Omitted material
2853.This Chapter derives from section 206A of ICTA. Section 206A was inserted by section 110 of FA 1996, with effect from 29 April 1996.
2854.Section 206A(5) and (7) of ICTA relate to issues likely to arise if regulations within the scope of section 206A of ICTA (“PSA regulations”) had effect for the tax year in which the PSA regulations were made.
2855.Section 206A(5) of ICTA allowed the PSA regulations to cover an agreement even though the agreement had been made before the PSA regulations came into force. So, for the tax year in which the PSA regulations came into force, an agreement could be covered even though the agreement had been made before the PSA regulations were made. But because a fresh agreement is entered into for each tax year, section 206A(5) of ICTA was only needed for the year in which PSA regulations were made. As PSA regulations were made on 14 October 1996 and came into force on 5 November 1996 this transitional provision is spent and omitted from this Act.
2856.Section 206A(7) of ICTA allowed the PSA regulations to cover sums accounted for under an agreement, and the income to which the sums related, even though those sums had been accounted for before PSA regulations came into force. So, for the tax year in which the PSA regulations came into force, those sums and that income could be covered even though those sums and that income may have arisen before the PSA regulations were made. This transitional provision is also spent and omitted from this Act because PSA regulations were made on 14 October 1996 and came into force on 5 November 1996.
Section 703: Introduction
2857.This section gives an overview of the Chapter and introduces the term “PAYE settlement agreements” (“PSAs”) which is used throughout the Chapter. It derives from section 206A(1) of ICTA.
Section 704: Sums payable by employers under agreements
2858.This section derives from section 206A(2) and (8) of ICTA.
2859.Subsection (1) allows PAYE Regulations to provide for an employer to enter into a PSA with the Inland Revenue under which the employer pays certain sums in place of sums that would be payable in the absence of the PSA. Subsection (1)(a) omits “Board of” in front of Inland Revenue – see Change 158 in Annex 1.
2860.Subsection (2) allows PAYE Regulations to make the same sort of provisions about sums payable under a PSA as can be made about other sums payable under the regulations. This ensures that provision can be made for matters such as interest on sums paid late or repayable.
Section 705: Approximations allowed in calculations
2861.This section contains guidance about the ways in which sums to be accounted for under a PSA can be calculated. It recognises that in practice the sums to be paid under a PSA will rarely be precisely equal to what would be the income tax liability of the employees in relation to the earnings covered by a PSA. It does this by permitting PAYE Regulations to recognise approximations as to who receives the earnings, how much those earnings would have been and how much the tax liability would have been on such earnings. It derives from section 206A(3) of ICTA.
Section 706: Exclusions of general earnings from income etc.
2862.This section permits PAYE Regulations to exclude the earnings covered by a PSA from the employees’ income for income tax purposes. It also allows the regulations to provide that no part of sums paid by the employer under a PSA are counted as tax paid by an employee. It derives from section 206A(4) of ICTA.
Section 707: Interpretation of this Chapter
2863.This section defines terms used in this Chapter. It derives from section 206A(9) of ICTA.
Chapter 6: Miscellaneous and supplemental
Overview
2864.Section 708 provides for the PAYE regulations to suspend the normal system of in-year repayments to persons getting jobseeker’s allowance or engaged in a trade dispute.
2865.Section 709 provides that an assessment made more than 12 months after the end of a tax year must, for some income dealt with under PAYE, be made in accordance with the generally prevailing practice at the end of that 12 months.
2866.Section 710 sets out how employers must try to deduct tax, and must account for it whether or not they can deduct, in respect of “notional payments”.
2867.Section 711 gives a person, who has suffered deduction of tax under PAYE, a right to make a tax return.
2868.Section 712 defines terms used in this Part and applies section 5 for the purposes of this Part (so it applies to offices as to employments).
Section 708: PAYE repayments
2869.This section allows the PAYE regulations to deny PAYE repayments to persons in two cases. It derives from part of section 204 of ICTA.
2870.Subsection (1) gives the two cases in which regulations can prevent PAYE repayments being made to a person. The first case is during periods for which the person has claimed jobseeker’s allowance. The second case is when the person is not entitled to jobseeker’s allowance solely because of some connection with a trade dispute.
2871.Subsection (2) allows regulations to treat the two cases differently.
2872.Subsection (3) defines “the trade disputes provisions”. This term has been introduced to make the section easier to read than section 204(d). Subsection (3) also sets out what the corresponding enactment in Northern Ireland is (which could not be done at the time section 204(d) was introduced).
2873.Section 204(a), (b) and (c) of ICTA are omitted from this Act as they have no application to the years to which it applies. See Note 60 in Annex 2.
Section 709: Additional provision for certain assessments
2874.This section provides that assessments must be made on the basis of generally prevailing practice in certain circumstances. It derives from section 206 of ICTA.
2875.The origin of section 206 was section 28(1) of FA 1961. Schedule 4 to the Income Tax Management Act 1964 extended section 28(1) of FA 1961 so that it applied to an assessment under Schedule E where it had previously applied to an assessment in respect of “emoluments”. Section 28(1) of FA 1961 was consolidated first as section 206 of ICTA 1970 and later as section 206 of ICTA. Section 111(2) of FA 1995 removed “under Schedule E” after the words “an assessment to income tax” in section 206 of ICTA.
2876.Subsection (1) sets out the circumstances in which the section applies.
2877.Subsection (2) sets out the consequences of the section applying.
2878.Subsection (3) defines “relevant income” – a term used to make the earlier subsections easier to read.
2879.Section 28(1) of FA 1961 was intended to put individuals who did not receive income tax assessments (because it was thought that all their tax had been settled under PAYE) on a similar footing to others who had received assessments. People who did not get assessments previously had an advantage over other taxpayers. Their tax affairs were not final so they had a much longer period after the end of a tax year in which to take advantage of a Court decision overturning what had earlier been the generally accepted practice. Section 28(1) accordingly set out circumstances in which a “late” assessment to income tax had to be made on the basis of earlier generally accepted practice. This could work to the disadvantage of individuals compared to their position prior to section 28(1). It could also work to their advantage by preventing the individual from being assessed on the basis of a later Court decision that was less favourable than earlier generally accepted practice. In short, it gave them broadly the same finality they would have had with an assessment.
2880.Section 206 of ICTA 1970 was considered in Walters v Tickner (1993) 66 TC 174. That case decided that section 206 could operate as a provision that charges income tax, but it could not do so in relation to an unqualified statutory exemption given to scholarship income.
2881.Since that case was decided the framework within which section 206 operates has been altered by Self Assessment. When the case was decided the Inland Revenue were obliged, subject to the pre-Self Assessment version of 205(1) of ICTA, to make assessments when returns of income were made which were considered to be correct and complete. But under Self Assessment, assessments are normally:
made by the taxpayer rather than the Inland Revenue; and
single assessments on all income rather than multiple assessments made on income split into separate Schedules.
2882.Section 111(2) of FA 1995 made a minor amendment to section 206 of ICTA in connection with the imminent start of Self Assessment. The amendment removed the words “under Schedule E” after the opening words “Where an assessment”. That minor amendment arguably introduced some uncertainties about how section 206 of ICTA operates under Self Assessment. This section removes those uncertainties, relating to the income in an assessment that must be based on earlier generally accepted practice. See Note 61 in Annex 2.
Section 710: Notional payments: accounting for tax
2883.This section sets out how an employer must account for tax on a “notional payment”. It derives from section 203J of ICTA.
2884.Subsection (1) (with the definition of relevant time in subsection (7)) requires the employer to deduct any tax due on a notional payment from actual payments made at the same time or later in the income tax period.
2885.Subsection (2) defines notional payment and extends references to employer in this section.
2886.Subsections (3) and (4) require the employer to account for tax which cannot be deducted from actual payments.
2887.Subsection (5) provides power for PAYE regulations to determine the time when any notional payment is made, to apply any provisions of the regulations to notional payments (with or without modifications), and to deal with matters about the collection and recovery of amounts accounted for in respect of notional payments.
2888.Subsection (6) provides for the employee to be treated as having paid the tax accounted for on a notional payment. It also provides when the employee is treated as having paid the tax: see Change 153 in Annex 1.
2889.Subsection (7) derives from regulations 7 and 8 of the Income Tax (Employments) (Notional Payments) Regulations, SI 1994 No 1212. It defines the relevant time for subsections (1) and (4).
2890.Subsection (8) derives from regulation 2 of the Income Tax (Employments) Regulations 1993, SI 1993 No 744. It provides that “income tax period” takes the same meaning as in the PAYE regulations. It is the tax month or (for some small employers) quarter.
