Finance Act 1989

Section 61.

SCHEDULE 4U.K. Profit-Related Pay

1The Taxes Act 1988 shall be amended in accordance with the followingprovisions of this Schedule.

2(1)In section 171(4) (limit on pay of which half may be exempt from tax) for “£3,000” there shall be substituted “£4,000”.

(2)This paragraph shall have effect in relation to profit-related pay paidby reference to profit periods beginning on or after 1st April 1989.

3After section 177 there shall be inserted—

“177A Death of scheme employer.

“177A(1)Where a scheme employer has died, his personal representatives may makea written application to the Board under this section for the amendment of theregistration of the scheme.

(2)If on receiving an application under this section the Board are satisfiedthat, apart from the death of the scheme employer, there would be no groundsfor cancelling the registration of the scheme, the Board shall amend theregistration of the scheme by substituting the personal representatives forthe deceased scheme employer.

(3)An application under this section shall be made before the end of theperiod of one month beginning with the date of the grant of probate or lettersof administration or, in Scotland, confirmation of executors.

(4)Where the Board amend the registration of a scheme under this section,this Chapter shall (subject to any necessary modifications) have effect as ifthe personal representatives had been the scheme employer throughout.

(5)The Board shall give notice to the personal representatives if they refusean application under this section.

177B Alteration of scheme’s terms.

177B(1)The alteration of the terms of a registered scheme shall not of itselfinvalidate the registration of the scheme.

(2)Subsection (1) above is without prejudice to the power of cancellationconferred on the Board by section 178(3A); but the power conferred by section178(3A) shall not be exercisable by virtue of an alteration registered inaccordance with this section.

(3)Where the terms of a registered scheme have been altered, the schemeemployer may apply to the Board for the registration of the alteration.

(4)An application under subsection (3) above—

(a)shall be in such form as the Board may prescribe;

(b)shall be made within the period of one month beginning with the day onwhich the alteration is made;

(c)shall contain a declaration by the applicant that the alteration is withinsubsection (8) below and that the scheme as altered complies with therequirements of Schedule 8 (either as that Schedule had effect when the schemewas registered, or as it then had effect but subject to one or more subsequentamendments specified in the declaration);

(d)shall be accompanied by a report by an independent accountant, in a formprescribed by the Board, to the effect that in his opinion the alteration iswithin subsection (8) below and the scheme as altered complies with therequirements of Schedule 8 (either as that Schedule had effect when the schemewas registered, or as it then had effect but subject to one or more subsequentamendments specified in the report).

(5)The Board shall not more than three months after the day on which theyreceive an application under subsection (3) above either register thealteration or refuse the application; and in either case they shall givenotice of their decision to the applicant.

(6)Subject to subsection (7) below, the Board shall register an alterationon an application under subsection (3) above.

(7)The Board may refuse an application under subsection (3) above if they arenot satisfied—

(a)that the application complies with the requirements of subsection (4)above, or

(b)that the declaration referred to in subsection (4)(c) above is true.

(8)An alteration is within this subsection if—

(a)it relates to a term which is not relevant to the question whether thescheme complies with the requirements of Schedule 8; or

(b)it relates to a term identifying any person (other than the schemeemployer) who pays the emoluments of employees to whom the scheme relates; or

(c)it consists of the addition of a term making provision for an abbreviatedprofit period of the kind referred to in paragraph 10(3) of Schedule 8; or

(d)it amends the provisions by reference to which the employees to whom thescheme relates may be identified, and does so only for the purposes of profitperiods which begin after the date on which the alteration is made; or

(e)it relates to a provision of a kind referred to in paragraph 13(4) or (5)or 14(3), (4) or (5) of Schedule 8 (as those provisions have effect at thetime of the application for registration of the alteration), and has effectonly for the purposes of profit periods beginning after the date on which thealteration is made; or

(f)it amends the provisions as to when payments will be made to employees,and does so only for the purposes of profit periods beginning after the dateon which the alteration is made; or

(g)the scheme did not comply with the requirements of Schedule 8 when it wasregistered, and the alteration—

(i)is made in order to bring the scheme into compliance with the requirementsof that Schedule (either as it had effect when the scheme was registered oras it has effect at the time of the application for registration of thealteration), and

(ii)is made for the purposes of the first and any subsequent profit period towhich the scheme relates, and

(iii)is made within two years of the beginning of the first profit period, and

(iv)does not invalidate (in whole or in part) any payment of profit-relatedpay already made under the scheme.”

