of the amount received, or be withdrawn if 5% of the amount is greater than the relief attributable for the year or accounting period. 
• if the disposal falls into neither of these categories, then all tax relief attributable to the shares or securities must be withdrawn

If the amount of relief attributable to the investment is less than 5% of the invested amount, then for the purposes of calculating any reduction, the amount received is proportionately reduced.

47. Example 5- A company with a 12 month accounting period (AP) ending on 31 December subscribes £8,000 for shares on 1 March 2004 in a CDFI which retains its accreditation throughout the five year period for those shares. It sells all the shares for £2,000 on 30 September 2007 by way of an arm's length bargain.

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The company will have already claimed tax relief of £400 for each of the three APs to 31 December 2006. No relief may be claimed for the AP to 31 December 2007 because the company has disposed of the shares before the qualifying date for that AP (Paragraph 23 of the Schedule). The relief attributable to the shares for each of the three previous APs is reduced by £100 (5% of £2000).

48. Example 6- If in Example 5 the company had sold the shares for £1000 when their market value was £9000, the disposal would have been neither a permitted disposal, nor an arm's length bargain, and so all relief attributable to the shares would be withdrawn.

49. Paragraph 30 makes provision for withdrawal of any tax relief attributable to a loan where, in essence, more of it is required to be repaid, or it is required to be repaid more quickly, than a loan meeting the terms of Paragraph 9 of the Schedule.

50. The provision works by comparing the average capital balance of the loan for the third, fourth or fifth years of the five year period with the permitted balance for the year in question. The permitted balance for these three years is as follows

• for the third year - 75% of the average capital balance outstanding for the six month period starting 18 months after the investment date (in most cases this will be the amount of the loan);
• for the fourth and fifth years, 50% and 25% of that balance respectively.

51. Where the average capital balance is less than the permitted balance for any of these three years, and the difference is not insignificant, then any relief attributable to the loan is withdrawn. In calculating the average capital balance for this purpose, any repayments which are, in effect, made at the CDFI's discretion rather than as a requirement of the loan agreement are disregarded. These "voluntary" repayments are described in the legislation as "non-standard" repayments. So if, for example, a CDFI with a loan which is repayable in full after six years chose to repay the whole of the loan after three, perhaps because it carried a high fixed interest rate, then a corporate investor would not lose the tax relief on that loan for the accounting periods relating to the first three years throughout which the loan was outstanding. Conversely, if the investor, in circumstances other than those which would trigger normal default conditions, required the loan to be repaid after three years, then all relief would be withdrawn.

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52. Example 7- A company agrees with a CDFI that it may borrow up to £100,000, with the maximum amount of the loan being drawn down within the first 12 months, and no capital repayments until the beginning of the third year, when the loan is to be repaid at the rate of 20 per cent of the maximum balance per year, with repayment made at the beginning of the year. The CDFI borrows £40,000 on 1 January 2003, increases the loan to £80,000 on 1 June 2003, repays £16,000 on 1 January 2005, £16,000 on 1 January 2006, and chooses to repay the remainder of the loan in full on 1 January 2007. The average capital balance and invested amounts for each year of the five year period are as follows

There is no withdrawal of earlier years relief because the repayment on 1 January 2007 was made at the CDFI's discretion and not required under the terms of the loan agreement.

53. Paragraphs 31 to 39 deal with "receipt of value". The aim of the value received rules is to prevent tax relief being obtained for an investment in a CDFI where the money invested is returned to the investor in some other form. Without such rules, it would be possible for individuals or companies to arrange matters such that they received tax relief without losing the use of their money.

54. Paragraph 31 makes provision for the situation where the investor receives any value (see paragraph 60), other than insignificant value, in respect of a loan during the period of six years beginning one year before the investment date (the "period of restriction"). In such a case, the investor is treated, for the purposes of calculating the tax relief due, and determining whether repayment has exceeded the permitted limits, as receiving a non standard repayment of the loan at the beginning of the year in which the value was received. For this purpose, value received in the first year of the period of restriction is treated as received in the second.

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55. Example 8- A company investor makes a loan of £80,000 to a CDFI on 1 January 2004, with no repayments until the beginning of year 3, when £5,000 is to be repaid, with a further repayment of £5,000 at the beginning of each year thereafter. On 1 June 2007 the investor receives value of £40,000 from the CDFI. The position is as follows

The average capital balance for the AP to 31/12/07 reflects the repayment of £5,000 and the value received of £40,000. This amount is less than the permitted balance for the year, and so all relief attributable to the loan is withdrawn for all years.