Section 711: Right to make a return
2891.This section gives a person a right to a notice under section 8 of TMA 1970 if that person has had PAYE deductions or repayments. A notice under section 8 of TMA 1970 in turn obliges that person to make a tax return. The section derives from section 205(4) of ICTA.
2892.Subsection (1) sets out the conditions that must be satisfied for a person to give notice to the Inland Revenue.
2893.Subsection (2) provides a time limit within which notice can be given to the Inland Revenue.
2894.Note 62 in Annex 2 explains why section 205(1) to (3) and (5) of ICTA are not needed and are not rewritten in this Act. Section 205(4) ICTA is however rewritten in response to requests made during consultation leading up to this Act. The requests were to preserve, as a matter of principle, any rights to make a tax return that it gives to some taxpayers until such time as there is an explicit general right for all taxpayers to submit a tax return.
Section 712: Interpretation of this Part
2895.This section provides definitions and interpretation. It derives from section 203L(1) of ICTA.
2896.Subsection (1) provides various definitions for the purposes of this Part. The definitions of “employee” and “employer” are different from those used elsewhere in this Act in order to relate a notional payment to a particular employment with a particular employer or former employer.
2897.Subsection (2) applies sections 4 and 5 to this Part so that “employment” has the same meaning as in the employment income Parts of this Act (see Note 1 in Annex 2); and that references to employees include office-holders and so on.
Part 12: Payroll giving
Overview
2898.The next three sections describe the circumstances in which a deduction may be available for charitable giving via the payroll. They derive from the provisions in section 202 of ICTA.
Section 713: Donations to charity: payroll deduction scheme
2899.This section describes the arrangements between the person it characterises as “the payer” and the individual from whose PAYE income that payer withholds the donations. The section derives from section 202(1) and (2) and part of (5) of ICTA.
2900.Subsection (1) sets out the basic circumstances for payroll giving to be possible. An individual asks the person making payments of PAYE income to him or her to deduct authorised charitable donations from those payments. Tax relief is available on the donations made.
2901.Subsection (2) removes the possibility of circularity in the operation of this section.
2902.Section 202(2) provides that the donations “ … shall … be allowed to be deducted as expenses incurred in the year of assessment in which they are withheld”. Under the structure of this Act, the amounts that are withheld do not need to be characterised as “expenses”. Subsections (3) and (4) simply refer to a deduction being allowed in calculating the amount of the individual’s income that is charged to tax. The particular manner of that deduction depends on the type of income from which the amount is withheld and is described in subsection (4). Those provisions refer to deductions being allowed in calculating “net taxable” earnings/income of the specified type for “the relevant tax year”. That fixes the tax year in which the deduction is due to that in which the income (from which the amount is withheld) is charged to tax. See Change 154 in Annex 1.
2903.Subsection (5) defines “relevant tax year” for the purposes of parts of the preceding subsection.
Section 714: Meaning of “donations”
2904.This section defines what is meant by “donations”. It also records the meanings of supporting terms that are used in that definition. The section derives from section 202(3), (4), (5), (6) and (11) of ICTA.
2905.Subsection (1) contains the definition of “donations”, where two (or possibly three) requirements that need to be fulfilled are identified.
2906.Subsection (2) contains definitions of three terms used in the preceding subsection.
2907.Section 202(4)(a) of ICTA refers to “a person (“the agent”)”, although that term is not further defined there. The Act recognises the reality that the agent will be a “body”. See Change 155 in Annex 1.
2908.This Act provides for the Inland Revenue, as opposed to the Board in the source legislation, to approve a scheme for payroll giving. See Change 158 in Annex 1.
2909.Subsection (3) provides for the Inland Revenue, as opposed to the Board in the source legislation, to approve an agent for payroll giving. That reflects the Inland Revenue’s practice on the application of section 202(3) whereby the power of the Board is delegated to the technical specialist. See Change 158 in Annex 1.
Section 715: Approval of schemes: regulation by Treasury
2910.This section describes the powers reserved for the Treasury to regulate certain matters relating to payroll giving. It derives from section 202(8), (9) and (10) of ICTA.
2911.Subsection (1) provides for the Treasury to make regulations governing how the Inland Revenue, as opposed to the Board in the source legislation, grant or withdraw approval of a scheme or agent. See Change 158 in Annex 1.
2912.Section 202(9)(a) refers to a notice “served on” a participating employer or agent by the Board. Subsection (3)(a)(i) instead refers to a notice the Inland Revenue “give to” such an employer or agent. See Changes 156 and 158 in Annex 1.
Part 13: Supplementary provisions
2913.This Part includes various supplementary provisions grouped under the following general headings:
Alteration of amounts;
Orders and regulations;
Interpretation; and
Amendments, repeals, citation etc.
Section 716: Alteration of amounts by Treasury order
2914.This section provides that sums of money in certain specified sections may be increased or further increased by an order from the Treasury.
2915.Subsection (1) introduces the right to increase or further increase the sums of money mentioned in the sections in subsection (2) by Treasury order. It derives from sections 191A, 200A(6), 828(1) and paragraph 24(10) of Schedule 11A to ICTA.
2916.Subsection (2) sets out the sections that are subject to such an order. It derives from sections 191A, 200A(6), 828(1) and paragraph 24(10) of Schedule 11A to ICTA. There is also some new material. See Changes 29, 56, 59, 78, 79 and 96 in Annex 1.
2917.Subsection (3) sets out further implications where an order is made in respect of section 241(3)(a) or (b). It derives from section 200A(6) of ICTA.
2918.Subsection (4) sets out further implications where an order is made in respect of section 287(1). It derives from paragraphs 24(1) and (10) of Schedule 11A to ICTA.
Section 717: Orders and regulations made by Treasury or Board
2919.This section sets out how any Treasury order or regulations under this Act are to be made.
2920.Subsection (1) provides that orders or regulations made by the Treasury or the Board of Inland Revenue under this Act must be exercised by statutory instrument. It derives from section 828(1) of ICTA.
2921.Subsection (2) sets out the one exception to subsection (1) of the section and relates to overseas Crown employment. See Change 4 in Annex 1.
2922.Subsection (3) explains that a statutory instrument issued in accordance with subsection (1) is subject to annulment in pursuance of a resolution of the House of Commons. It derives from section 828(3) of ICTA.
2923.Subsection (4) sets out the one exception to subsection (3) of the section and relates to deductions for professional membership fees. See Change 85 in Annex 1.
Section 718: Connected persons
2924.This section applies the same meaning of connected person as set out in section 839 of ICTA for the purposes of this Act. It derives from sections 140(2), 140H(9), 146(11), 161(3), 162(10), 187(6), 200B(7), 200C(8), 203B(5), 596A(16) and paragraph 4(4) of Schedule 7 to ICTA, paragraph 129(2) of Schedule 8 to FA 2000 and paragraph 71(2) of Schedule 14 to FA 2000. See also Change 59 in Annex 1.
Section 719: Control in relation to a body corporate
2925.This section applies the same meaning of control in relation to a body corporate as set out in section 840 of ICTA for the purposes of this Act. It derives from sections 140F(7), 187(2), paragraph 8(2) of Schedule 11 and paragraph 4(2) of Schedule 12AA to ICTA; section 87(3) of FA 1988; paragraph 129(1) of Schedule 8 to FA 2000; and paragraphs 13(3), 15(2) and 59(3) of Schedule 14 to FA 2000. See also Changes 133 and 157 in Annex 1.
Section 720: Meaning of “the Inland Revenue” etc.
2926.This section provides definitions of “Inland Revenue” and “the Board of Inland Revenue” for the purposes of this Act.
2927.Subsection (1) defines “the Inland Revenue” as any officer of the Board of Inland Revenue. It derives from paragraph 124 of Schedule 8, paragraph 20 of Schedule 12 and paragraph 68 of Schedule 14 to FA 2000. See also Change 158 in Annex 1.
2928.Subsection (2) defines “the Board of Inland Revenue” as the Commissioners of Inland Revenue. The term “Commissioners of Inland Revenue” is defined in the Inland Revenue Regulation Act 1890.
2929.Subsection (3) sets out how section 4A of the Inland Revenue Regulation Act 1890 provides for some devolution of the Board’s powers.
Section 721: Other definitions
2930.This section provides a list of definitions for the purposes of this Act.
2931.Subsection (1) contains new drafting material and sets out each definition. In connection with the definition of “personal representatives”, see Change 159 in Annex 1.
2932.Subsection (2) deals with the meaning of “assignment” in the application of this Act to Scotland. It is new.
2933.Subsection (3) defines the meaning of “domiciled in the United Kingdom” for the purposes of this Act. It is new.