4(1)Section 178 (cancellation of registration) shall be amended as follows.

(2)In subsection (1) for the words “subsection (5)” there shall besubstituted the words “subsections (5) and (5A)”.

(3)After subsection (3) there shall be inserted—

“(3A)Where the terms of a registered scheme have been altered, then, subjectto section 177B(2), the Board may cancel the registration of the scheme witheffect from the beginning of the profit period during which the alterationtook effect or with effect from the beginning of any later profit period.

(3B)If after an alteration of the terms of a scheme has been registered undersection 177B it appears to the Board—

(a)that the application for registration of the alteration did not complywith the requirements of subsection (4) of that section, or

(b)that the declaration referred to in subsection (4)(c) of that section wasfalse,

the Board may cancel the registration of the scheme with effect from thebeginning of the profit period during which the alteration took effect or witheffect from the beginning of any later profit period.”

(4)After subsection (5) there shall be inserted—

“(5A)Where—

(a)the scheme employer has died, and

(b)his personal representatives by notice request the Board to cancel theregistration of the scheme with effect from the date of death,

then, if the notice is given before the end of the period of one monthbeginning with the date of the grant of probate or letters of administrationor, in Scotland, confirmation of executors, the Board shall comply with therequest.”

5At the end of section 179 (recovery of tax) there shall be added—

“(3)Where—

(a)the scheme employer has died, but

(b)his personal representatives have not been substituted for him as thescheme employer by virtue of section 177A,

the reference in subsection (2) above to the scheme employer shall beconstrued as a reference to the personal representatives.

(4)Where—

(a)a payment to which this section applies was made by a person other thanthe scheme employer, and

(b)the scheme employer is not resident in the United Kingdom,

then in relation to that payment the reference in subsection (2) aboveto the scheme employer shall include a reference to the person by whom thepayment was made.”

6At the end of section 180 (annual returns) there shall be added—

“(5)Where—

(a)the scheme employer has died, but

(b)his personal representatives have not been substituted for him as thescheme employer by virtue of section 177A,

the reference in subsection (1) above to the scheme employer shall beconstrued as a reference to the personal representatives.”

7At the end of section 181 (information) there shall be added—

“(4)Where the scheme employer has died, his personal representatives shallinform the Board of his death by notice given before the end of the period ofone month beginning with the date of the grant of probate or letters ofadministration or, in Scotland, confirmation of executors.”

8(1)Section 182 (appeals) shall be amended as follows.

(2)In subsection (1) after paragraph (b) there shall be inserted—

“(bb)against a refusal by the Board of an application under section 177B(3);”.

(3)After subsection (1) there shall be inserted—

“(1A)An appeal to the Special Commissioners may be made by the personalrepresentatives of a scheme employer against a refusal by the Board of anapplication under section 177A.”

(4)In subsection (2) for the words “scheme employer” there shall besubstituted the word “appellant”.

9(1)Paragraph 7 of Schedule 8 (no payments for employees with materialinterest in company) shall be amended as follows.

(2)In sub-paragraph (1), the words “, or is an associate of a person who has,” shall be omitted.

(3)In sub-paragraph (3), after the words “section 417(3) and (4)” thereshall be inserted the words “, but subject to sub-paragraph (4) below”.

(4)The following sub-paragraphs shall be added at the end—

“(4)For the purposes of this paragraph, where an employee of a company has aninterest in shares or obligations of the company as a beneficiary of anemployee benefit trust, the trustees shall not be regarded as associates ofhis by reason only of that interest unless sub-paragraph (8) below applies inrelation to him.

(5)A trust is an employee benefit trust for the purposes of this paragraphif—

(a)all or most of the employees of the company are eligible to benefit underit, and

(b)none of the property subject to it has been disposed of on or after 14thMarch 1989 (whether by sale, loan or otherwise) except in the ordinary courseof management of the trust or in accordance with sub-paragraph (6) below.