56. Paragraph 32 deals with the receipt of value, other than insignificant value, during the period of restriction, by an investor in respect of shares or securities held by the investor since issue. Where the receipt exceeds the permitted level of receipts by an amount which is not insignificant, then any relief attributable to the shares or securities is withdrawn.

57. The permitted level of receipts is exceeded where

• any amount of value (disregarding insignificant value) is received during the first three years of the period of restriction, or
• the aggregate amount of value received by the investor
• • before the beginning of the fifth year of that period exceeds 25% of the amount subscribed for the shares or securities; 
  • before the beginning of the final year of that period exceeds 50% of that amount, or 
  • before the end of that period exceeds 75% of that amount.
    

58. Paragraph 33 provides the meaning of the period of restriction, referred to in paragraph 54 above, and used in the Paragraphs dealing with the receipt of value.

59. Paragraph 34 provides a set of rules to deal with the situation where there are a number of receipts of value during the period of restriction, each of which is insignificant in itself, but which in aggregate are sufficiently large to be taken into account for the purposes of Paragraphs 31 and 32. The Paragraph applies to loans and to shares and securities.

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60. Paragraphs 35 sets out the circumstances in which an investor receives value from the CDFI. A CDFI receives value when it

• repays, redeems or repurchases any shares or securities included in the investment; 
• releases any liability of the investor to the CDFI, or discharges any liability of the investor to a third party; 
• makes a loan or advance to the investor which has not been repaid in full before the investment is made; 
• provides a benefit or facility for the investor or certain individuals linked with the investor; 
• disposes of an asset to the investor at undervalue, or acquires one at overvalue; 
• makes a payment which, in broad terms, is not made in respect of a commercial transaction on commercial terms.

61. Paragraph 36 determines the amount of the value received in each of the circumstances set out in Paragraph 35. For example, if the CDFI released an investor from a liability of £1000, the amount of value received by the investor would be £1000.

62. Paragraph 37 makes provision for the case where an investor with more than one investment on which they have obtained relief receives value within the periods of restriction for more than one of those investments. The Paragraph provides for the value to be allocated in proportion to the amount of each investment.

63. Paragraph 38 applies to an investment of shares or securities. It has effect where an investor receives any value (other than insignificant value) from the CDFI during the period of restriction for the investment, but where the amount of the value was insufficient to cause all relief attributable to the shares or securities to be withdrawn under Paragraph 32 of the Schedule.

64. If Paragraph 38 applies, then in calculating any relief due for tax years or periods corresponding to years following the year in which the amount of value was received, the amount subscribed for the shares or securities is treated as reduced by the value received.

65. Paragraph 39 extends the application of Paragraphs 31 to 38 by providing that references to the investor or CDFI include references to any person who at any time in the period of restriction relating to the investment is connected (within the meaning of section 839 ICTA 1988) with the investor or CDFI as appropriate.

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Part 7 - Restructuring of CDFI

66. Paragraph 40 applies only if the CDFI takes the form of a company.

67. Sub-paragraph (1) applies where, for example, in the case of a rights issue, a reorganisation of the CDFI's share capital entails a pro rata allotment of shares (other than "corresponding bonus shares" - defined in sub-paragraph (3)) or debentures to the investor, and, immediately after the reorganisation, relief is attributable to the shares comprised in the investor's "existing holding" or the shares allotted in respect of that holding. The "existing holding" consists of shares of the same class which the investor holds in the same capacity. In these circumstances, the rules in sections 127 to 130 Taxation of Capital Gains Act 1992 (TCGA) will not apply in relation to the existing holding, so that it will be treated as a separate asset from the allotted shares or debentures, which will, therefore, be treated for TCGA purposes as acquired by the investor when they are issued.
68. Sub-paragraph (2) has effect where, immediately prior to a reorganisation of the CDFI's share capital to which sub-paragraph (1) does not apply, the investor holds shares to which relief is attributable and has continuously held those shares since they were issued. The effect of the provision is that the investor is treated as disposing of the shares if they are replaced by a qualifying corporate bond, and any chargeable gain or allowable loss arising on those shares will be crystallised at that time.

69. Paragraph 41 is again restricted in application to CDFIs which are companies. The Paragraph applies in certain circumstances where, as a result of a corporate reconstruction or amalgamation, the shares or securities of another company are issued in exchange for, or in respect of, the CDFI's shares or securities. These circumstances apply where, immediately prior to the reconstruction or amalgamation, relief is attributable to any shares or securities in the CDFI which have been held continuously by the investor since they were issued. Where the provision has effect, it disapplies the TCGA rules in sections 135 and 136 in respect of those shares. This means, in particular, that in any case where the shares are exchanged they are treated for TCGA purposes as being disposed of at the time of the reconstruction or amalgamation, (see also Paragraph 48(2) of the Schedule.)