2934.Subsection (4) defines the members of a person’s family for the purposes of this Act. It derives from sections 148(5), 149(3), 157(3), 159AA(3) and 159AC(3) of ICTA and also contains new material.
2935.Subsection (5) defines the members of a person’s family or household for the purpose of this Act. It derives from sections 148(5), 168(4), 191B(16), 197G(6), 200AA(4), 203F(6) and paragraph 26 of Schedule 11A to ICTA and paragraph 21(3) of Schedule 12 to FA 2000 and also contains new material.
2936.In connection with the application of a “person’s family or household” to costs and expenses of personal security assets and services, see Note 39 in Annex 2.
2937.Subsection (6) excludes certain statutory provisions in interpreting “child” or “children” for the purposes of this Act. It derives from section 831(4) of ICTA and corrects a small mistake in that section. See Note 63 in Annex 2.
Section 722: Consequential amendments
2938.This section advises that Schedule 6 contains consequential amendments.
Section 723: Commencement and transitional provisions and savings
2939.This section sets out when the Act has effect. This is subject to the transitional provisions and savings that are listed in Schedule 7.
Section 724: Repeals and revocations
2940.This section makes repeals (subsection (1)) and revocations (subsection (2)). The affected enactments and instruments are listed in Parts 1 and 2 of Schedule 8.
Section 725: Citation
2941.This section provides the name under which the Act may be cited.
Schedule 1: Abbreviations and Defined Expressions
Part 1: Abbreviations of Acts and instruments
2942.Part 1 provides a list of abbreviations referring to other Acts.
Part 2: Index of defined expressions
2943.Part 2 lists expressions defined in the Act.
Schedule 2: Approved Share Incentive Plans
Overview
2944.This Schedule, which is introduced in Chapter 6 of Part 7, deals with some of the topics involved in rewriting the legislation relating to share incentive plans (or “SIPs” for short). SIPs were earlier known as employee share ownership plans (or “ESOPs” for short).
2945.Nearly all the source legislation relating to SIPs is contained in Schedule 8 to FA 2000 (referred to in the notes on this Schedule as “Schedule 8”). Schedule 8 was introduced by section 47 of FA 2000; and amended, to a certain extent, by Schedule 13 to FA 2001 (introduced by section 61 of that Act). Further amendments to Schedule 8 have been made by section 39 of FA 2002 and by the Employee Share Schemes Act 2002.
2946.The new legislation relating to SIPs, the majority of which is contained in Chapter 6 of Part 7 and in this Schedule, is called “the SIP code” - a term introduced in section 488. Chapter 6 of Part 7 deals with the tax advantages that an approved SIP provides, and with the tax charges that may arise in certain circumstances.
2947.This Schedule contains further provisions relating to SIPs. After the Introductory Part (Part 1) it deals with the following matters:
it specifies the requirements that a SIP must meet before it may be “approved” for the purposes of the SIP code (in Parts 2 to 9);
it deals with the procedural aspects of the approval of plans and with the withdrawal of approval (in Part 10); and
it deals with supplementary matters (in Part 11).
2948.The majority of the provisions in this Schedule are concerned with the various requirements that a SIP must meet before it may be “approved”. The general policy adopted has been (first) to place the various Parts in an order consistent with that to be found in the rewritten legislation relating to other share schemes; but also (secondly) to deal with those requirements that all SIPs must meet before dealing with the requirements that are not essential. The various requirements have accordingly been placed in a different order from that found in Schedule 8. Part 2 of this Schedule accordingly deals with the general requirements that apply in all cases; Part 3 with the requirements relating to the eligibility of individual employees; and Part 4 with the types of shares that may be awarded. The following Parts then deal with free shares (Part 5), partnership shares (Part 6), matching shares (Part 7) and cash dividends and dividend shares (Part 8). Part 9 is the final Part of this Schedule concerned with the requirements for approval, and deals with the trustees.
2949.Each of Parts 2 to 9 lists, at an early point, the requirements relevant for that Part. Users may find it helpful to be able to refer to these lists. In some cases (for example, in paragraph 6) these lists simply reproduce the source legislation; but in other cases (for example, in paragraph 70) it has been necessary to devise new material.
Part 1: Introduction
2950.This Part, which consists of paragraphs 1 to 5, is introductory. It indicates the contents of this Schedule (in paragraph 1) and introduces various terms of general application (in paragraphs 2 to 5).
Paragraph 1: Approval of share incentive plans (SIPs)
2951.This paragraph indicates the contents of this Schedule (in sub-paragraph (1)), and the Parts into which it is divided (in sub-paragraphs (2) to (4)). The opening paragraphs of Schedules 3, 4 and 5 have been organised in the same manner.
2952.This paragraph is new. It aims to help users to understand the subject matter of the Schedule and to locate relevant material.
Paragraph 2: SIPs: free shares and partnership shares
2953.In this paragraph, sub-paragraph (1) sets out the central definition of “share incentive plan” (or “SIP” for short), a definition derived from that of “employee share ownership plan” in paragraph 1(1) of Schedule 8. In the source legislation, that sub-paragraph was followed by a provision relating to matching shares; but in this Act the proposition set out here appears on its own, and the provision relating to matching shares has been postponed until the following paragraph.
2954.Sub-paragraph (2) contains three definitions:
the definition of “the company” derives from paragraph 1(4) of Schedule 8;
the definition of “plan requirements” is new; and
the definition of “the trustees” is a new feature of these introductory provisions, introducing a term that will be used before the requirements relating to the trustees are dealt with in Part 9 of this Schedule.
Paragraph 3: Matching shares
2955.This paragraph introduces the concept of “matching shares”. It derives from paragraph 1(2) and (3) of Schedule 8.
2956.Sub-paragraph (2) now refers to “free shares, partnership shares, and matching shares”, as opposed to “the kinds of shares mentioned in sub-paragraphs (1) and (2)”; and states that “the plan may provide for the company to decide” as opposed to “it may leave it for the company to decide”.
Paragraph 4: Group plans
2957.This paragraph is concerned with group plans. It derives from paragraph 2 of Schedule 8.
2958.In sub-paragraph (3) the term “constituent company” replaces the term “participating company”. This change, which is in alignment with corresponding changes made in Schedules 3, 4 and 5, has been made on the basis that these Schedules necessarily make numerous references to “participants” and to people who “participate” - so that the use of another term is advantageous.
Paragraph 5: Meaning of “award of shares”, “participant” etc.
2959.This paragraph defines various expressions to be found in the SIP code. It derives from paragraph 3 of Schedule 8.
2960.These definitions are set out in an order that differs somewhat from that found in the source legislation, because sub-paragraph (2) derives from the full-out words at the end of paragraph 3(2) of Schedule 8.
2961.In paragraph 3(2) of Schedule 8, the source legislation provides for the definition of “the individual award”. This term is not used in this Act, as it appears in one place only: in paragraph 53(5) of this Schedule (derived from paragraph 43(4) of Schedule 8). The wording of paragraph 53(5) has been amended accordingly.
Part 2: General requirements
2962.It was mentioned, in the overview to the explanatory notes for this Schedule, that the contents of this Schedule could be divided into three categories. This Part is the first of eight that deal with the first category: the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 6 to 12, deals with general requirements that all SIPs must meet.
Paragraph 6: General requirements for approval: introduction
2963.This paragraph lists the general requirements that must be met before a SIP may be approved. It derives from paragraph 6 of Schedule 8.
Paragraph 7: The purpose of the plan
2964.This paragraph deals with the purpose of a SIP. It derives from paragraph 7 of Schedule 8.
Paragraph 8: All-employee nature of plan
2965.This paragraph contains provisions designed to ensure as many employees as possible are eligible to benefit in an award of shares under a SIP. It derives from paragraph 8 of Schedule 8.
2966.Sub-paragraph (1), in its final full-out words, adds a second “is” to the material that deriving from the final full-out words of paragraph 8(1) of Schedule 8, so that the sub-paragraph now ends “is invited to do so”. This addition brings this sub-paragraph into better alignment with sub-paragraph (5).
2967.Sub-paragraph (2) introduces a definition of a “UK resident taxpayer”, drawing on material in paragraph 8(1)(b) of Schedule 8. This definition is then used again in sub-paragraph (5)(b).
2968.Sub-paragraphs (3) and (4) deal with the material in paragraph 8(2) of Schedule 8, which has two sentences.
2969.Sub-paragraph (6) substantially recasts and shortens paragraph 8(4) of Schedule 8.
Paragraph 9: Participation on same terms
2970.This paragraph states that a SIP must provide that all employees who participate in it must do so on the same terms. It derives from paragraph 9 of Schedule 8.