(6)Property is disposed of in accordance with this sub-paragraph if—

(a)it is applied for the benefit of—

(i)individual employees or former employees of the company,

(ii)spouses, former spouses, widows or widowers of employees or formeremployees of the company,

(iii)relatives, or spouses of relatives, of persons within sub-paragraph (i)or (ii) above, or

(iv)dependants of persons within sub-paragraph (i) above,

(b)it is applied for charitable purposes, or

(c)it is transferred to the trustees of an approved profit sharing scheme(within the meaning of section 187), of another employee benefit trust, or ofa qualifying employee share ownership trust (within the meaning of Schedule5 to the Finance Act 1989),

and the property applied or transferred consists of any of the ordinaryshare capital of the company or of money paid outright.

(7)In sub-paragraph (6)(a)(iii) above “relative” means parent or remoter forebear, child or remoterissue, brother, sister, uncle, aunt, nephew or niece.

(8)This sub-paragraph applies in relation to an employee if at any time onor after 14th March 1989—

(a)the employee, either on his own or with any one or more of his associates,or

(b)any associate of his, with or without other such associates,

has been the beneficial owner of, or able (directly or through the mediumof other companies or by any other indirect means) to control, more than 25per cent. of the ordinary share capital of the company.

(9)Where—

(a)on or after 14th March 1989 an employee of a company, or an associate ofhis, receives a payment (“the relevant payment”) from the trustees of anemployee benefit trust, and

(b)at any time during the period of three years ending with the day on whichthe relevant payment is received, the property subject to the trust consistsof or includes any part of the ordinary share capital of the company,

the employee or associate shall be treated for the purposes ofsub-paragraph (8) above as if he were the beneficial owner of the appropriatepercentage of the ordinary share capital of the company on the day on whichthe relevant payment is received (in addition to any percentage of that sharecapital of which he is actually the beneficial owner on that day).

(10)For the purposes of sub-paragraph (9) above, the appropriate percentageis—

• A is the smaller of—

  • (a) the aggregate of the relevant payment and any other paymentsreceived by the employee or associates of his from the trustees of the trustduring the period of 12 months ending with the day on which the relevant payment is received, and

  • (b) the aggregate of the distributions made to the trustees of the trustby the company in respect of its ordinary share capital during the period ofthree years ending with the day on which the relevant payment is received; and

• B is the aggregate of—

  • (a) any distributions made by the company in respect of its ordinaryshare capital during the period of 12 months ending with the day on which therelevant payment is received,

  • (b) any distributions so made during the period of 12 months immediatelypreceding that mentioned in paragraph (a) above, and

  • (c) any distributions so made during the period of 12 months immediately preceding that mentioned in paragraph (b) above,

divided by the number of the periods mentioned in paragraphs (a) to(c) above in which distributions were so made.

(11)Where—

(a)an employee or associate is treated by sub-paragraph (9) above as if hewere the beneficial owner of a percentage of the ordinary share capital of acompany by reason of receiving the relevant payment from the trustees of atrust, and

(b)that employee, or an associate of his, has, during the period of 12 monthsending with the day on which the relevant payment is received, received oneor more payments from trustees of another employee benefit trust or trustssatisfying the requirement in paragraph (b) of sub-paragraph (9) above,

that sub-paragraph shall have effect in relation to the employee orassociate mentioned in paragraph (a) above as if he had received the paymentfrom the trustees of the trust or of each of the trusts mentioned in paragraph(b) above (or where more than one payment has been received from the trusteesof a trust, the last of the payments) on the day on which the relevant paymentis received.

(12)In sub-paragraphs (8) to (11) above “associate”, in relation to an employee, does not include thetrustees of an employee benefit trust by reason only that the employee has aninterest in shares or obligations of the trust.”

10(1)Paragraphs 13(2) and 14(2) of Schedule 8 (which provide for a scheme’sdistributable pool to be at least 5 per cent. of the pay of all the employeesto whom the scheme relates if profits remain unchanged) shall be omitted.

(2)In consequence of sub-paragraph (1) above—

(a)the following provisions shall be omitted—

• section 175(3);

• in section 176(1), the words “(but not more than six months)”;

• section 178(2)(b);

• in paragraph 13(1) of Schedule 8, the word “fixed”;

• paragraph 13(3) of that Schedule;

• paragraph 14(7) of that Schedule.