Part 8 - Supplementary and general

70. Paragraph 42 provides that the investor must notify the Inland Revenue if relief attributable to an investment has to be withdrawn or reduced because of

• disposal of a loan, shares or securities during the five year period (see paragraphs 44-48 above);
• repayment of loan capital in excess of the "permitted balance" (see paragraphs 49-52 above);
• receipt of value in respect of shares or securities (see paragraphs 56 and 57)

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71. The time limit for giving the notice is, in most cases, the same as that for making a tax return for the tax year or accounting period in which the event occurred. Where value was received by a person connected with the investor, rather than the investor himself, the limit is extended to 60 days after the investor learns of the receipt.

72. Paragraph 43 provides for the exchange of information between the Secretary of State and the Inland Revenue in so far as this is necessary for each to discharge their functions under the Schedule. Information obtained by such disclosure cannot be further disclosed except for the purposes of legal proceedings arising from these functions. 

73. Paragraph 44 provides that, for the purposes of the Schedule, actions of a nominee in relation to loans, shares or securities are treated as actions of the person for whom the nominee acts.

74. Paragraph 45 requires that investors cannot claim to postpone payment of tax on the grounds that they are eligible for relief unless they have made a claim to relief (which depends on their having received a tax relief certificate).

75. Paragraph 46 defines an issue of securities or shares as all those securities or shares with the same terms or rights, or of the same class, as are issued on the same day, and an issue of securities or shares in a body to a person as all the securities or shares issued to that person in one capacity.

76. Paragraph 47 contains the rules which are used to identify which securities or shares are disposed of if the investor makes a part disposal of a holding of securities or shares with the same terms or rights, or of the same class, in the CDFI, and which it holds in the same capacity. The rules apply for disposals which are made at a time when the holding includes securities or shares to which relief is attributable which the investor has held continuously since they were issued. These rules, which override the normal TCGA identification rules, operate on a first-in-first-out basis. If securities or shares were acquired, or are treated for TCGA purposes as having been acquired, on the same day, any securities or shares to which relief is attributable are treated as being disposed of after any others if they have been held continuously by the investor since they were issued.

77. Paragraph 48 provides that references in the Schedule to "disposal", "disposing" etc are to have the same meaning as they have in the TCGA. It also provides that securities or shares to which relief is attributable are to be treated as being disposed of in certain circumstances where they are retained and not treated as disposed of under any TCGA provision. (This treatment applies not only for the purposes of the tax relief, but also for the purposes of capital gains tax and corporation tax on chargeable gains.)

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78. Paragraph 49 provides that, for the purposes of the Schedule, securities or shares are not treated as having been held continuously throughout a period by an investor if at some time in that period-

• the investor is deemed for TCGA purposes to have disposed of and immediately reacquired the securities or shares; or
• the company is treated as having disposed of the securities or shares in the circumstances provides for by Paragraph 48(2) of the Schedule where it retains them following a scheme of reconstruction or amalgamation.

79. Paragraph 50 defines an "associate" of a person as any relative or business partner of that person, the trustee(s) of any settlement of which that person or a relative was the settlor and, where that person has an interest in any shares or obligations of a company which are subject to a trust or part of an estate of a deceased person, the trustee(s) or personal representatives of that trust or estate or, if the person is a company, any other company with an interest in those shares or obligations. "Relative", "settlor" and "settlement" are also defined.

80. Paragraph 51 sets out a number of minor definitions used in the Schedule, while Paragraph 52 provides an index of defined expressions.

Schedule 2 (consequential amendments)

81. This Schedule makes a small number of consequential changes to legislation elsewhere in the Taxes Acts.

82. Paragraphs 1 and 2 provide for tax relief under the Enterprise Investment Scheme and the Venture Capital Trust Scheme to be given before any tax relief under the CITC, while Paragraph 3 provides for sufficient income tax to be retained to cover gift-aid donations.

83. Paragraph 4 provides for tax relief for companies to be set against their corporation tax liability after any investment relief obtained under the Corporate Venturing Scheme, and before any double taxation relief. 

Schedule 3 (repeals)

84. This Schedule  provides for a minor repeal, linked to one of the consequential amendments.

Supporting Docs & Media
PDF file of Finance Bill 2002 Draft Clauses: Community Investment Tax Credit

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Finance Bill 2002 index