2971.Sub-paragraph (3) recasts paragraph 9(3) of Schedule 8, replacing two sentences with a single sentence.
2972.In sub-paragraph (5), the cross-references to the provisions dealing with performance allowances have been placed in paragraphs of their own.
2973.Sub-paragraph (7) is new. This provision makes explicit that, in the case of partnership shares, the requirements of this paragraph are not infringed because a deduction of the same percentage of salary will result in employees with larger salaries having larger amounts deducted and receiving awards of more shares. This provision accords with Inland Revenue practice on this point.
Paragraph 10: No preferential treatment for directors and senior employees
2974.This paragraph provides that the SIP must not have the effect of conferring benefits mainly on directors or more highly paid employees. It derives from paragraph 10 of Schedule 8.
2975.Sub-paragraphs (2) and (3) contain the material that is presently in paragraph 10(2) of Schedule 8. The material has been divided in order to make it easier to follow and to understand.
2976.In sub-paragraph (1) the words “no feature of the plan must have or be likely to have the effect” in paragraph 10(1) of Schedule 8 have been replaced by the words “no feature of the plan has or is likely to have the effect”.
2977.Sub-paragraph (4) sets out, in full, the proposition that is contained in paragraph 10(3) of Schedule 8, instead of providing a reference to paragraph 9(3) of that Schedule.
2978.Sub-paragraphs (1)(b) and (3)(a) now refer to “the higher or highest levels of remuneration”. These changes have been made to achieve greater alignment in the legislation: in this case an alignment with paragraph 8(1)(b) of Schedule 3.
Paragraph 11: No further conditions
2979.This paragraph provides that a SIP must not impose additional conditions on an employee’s participation in an award of shares under the plan. It derives from paragraph 11 of Schedule 8.
2980.A reference to conditions “required or authorised by this Schedule” replaces a reference to conditions “required or permitted by this Schedule”. This change brings the wording used into alignment with that used elsewhere (for example, in paragraph 8(4) of this Schedule).
Paragraph 12: No loan arrangements
2981.This paragraph provides that the arrangements for the plan must not be associated in any way with any provision made for loans to employees. It derives from paragraph 12 of Schedule 8.
2982.Sub-paragraphs (1) and (2) both derive from paragraph 12(1) of Schedule 8. The material has been divided to make it easier to follow and to understand.
2983.In sub-paragraph (3), the words “For the purposes of sub-paragraph (1)” have been replaced by the words “In sub-paragraph (1)”.
Part 3: Eligibility of individuals
2984.This Part is the second of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 13 to 24, deals with requirements relating to the eligibility of individuals.
2985.Four such requirements are listed in paragraph 13; but those four differ widely in the amount of statutory material devoted to them. The requirements in paragraphs 14 and 18 need one paragraph each; but paragraph 15 is supplemented by paragraphs 16 and 17; and paragraph 19 is supplemented by paragraphs 20 to 24.
Paragraph 13: Eligibility of individuals: introduction
2986.This paragraph lists the plan requirements relating to the eligibility of individuals. The paragraph is the counterpart of paragraph 6, and is new.
Paragraph 14: Time of eligibility to participate
2987.This paragraph states (in sub-paragraph (1)) that the SIP must provide that an individual may only participate in an award of plan shares if the individual is eligible to participate in the award at the appropriate time. The expression “the appropriate time” is new, and has been devised to help to make the rest of this paragraph easier to understand.
2988.Sub-paragraphs (2) to (6) specify “the appropriate time” in the case of the various different classes of plan shares. Each class of plan shares has been made the subject of a separate sub-paragraph; and in cases involving matching shares (see sub-paragraphs (5) and (6)) the provisions in paragraph 13(1)(b) of Schedule 8 have been supplemented by those in paragraph 13(2).
2989.Sub-paragraphs (7) and (8) deal with the meaning of the expression “eligible to participate”.
2990.This paragraph derives from paragraph 13 of Schedule 8. The material in that paragraph has been substantially recast.
Paragraph 15: The employment requirement
2991.This is the first of three paragraphs setting out the employment requirement in paragraph 14 of Schedule 8. Following the amendments made by paragraph 2 of Schedule 13 to FA 2001, this paragraph is now long, and may usefully be subdivided. This paragraph derives from paragraph 14(1) of Schedule 8.
2992.After the introductory sub-paragraph (1), sub-paragraph (2) deals with the core of the employment requirement. The SIP must provide that an individual may not participate in an award of shares unless employed by the company (or, in the case of a group plan, by a constituent company) (sub-paragraph (2)(a)). And if the plan provides for a qualifying period, the individual must have been employed throughout that period (sub-paragraph (2)(b)) by a qualifying company.
2993.Sub-paragraph (3) then provides that, in the SIP code, “the employment requirement” means the requirement specified in sub-paragraph (2).
2994.Sub-paragraph (4) is a drafting addition, indicating that the terms “qualifying period” and “qualifying company” receive further attention in paragraphs 16 and 17 respectively. The wording of this sub-paragraph is in alignment with wording used elsewhere (for example in paragraph 19(3) of this Schedule).
Paragraph 16: Qualifying periods
2995.This paragraph supplements paragraph 15, and specifies various qualifying periods that may apply. The paragraph derives from paragraph 14(2) to (5) of Schedule 8.
2996.The material in sub-paragraphs (2) and (3) has been substantially recast to produce a result similar to that achieved in paragraph 14.
Paragraph 17: Meaning of “qualifying company”
2997.This paragraph also supplements paragraph 15, and deals with the meaning of the expression “qualifying company”. The paragraph derives from paragraph 14(1A) and (1B) of Schedule 8, inserted by paragraph 2 of Schedule 13 to FA 2001.
2998.It may not be obvious what is achieved by sub-paragraph (3)(c)(ii), but this provision has a role to play. A qualifying company may fall within paragraph (a) or paragraph (b); or within paragraph (c)(i) as an associated company of a company within paragraph (a) or (b); or within paragraph (c)(ii) as an associated company of an associated company within paragraph (c)(i) (and so on indefinitely).
Paragraph 18: Requirement not to participate in other SIPs
2999.This paragraph restricts the ability of an individual to participate in an award of shares under more than one SIP in a tax year.
3000.The paragraph derives from paragraph 16 of Schedule 8. In that Schedule, paragraphs 17 to 22 supplement paragraph 15; so, to improve the narrative “flow”, this paragraph now appears before the paragraphs rewriting paragraphs 15 and 17 to 22, which now constitute one single uninterrupted “block”.
3001.The title to this paragraph has been changed to make it simpler.
3002.In sub-paragraph (1) the word “eligible” has been added to bring this provision into alignment with paragraphs 15(1) and 19(1).
3003.Sub-paragraph (1) combines and abbreviates paragraph 16(1) and (2) of Schedule 8. References to approved profit sharing schemes in paragraph 16(1) of Schedule 8 have been removed. See Change 160 in Annex 1.
Paragraph 19: The “no material interest” requirement
3004.This paragraph states that the SIP must provide that an individual is not eligible to participate in an award of shares if the individual has (or has recently had) a “material interest” in a company with specified characteristics. In determining whether the individual has such a “material interest”, it is necessary to consider the interests of the individual’s “associates”. This paragraph is accordingly then supplemented by paragraphs 20 and 21 (which deal with the meaning of “material interest”) and by paragraphs 22 to 24 (which deal with the meaning of “associate”). This paragraph derives from paragraph 15 of Schedule 8.
3005.As the paragraphs in this Part of Schedule 8 have now been placed in a different order (see the explanatory notes relating to paragraph 18), this paragraph is now followed immediately by the paragraphs that supplement it.
3006.In sub-paragraph (3), the wording of the two paragraphs has been brought into alignment.
Paragraph 20: Meaning of “material interest”
3007.This paragraph supplements paragraph 19. It contains the definition of “material interest” and is in its turn supplemented by paragraph 21. This paragraph derives from paragraph 17 of Schedule 8.
3008.Sub-paragraphs (2) and (3) separate out the two alternatives which, at present, are combined in the lengthy paragraph 17(1) of Schedule 8. In this Act, the two alternatives are called a material interest in the share capital of the company, and a material interest in the assets of a close company.
Paragraph 21: Material interest: options and interests in SIPs
3009.This paragraph supplements paragraph 20, and contains further provisions dealing with the meaning of the expression “material interest”. The paragraph derives from paragraph 18 of Schedule 8 (in sub-paragraphs (1) to (5)) and from paragraph 19 of Schedule 8 (in sub-paragraph (6)).