(b)in paragraph 13 of Schedule 8—

(i)after sub-paragraph (1) there shall be inserted—

“(1A)That percentage must be a fixed percentage specified in the scheme and,if the scheme relates to more than one period, must be the same for eachperiod.”;

(ii)in sub-paragraph (4)(a), for the words “the base year referred to insub-paragraph (3) above” there shall be substituted the words “a baseyear specified in the scheme”;

(iii)in sub-paragraph (5), for the words “must be” onwards there shall besubstituted the words “must not exceed the profits for a base year specifiedin the scheme”;

(iv)for sub-paragraph (6), there shall be substituted—

“(6)The base year referred to in sub-paragraph (4)(a) and sub-paragraph (5)above must be a period of 12 months ending at a time within the period of twoyears immediately preceding the profit period, or the first of the profitperiods, to which the scheme relates”;

(c)in paragraph 14(5) of that Schedule, for the words “must be” onwardsthere shall be substituted the words “must not exceed the profits in theperiod of 12 months immediately preceding the first or only profit period towhich the scheme relates”.

11At the end of paragraph 13 of Schedule 8 (calculation of distributablepool by method A) there shall be added—

“(7)Any provision included in a scheme by virtue of sub-paragraph (4) or (5)above may take effect either from the scheme’s first profit period or from anylater profit period determined in accordance with the scheme.”

12In paragraph 14 of Schedule 8 (calculation of distributable pool by methodB), in sub-paragraph (5) the words “specified in, or” shall be omitted.

13At the end of paragraph 14 of Schedule 8 there shall be added—

“(8)Any provision included in a scheme by virtue of sub-paragraph (3)(b), (4)or (5) above may take effect either from the scheme’s first profit period orfrom any later profit period determined in accordance with the scheme.”

14(1)Paragraph 19 of Schedule 8 (profit and loss account for purposes ofprofit-related pay scheme) shall be amended as follows.

(2)After sub-paragraph (4) (account to make no allowance for remuneration ofpersons excluded from scheme) there shall be inserted—

“(4A)In sub-paragraph (4) above “remuneration”, in relation to a person, includes fees andpercentages, any sums paid by way of expenses allowance (insofar as those sumsare charged to income tax), any contributions paid in respect of him under anypension scheme and the estimated value of any other benefits received by himotherwise than in cash.”

(3)In sub-paragraph (6) (items which may be left out of account in arrivingat profits or losses) for paragraph (f) there shall be substituted—

“(f)profit-related pay payable under the scheme, and profit-related paypayable under any other registered scheme if it is one to which paragraph 21below applies;

(ff)secondary Class 1 contributions under Part I of the Social Security Act 1975 or Part I of the SocialSecurity (Northern Ireland) Act 1975 in respect of profit-related pay payableunder the scheme;”.

15After paragraph 20 of Schedule 8 there shall be inserted—

“ Parts of undertakings

21(1)This paragraph shall apply to a scheme if the employment unit is a partof an undertaking, and the scheme states that the profits or losses of theunit are for the purposes of the scheme to be taken to be equivalent to thoseof the whole undertaking (which must be identified by the scheme).

(2)Where this paragraph applies to a scheme, this Schedule shall have effectas if any reference to the profits or losses of the employment unit were areference to the profits or losses of the undertaking of which it forms part.

22(1)Where paragraph 21 above applies to a scheme, the scheme must containprovisions ensuring that no payments are made under it by reference to aprofit period unless, at the beginning of that profit period,—

(a)there is at least one other registered scheme which relates to employeesemployed in the same undertaking as that of which the employment unit formspart, and

(b)the number of the employees to whom the scheme relates does not exceed 33per cent. of the number of the employees to whom that other scheme relates (orif there is more than one other scheme, the aggregate number of the employeesto whom they relate).

(2)Another registered scheme shall be disregarded for the purposes ofsub-paragraph (1) above—

(a)if paragraph 21 above applies to it, or

(b)if, by virtue of provisions of the kind described in paragraph 6 above,no payments could be made under it by reference to the profit periodconcerned.

(3)Where paragraph 21 above applies to two or more schemes relating toemployment units which are parts of the same undertaking, an employee to whomanother scheme relates shall not be counted for the purposes of sub-paragraph(1)(b) above in connection with more than one of those schemes.”