3010.Sub-paragraphs (3) and (4) both derive from paragraph 18(2) of Schedule 8. This sub-paragraph has been divided to make the text easier to understand.
3011.In sub-paragraph (6), the reference to “any approved profit sharing scheme” (in paragraph 19 of Schedule 8) has been omitted. The legislation relating to approved profit sharing schemes has not been rewritten; but, in this Act, paragraph 87 of Schedule 7 (transitionals and savings) preserves the effect of this reference.
Paragraph 22: Meaning of “associate”
3012.This paragraph also supplements paragraph 19. It contains the definition of “associate” and is in its turn supplemented by paragraphs 23 and 24. This paragraph derives from paragraph 20 of Schedule 8.
3013.In sub-paragraph (1) references to an “individual” replace references to a “person”; and in sub-paragraph (1)(c) different words are used to describe the relevant company.
3014.Sub-paragraph (2) is new. This provision links sub-paragraph (1)(c) with paragraphs 23 and 24 of this Schedule.
3015.In sub-paragraph (3) the definition of “relative” has been slightly amended.
Paragraph 23: Meaning of “associate”: trustees of employee benefit trust
3016.This paragraph supplements paragraph 22 and contains provisions that apply where an individual is interested as a beneficiary of an employee benefit trust. The paragraph derives from paragraph 21 of Schedule 8.
3017.This paragraph has counterparts in Schedules 3, 4 and 5. Chapter 11 of Part 7 (supplementary provisions) defines the expression “employee benefit trust”, and deals with further matters arising when payments from employee benefit trusts are made. In the later sub-paragraphs of this paragraph there are references to provisions in Chapter 11 of Part 7 and to the contents of that Chapter.
3018.The defined term “relevant company” in paragraph 21 of Schedule 8 has been omitted. This definition is not in fact used.
Paragraph 24: Meaning of “associate”: trustees of discretionary trust
3019.This paragraph also supplements paragraph 22 and contains provisions that apply where an individual is interested as an object of a discretionary trust. The paragraph derives from paragraph 22 of Schedule 8.
3020.The defined term “relevant company” in paragraph 22 of Schedule 8 has been omitted. It is possible to rewrite this paragraph without making use of this definition.
3021.Sub-paragraphs (1) and (2) recast the material in paragraph 22(1) and (2). Sub-paragraph (1) deals with all the conditions (which, at present, are distributed between sub-paragraphs (1) and (2)); and sub-paragraph (2) states the main rule (which, at present, is contained in the full-out words at the end of sub-paragraph (2)).
Part 4: Types of shares that may be awarded
3022.This Part is the third of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 25 to 33, deals with requirements relating to the types of shares that may be awarded.
3023.This Part of the Schedule imposes requirements that all SIPs must meet. It has therefore been placed at an earlier point in this Schedule than in Schedule 8 (where it is Part 8 of that Schedule). This change has the consequence that the order of Parts in Schedules 2 to 5 is in closer alignment.
3024.Within this Part, five requirements are listed in paragraph 25(1). Of these, the requirement imposed by paragraph 29 (prohibited shares) is now dealt with at an earlier point, thus enabling the requirement in paragraph 30 (only certain kinds of restriction allowed), which has further supplementary paragraphs, to be dealt with last.
3025.This Part is now entitled “Types of shares that may be awarded” as opposed to “Types of shares that may be used” (the title to Part 8 of Schedule 8).
Paragraph 25: Types of shares that may be awarded: introduction
3026.This paragraph is introductory, and derives from paragraph 59 of Schedule 8.
3027.Sub-paragraph (1) lists the requirements relating to types of shares that must be met before a SIP may be approved. The paragraph follows the source legislation and, unlike paragraphs 6 and 13 (for example), contains no reference to “plan requirements”. This divergence may be explained by the fact that the requirements imposed in this Part of this Schedule are not matters that must be dealt with in the plan documentation.
3028.Sub-paragraph (2) then defines shares that may be awarded under the plan as “eligible shares”. This definition is in a new sub-paragraph.
Paragraph 26: Shares must be part of ordinary share capital of certain companies
3029.This paragraph provides that the shares that may be awarded must be part of the ordinary share capital of a company with characteristics specified in this paragraph. The paragraph derives from paragraph 60 of Schedule 8.
Paragraph 27: Requirement as to listing etc.
3030.This paragraph provides that the shares that may be awarded must fall within one of the three categories specified in sub-paragraph (1).
3031.The paragraph derives from paragraph 61 of Schedule 8, dividing that paragraph into two sub-paragraphs with the object of making its contents easier to follow. The definition of “listed company” in sub-paragraph (2) is new, and this sub-paragraph contains most of the material from paragraph 61(c).
Paragraph 28: Shares must be fully paid up and not redeemable
3032.This paragraph provides that eligible shares must be fully paid up and not redeemable. It derives from paragraph 62 of Schedule 8.
3033.In sub-paragraph (2), the words “for the purposes of sub-paragraph (1)(a)” have been moved to the beginning of the sentence. This change brings this sub-paragraph into better alignment with sub-paragraph (3), and makes it easier to grasp the relationship with sub-paragraph (1). Sub-paragraph (2) also contains new additional wording to make it clear that the payment of cash is to be made to the company whose shares are being issued.
3034.Sub-paragraphs (4) and (5) abbreviate the material in paragraph 62(4) and (5) of Schedule 8. In that Schedule, it is provided that sub-paragraph (1)(b) does not apply in relation to shares in a co-operative. The term “co-operative” is then defined as “a registered industrial and provident society which is a co-operative society”; and the terms “registered industrial and provident society” and “co-operative society” then receive definitions of their own. (This legislation was amended while the Finance Act 2000 was before Parliament.).
3035.In this Act the term “co-operative” has been omitted. It is provided instead (in sub-paragraph (4)) that sub-paragraph (1)(b) does not apply to shares in a registered industrial and provident society which is a co-operative society; and then, as before, the terms “registered industrial and provident society” and “co-operative society” are defined. This procedure enables the term “co-operative” to be omitted.
Paragraph 29: Prohibited shares
3036.This paragraph specifies types of shares that may not be awarded under a SIP. The paragraph derives from paragraph 67 of Schedule 8.
3037.The title of this paragraph is now “prohibited shares” as opposed to “prohibited companies”. The new wording should provide a better indication of what is being prohibited.
3038.This paragraph now refers to a “service company” as opposed to an “employer company”. The new term is more descriptive and accords better with actual commercial usage. The expression “the employer company” is used elsewhere in this Act to mean the employee’s employer.
3039.Amendments have been made to sub-paragraphs (1)(b) and (4)(b) with a view to making those provisions easier to understand.
3040.Sub-paragraph (4) has wording differing from that in the source legislation. Schedule 1 to the Interpretation Act 1978 provides that “‘person’ includes a body of persons corporate or unincorporate”; and the view is taken that there can be no doubt that the word “person” includes a partnership.
Paragraph 30: Only certain kinds of restriction allowed
3041.This paragraph limits the restrictions to which eligible shares may be subject. Certain restrictions, however, are permitted, and these are specified in paragraphs 31 to 33, which supplement this paragraph. This paragraph derives from paragraph 63 of Schedule 8.
3042.In sub-paragraph (1) the order in which the three paragraphs appear has been changed to make the references to paragraphs 31 to 33 (which supplement this paragraph) more prominent, and to make the references to the paragraphs dealing with holding periods (which only appear later in this Schedule) less prominent.
3043.Sub-paragraph (2), which rewrites paragraph 63(2) of Schedule 8, now divides that material into two sentences.
3044.The opening words of sub-paragraph (3) differ from those of the corresponding provision in the source legislation, and now include a reference back to sub-paragraph (2). This has led to a further variation in the order of the sub-paragraphs in this paragraph; in paragraph 63 of Schedule 8, what is now sub-paragraph (4) preceded what is now sub-paragraph (3).
Paragraph 31: Permitted restrictions: voting rights
3045.This paragraph supplements paragraph 30. It derives from paragraph 64 of Schedule 8.
Paragraph 32: Permitted restrictions: provision for forfeiture
3046.This paragraph also supplements paragraph 30 and deals with the circumstances in which free or matching shares may be subject to provision for forfeiture.
3047.This paragraph derives from sub-paragraphs (1) to (5) of paragraph 65 of Schedule 8. (Paragraph 65(6) of Schedule 8 is a definition of “provision for forfeiture” applying for the purposes of the SIP code generally. This definition has now been moved to paragraph 99(1) of this present Schedule.)
3048.Sub-paragraph (1) combines sub-paragraph (1) and the first part of sub-paragraph (2) of paragraph 65 in Schedule 8. The words “in the following circumstances” have been removed.
3049.Sub-paragraph (2) gives a complete list of the events within paragraph 87(2) of Schedule 8. Although the amount of text is increased and there is duplication, the view has been taken that it is more helpful to set the relevant material out again than to refer users to section 498(2).
3050.In sub-paragraph (2), the reference at the beginning of this provision has been confined to sub-paragraph (1)(a). The reference can only be to paragraph (a) of sub-paragraph (1); and in the interests of clarity this cross-reference is more precise. Sub-paragraph (2)(d) reorganises the material in paragraph 87(3)(d) of Schedule 8.
Paragraph 33: Permitted restrictions: pre-emption conditions
3051.This paragraph also supplements paragraph 30 and deals with the circumstances in which pre-emption conditions may be permitted. The paragraph derives from paragraph 66 of Schedule 8.
Part 5: Free shares
3052.This Part is the fifth of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 34 to 42, deals with requirements relating to free shares. A SIP does not have to provide for free shares to be appropriated to employees (it may provide for partnership shares to be acquired for employees - see paragraph 2(1)), so it may be expected that there will be SIPs to which the provisions of this Schedule do not apply.
Paragraph 34: Free shares: introduction
3053.This paragraph is introductory. It derives from paragraphs 23 and 25 of Schedule 8.
3054.Sub-paragraph (1) sets out the requirements that must be met by all SIPs that provide for free shares. This sub-paragraph expands paragraph 23 of Schedule 8 by specifying the relevant requirements, a procedure now adopted throughout this Schedule.
3055.Sub-paragraph (2) sets out the additional requirements that must be met by SIPs that provide both for free shares and for performance allowances (a term defined in paragraph 34(4)).
3056.Sub-paragraph (4) recasts the definition of “performance allowances” in paragraph 25(1) of Schedule 8.
3057.This paragraph follows the other introductory paragraphs in the various Parts of this Schedule by providing that a SIP must “meet” plan requirements, as opposed to “complying” with them.
Paragraph 35: Maximum annual award
3058.This paragraph specifies the maximum annual award for which the plan must provide. It derives from paragraph 24 of Schedule 8.
3059.There is a sub-paragraph for each individual proposition; and in sub-paragraphs (2) and (4), the opening words “For this purpose”, which occurred in the corresponding places in the earlier legislation, have been omitted.
Paragraph 36: The holding period
3060.This paragraph states that the plan must require the company to specify a period (“the holding period”) during which a participant is bound to permit the free shares to remain in the hands of the trustees, and is bound not to dispose of the beneficial interest in those shares.
3061.This paragraph derives from paragraph 31 of Schedule 8. This paragraph has been placed somewhat earlier in this part of this Schedule, as the requirement set out in this paragraph applies whether or not the SIP makes provision for performance allowances (see paragraph 34(2)).
3062.Sub-paragraph (3) joins the two separate sentences in paragraph 31(3) of Schedule 8.
3063.Sub-paragraphs (4) and (5) divide the material presently contained in paragraph 31(4) of Schedule 8.
Paragraph 37: Holding period: power of participant to direct trustees to accept general offers etc.
3064.This paragraph provides that a participant may give directions of various types to the trustees during the holding period.
3065.This paragraph derives from paragraph 32 of Schedule 8. There has been a significant amount of reorganisation; and this paragraph is now divided into sub-paragraphs.
3066.Sub-paragraph (1) derives from the opening words of paragraph 32.
3067.Sub-paragraphs (2) and (3) derive from paragraphs (a) and (d) of paragraph 32 respectively. In sub-paragraph (3), the words “as a result of” replace the words “pursuant to”.
3068.Sub-paragraphs (4) to (6) rewrite paragraphs (b) and (c) of paragraph 32; but that material is now organised differently, with sub-paragraph (5) containing a definition of a “general offer”.
Paragraph 38: Performance allowances: general application
3069.This paragraph states that a SIP that provides for performance allowances must provide for such allowances for all qualifying employees. The paragraph derives from paragraph 26 of Schedule 8.
3070.The expression “qualifying employee” is defined in paragraph 8(6) of this Schedule.
Paragraph 39: Performance allowances: targets and measures
3071.This paragraph specifies the performance targets and performance measurements that must be set where the SIP provides for performance allowances. The paragraph derives from paragraph 27 of Schedule 8.
3072.The material dealing with performance targets has now been placed before the material dealing with performance measures. This has resulted in some reorganisation of the contents of this paragraph, and an amendment to its title.
Paragraph 40: Performance allowances: information to be given to employees
3073.This paragraph specifies the information that must be given to employees if the SIP provides for performance allowances. The paragraph derives from paragraph 28 of Schedule 8.
3074.In sub-paragraph (1)(a) the words “each qualifying employee who has accepted an invitation to participate in the award” replace the words “each employee participating in the award”. See Change 161 in Annex 1.
Paragraph 41: Performance allowances: method one
3075.This paragraph deals with the first method of calculating performance allowances. It derives from paragraph 29 of Schedule 8.
3076.Sub-paragraphs (1) and (2) derive from paragraph 29(1) of Schedule 8. Sub-paragraph (1) is designed to correspond to sub-paragraph (1) in paragraph 42.
Paragraph 42: Performance allowances: method two
3077.This paragraph deals with the second method of calculating performance allowances.
3078.Sub-paragraphs (1), (2), (4) and (5) derive from paragraph 30 of Schedule 8; and sub-paragraphs (3) and (6) derive from paragraph 118(2)(c) and (4) of that Schedule.
3079.The material in sub-paragraphs (3) and (6) seems better placed here than in a paragraph dealing with disqualifying events, which has itself now been placed in Part 10 of this Schedule (Approval of plans). See Note 64 in Annex 2.
Part 6: Partnership shares
3080.This Part is the fifth of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 43 to 57, deals with requirements relating to partnership shares. A SIP does not have to provide for partnership shares to be acquired for employees (it may provide for free shares to be appropriated to employees - see paragraph 2(1)), so there may well be SIPs to which the provisions of this Part of this Schedule do not apply.
Paragraph 43: Partnership shares: introduction
3081.This paragraph is introductory.
3082.In Schedule 8, the requirements relating to partnership shares are introduced in paragraph 33. But that paragraph merely states that if a plan provides for partnership shares, it must comply with the requirements of that Part of Schedule 8. Sub-paragraph (1) follows an alternative, more helpful, procedure and (adopting the procedure used elsewhere in this Schedule) indicates the provisions that apply.
3083.Sub-paragraph (1) nevertheless departs from the introductory wording used at the beginning of the majority of the other Parts of this Schedule. This is because a number of the paragraphs in this Part of the Schedule are permissive as opposed to mandatory - that is, they deal with provisions which the plan may contain, as opposed to provisions that the plan must contain.
3084.Sub-paragraph (3) deals with a general point relating to the acquisition of partnership shares. This provision derives from paragraph 39(2) of Schedule 8; but it has now been moved so that this general point is dealt with early on.
3085.Sub-paragraph (4) contains the definition of the word “salary”. This definition is in paragraph 48 of Schedule 8; and it has been amended by paragraph 3 of Schedule 13 to FA 2001. The ambit of this definition has, however, been widened, so that this definition, instead of applying only for the purposes of the provisions relating to partnership shares, applies for the purposes of the SIP code generally. See Note 65(A) in Annex 2.
Paragraph 44: Partnership share agreements
3086.This paragraph states that the SIP must provide for qualifying employees to enter into partnership share agreements. (The definition of “qualifying employee” may be found in paragraph 8(6) of this Schedule.) This paragraph derives from paragraph 34 of Schedule 8.
3087.This paragraph now has three sub-paragraphs. Sub-paragraph (2) deals with the definition of the term “partnership share agreements” and the ambit of that definition.
3088.Paragraph 34 of Schedule 8 referred to “the company” on three different occasions, with the company being defined elsewhere in that Schedule, in relation to a SIP, as the company which established the plan (as it is in paragraph 2(2) of this Schedule). One of those three occasions referred to the employee authorising the company to deduct part of the employee’s salary. However, in the case of a group plan, an employee might be employed by a group company which had not established the SIP; and, in such a case, the reference to authorising “the company” to make deductions from salary would not work well.
3089.Sub-paragraph (1)(a), read with sub-paragraph (3), accordingly provides for the authorisation to make deductions from the employee’s salary to be given to the company by reference to which the employee meets the employment requirement in relation to the plan. See Change 162 in Annex 1.
Paragraph 45: Deductions from salary
3090.This paragraph states that the SIP must provide for a partnership share agreement to be given effect by deductions from the employee’s salary. Amounts so deducted are referred to in the SIP code as “partnership share money”. This paragraph derives from paragraph 35 of Schedule 8.
3091.The rewritten paragraph has six sub-paragraphs (as opposed to the four in paragraph 35 of Schedule 8); but in the rewritten legislation each sub-paragraph consists of a single sentence. (In the case of sub-paragraph (3), two separate sentences have been joined.)
3092.In sub-paragraph (2), the term “partnership share money” now applies to the entirety of the SIP code, instead of being confined to one part of Schedule 8, as was the case in FA 2000. In other contexts the expression was undefined; but it is considered that the definition provided here would have been held to apply in those other contexts also. See Note 65(B) in Annex 2.
Paragraph 46: Maximum amount of deductions
3093.This paragraph specifies the maximum amount of partnership share money that may be deducted. The paragraph derives from paragraph 36 of Schedule 8.
3094.In the second sentence of sub-paragraph (2), the word “This” has been replaced by the more specific “10% of the employee’s salary”.
3095.In sub-paragraphs (3) and (4), two sub-paragraphs, each one sentence long, now replace a single sub-paragraph with two sentences. In sub-paragraph (4) there have been changes in the detail of the wording.
Paragraph 47: Minimum amount of deductions
3096.This paragraph specifies the minimum amount of partnership share money that may be deducted. The paragraph derives from paragraph 37 of Schedule 8.
3097.In sub-paragraph (1), the words “under a partnership share agreement” replace the words “in pursuance of the partnership share agreement”; and in sub-paragraph (3), the words “may be” have been added at the end.
Paragraph 48: Notice of possible effect of deductions on benefit entitlement
3098.This paragraph states that the SIP must provide that the company may not enter into a partnership share agreement unless the employee is given a notice relating to the possible effect of deductions on social security benefits. The paragraph derives from paragraph 38 of Schedule 8.
3099.That paragraph provides authority to make regulations, and regulations have been made. They are the Employee Share Ownership Plans (Partnership Shares - Notice of Effects on Benefits, Statutory Sick Pay and Statutory Maternity Pay) Regulations 2000 (SI 2000 No 2090).
Paragraph 49: Partnership share money held for employee
3100.This paragraph states that the SIP must provide that partnership share money must be paid to the trustees and held by them on the employee’s behalf. The paragraph derives from paragraph 39(1), (3) and (4) of Schedule 8.
3101.In sub-paragraph (1) the words “in accordance with” have been replaced by the word “under”.
3102.Sub-paragraph (3) has been amended to take account of the amendments made by article 107 of the Financial Services and Markets Act 2000 (Consequential Amendments) (Taxes) Order 2001 (SI 2001 No 3629).
3103.In sub-paragraph (4), the word order has been changed. The subject of the sentence has been placed first, followed immediately by the main verb, and the condition has been moved to the end of the sentence.
Paragraph 50: Application of money deducted where no accumulation periods
3104.This paragraph specifies how partnership share money must be applied if the SIP does not provide for an accumulation period. The paragraph derives from paragraph 40 of Schedule 8.
3105.The five sub-paragraphs have, however, been placed in a different order. The major proposition has been placed first (sub-paragraph (1)); and this is followed by the proposition relating to the market value of the shares (sub-paragraph (2)). It is only these two sub-paragraphs that are affected by the operation of paragraph 53 (restrictions on number of shares awarded), so this limitation is dealt with next (sub-paragraph (3)). The definition of the expression “the acquisition date” is dealt with next (sub-paragraph (4)) in a location that follows the two sub-paragraphs in which the expression is used (as opposed to being placed between those two sub-paragraphs). The provision dealing with surplus partnership money is now placed at the end (sub-paragraph (5)).
Paragraph 51: Accumulation periods
3106.This paragraph contains provisions that apply if the SIP provides for an accumulation period. The paragraph derives from paragraph 41 of Schedule 8.
3107.The material in Schedule 8 has been rearranged, with a view to making the main propositions more prominent and easier to understand. Sub-paragraph (2) derives from the opening words of paragraph 41(2) of Schedule 8; and sub-paragraphs (3) and (4) reorganise all the other material in paragraph 41(2) and (3) of that Schedule.
3108.At the end of sub-paragraph (4)(b), the words “all individuals entering into partnership share agreements” have replaced the words “all individuals who are eligible to participate in the award”. The new wording is intended to be a more accurate statement of the legislative intention. See Change 163 in Annex 1.
3109.Sub-paragraph (5) is arranged somewhat differently from paragraph 41(4) of Schedule 8.
Paragraph 52: Application of money deducted in accumulation period
3110.This paragraph contains provisions that govern how partnership share money deducted may be applied during an accumulation period. The paragraph derives from paragraph 42 of Schedule 8.
3111.The material in this paragraph has been rearranged. After the introductory proposition (sub-paragraph (1)), the central propositions are now in sub-paragraphs (2) and (3); those propositions are followed by a limitation that applies to those two sub-paragraphs (sub-paragraph (4)), and then by a definition with the same ambit (sub-paragraph (5)).
3112.Sub-paragraph (4) provides for sub-paragraphs (2) and (3) (instead of the paragraph as a whole) to be subject to paragraph 53; and sub-paragraph (5) provides for the definition of “the acquisition date” to apply in both sub-paragraphs (2) and (3) (instead of in sub-paragraph (2) only as in paragraph 42 of Schedule 8).
3113.In sub-paragraph (2) the words “under a partnership share agreement” have been added; and in sub-paragraph (7) the constituent parts of this provision have been reorganised, and the words “to be” have been added in the expression “is to be paid”.
Paragraph 53: Restriction on number of shares awarded
3114.This paragraph provides that the SIP may authorise the company to specify the maximum number of shares to be included in an award of partnership shares.
3115.This paragraph derives from paragraph 43 of Schedule 8, presenting the material in a somewhat different order.
3116.The wording of sub-paragraph (5) has been modified to deal with the removal of the expression “the individual award” (an expression introduced in paragraph 3 of Schedule 8), which made its one and only appearance at this point. The new wording includes the expression “on behalf of each employee”.
Paragraph 54: Stopping and re-starting deductions
3117.An employee is entitled both to stop deductions under a partnership share agreement and to restart those deductions. This paragraph sets out the requirements that the SIP must contain to deal with these matters.
3118.This paragraph derives from paragraph 44 of Schedule 8. The material is presented in a somewhat different order, with the new order following the order in which events may be expected to occur.
3119.Sub-paragraphs (1) and (3) refer to deductions “under” a partnership share agreement and not to deductions “in pursuance of” a partnership share agreement.
3120.Sub-paragraph (7) retains the requirement that a notice under this paragraph should be a notice in writing, but moves that requirement to a sub-paragraph of its own.
Paragraph 55: Withdrawal from partnership share agreement
3121.This paragraph sets out the requirement that a SIP must provide that an employee may give notice to withdraw from a partnership share agreement. The paragraph derives from paragraph 45 of Schedule 8.
3122.Sub-paragraph (1) has been rewritten to emphasise that it is the notice that may be given at any time rather than the withdrawal from the plan that may be effected at any time.
3123.Sub-paragraph (4) retains the requirement that a notice under this paragraph should be a notice in writing, but moves that requirement to a sub-paragraph of its own.
Paragraph 56: Repayment of partnership share money on withdrawal of approval or termination
3124.This paragraph sets out the requirement that a SIP must provide that partnership share money held on behalf of an employee must be paid over to that employee in certain circumstances. The paragraph derives from paragraph 46 of Schedule 8.
3125.This material has been placed in a different order. Provisions relating to the withdrawal of approval are dealt with before the provisions relating to the issue of a plan termination notice.
Paragraph 57: Access to partnership shares
3126.This paragraph sets out the requirement that a SIP must provide that, when partnership shares have been awarded to an employee, the employee may withdraw any or all of those shares from the plan. The paragraph derives from paragraph 47 of Schedule 8.
3127.Sub-paragraph (2) has been expanded by the addition of the words “If the employee does so” at the beginning of this provision.
Part 7: Matching shares
3128.This Part is the sixth of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 58 to 61, deals with requirements relating to matching shares. A SIP does not have to provide for matching shares - defined earlier in this Schedule as shares that may be appropriated without payment to employees in proportion to the partnership shares acquired by them (see paragraph 3(1)). There will therefore probably be SIPs to which the provisions of this Part of this Schedule do not apply.
Paragraph 58: Matching shares: introduction
3129.This paragraph is introductory, setting out the requirements that a SIP must meet if it provides for matching shares. It derives from paragraph 49 of Schedule 8..
3130.This paragraph lists the requirements contained in the following paragraphs of Part 7 of this Schedule, introducing the individual paragraphs that will follow (as in paragraph 6 of Schedule 8) as opposed to stating that the plan “must comply with the requirements of this Part of this Schedule” (as in paragraph 49 of Schedule 8).
Paragraph 59: General requirements for matching shares
3131.This paragraph sets out the general requirements relating to matching shares that must be contained in the SIP. The paragraph derives from paragraph 50 of Schedule 8.
Paragraph 60: Ratio of matching shares to partnership shares
3132.This paragraph sets out the ratio of matching shares to partnership shares that must be specified in the partnership share agreement. The paragraph derives from paragraph 51 of Schedule 8.
Paragraph 61: Holding period for matching shares
3133.This paragraph applies the provisions relating to the holding period for free shares to matching shares. The paragraph derives from paragraph 52 of Schedule 8.
3134.The rewritten paragraph is more closely aligned with paragraph 67 of this Schedule than is the case with the corresponding provisions in Schedule 8.
Part 8: Cash dividends and dividend shares
3135.This Part is the seventh of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 62 to 69, deals with the treatment of cash dividends. The SIP may provide that, where the company so directs, the cash dividends must be applied in acquiring further plan shares, known as “dividend shares”. The application of cash dividends in this way is referred to as “reinvestment” in the SIP code.
3136.Although it would be more consistent to begin each Part of this Schedule by listing the plan requirements that must be met, there are difficulties in beginning this Part in this way. The plan may or may not contain a direction authorising reinvestment; and the company may or may not give a direction for reinvestment to take place. The list of provisions that apply if the trustees are authorised to carry out reinvestment is therefore postponed until paragraph 63.
Paragraph 62: Reinvestment of cash dividends
3137.This paragraph sets out propositions that are of central importance for this Part of this Schedule. A SIP may provide that, where the company so directs, the trustees must apply all cash dividends in respect of plan shares in acquiring further plan shares on behalf of participants. This application of cash dividends is referred to as “reinvestment” in the SIP code, and the further plan shares acquired are referred to as “dividend shares”.
3138.Sub-paragraphs (1) to (4) of this paragraph derive from sub-paragraphs (1), (2) and (4) of paragraph 53 of Schedule 8; and sub-paragraph (5) derives from paragraph 56(5) of that Schedule. (Paragraph 53(3) of Schedule 8 is the source for paragraph 69 in this Schedule.).
3139.Sub-paragraph (1) contains a reference to “the trustees”, so permitting the use of a verb in the active, and not the passive, voice; and sub-paragraph (4) contains additional concluding words to make its meaning easier to grasp.
3140.Sub-paragraph (5) consists of a proposition placed considerably earlier than in the corresponding Part of Schedule 8, in the interests of user-friendliness.
Paragraph 63: Requirements to be met as regards cash dividends
3141.This paragraph lists the paragraphs in this Part that apply if the trustees of the SIP are directed to apply cash dividends in acquiring further plan shares. It is new.
3142.Sub-paragraph (3) provides that the SIP must in any event meet the requirement contained in paragraph 69.
Paragraph 64: Limit on amount reinvested
3143.This paragraph specifies a limit for total dividend reinvestment that must be included in the plan. It derives from paragraph 54 of Schedule 8.
3144.Sub-paragraph (2)(b) has new wording, including a mention of “approved SIPs”, and this has permitted the removal of the two further sub-paragraphs from the source legislation.
Paragraph 65: General requirements as to dividend shares
3145.This paragraph sets out the general requirements relating to dividend shares that the plan must meet. It derives from paragraph 55 of Schedule 8.
3146.In paragraph (a), the words “in the same company” have been added at the beginning. It is likely that these words would be implied if the point ever arose; but the addition of these words put the point beyond any doubt. See Note 66 in Annex 2.
Paragraph 66: Acquisition of dividend shares
3147.This paragraph sets out the conditions relating to the acquisition of dividend shares that a SIP must meet. The acquisition must take place on “the acquisition date”. The paragraph derives from sub-paragraphs (1) to (4) of paragraph 56 of Schedule 8. (Paragraph 56(5) of Schedule 8 is the source of paragraph 62(5) of this Schedule.)
3148.The definition of “the acquisition date” has now been placed at the end of this paragraph (in sub-paragraph (4)); and there have been changes in the detail of the wording at various places in this paragraph.
3149.The second sentence of paragraph 56(2) of Schedule 8 has been omitted. This sentence merely stated a proposition that was true in any case, and has accordingly been removed on the basis that it is unnecessary.
Paragraph 67: Holding period for dividend shares
3150.This paragraph applies the provisions relating to the holding period for free shares to dividend shares. It derives from paragraph 57 of Schedule 8.
3151.The paragraph is more closely aligned with paragraph 61 of this Schedule than is the case with the corresponding provisions in Schedule 8.
Paragraph 68: Reinvestment: amounts to be carried forward
3152.This paragraph contains provisions that apply when an amount is not reinvested. The paragraph derives from paragraph 58 of Schedule 8.
3153.Sub-paragraphs (1) to (3) all derive from paragraph 58(1) of Schedule 8. In order to make the legislation easier to understand that provision is divided into a number of separate propositions; and, as a result, there have been changes in the detail of the wording. In sub-paragraphs (4)(b) and (c), cross-references have been added.
Paragraph 69: Cash dividends where no requirement to reinvest
3154.This paragraph sets out the provision that a SIP must make for cash dividends that are not required to be reinvested under the plan. The dividends must be paid over to participants as soon as practicable.
3155.This paragraph derives from paragraph 53(3) of Schedule 8; but that sub-paragraph is now dealt with separately to take account of the circumstances in which it applies (see paragraph 63(3) of this Schedule).
3156.The material in paragraph 53(3) of Schedule 8 has been reorganised and divided into two sub-paragraphs to make it easier to understand. The definition of “distributable cash dividends” is new.
Part 9: Trustees
3157.This Part is the last of eight that deal with the requirements that a SIP must meet before it is approved. This Part, which consists of paragraphs 70 to 80, deals with the requirements relating to the trustees. All SIPs must have trustees; but, in accordance with the general policy of placing the various Parts of Schedules 2 to 5 in an order displaying overall consistency, this Part is now the final Part that deals with the requirements to be met.
Paragraph 70: Requirements etc. relating to trustees: introduction
3158.This paragraph is introductory. It is new, being designed to fulfil the same purpose of introducing paragraphs in Part 9 of this Schedule as is played by other corresponding early paragraphs in each of Parts 2 to 8 of this Schedule.
3159.In Part 9 of this Schedule, there are two paragraphs that impose plan requirements that must be met, and these are listed in sub-paragraph (1). However, the majority of the paragraphs relate to the powers and duties of the trustees, and these are listed in sub-paragraph (2).
Paragraph 71: Establishment of trustees
3160.This paragraph sets out the requirements and duties that a SIP must contain regarding the establishment and duties of the trustees. The paragraph derives from paragraph 68 of Schedule 8.
3161.Sub-paragraph (1) has been reworded to make it clear that the body of trustees should consist of persons resident in the United Kingdom.
3162.Sub-paragraph (3) provides for the introduction of the term “the trust instrument”. Schedule 8 contains no formal introduction of this term, although the term is used extensively in the following paragraphs of this Part.
3163.Sub-paragraphs (5) and (6) incorporate provisions deriving from the Employee Share Schemes Act 2002.
Paragraph 72: Duty to act in accordance with participant’s directions
3164.This paragraph provides that the trust instrument must require the trustees to act in accordance with a participant’s directions.
3165.The paragraph is the first of three that derive from paragraph 71 of Schedule 8. That paragraph is lengthy; and its contents are divided up in the new legislation, to make its contents more accessible. This paragraph derives from sub-paragraphs (1) and (2) of paragraph 71.
Paragraph 73: Duty not to dispose of plan shares
3166.This paragraph provides that the trust instrument must require the trustees not to dispose of plan shares during the holding period (although this general rule is subject to certain exceptions). (The expression “the holding period” is defined in paragraph 36 of this Schedule.)
3167.The paragraph is the second of three that derive from paragraph 71 of Schedule 8. This paragraph derives from paragraph 71(3).
3168.In sub-paragraph (2), the reference to a participant ceasing to be in relevant employment is explained further in paragraph 95.
Paragraph 74: Duty to make payments to participants
3169.This paragraph provides that the trust instrument must require the trustees to make payments to participants in various specified circumstances.
3170.The paragraph is the third of three that derive from paragraph 71 of Schedule 8. This paragraph derives from paragraph 71(4).
3171.Sub-paragraph (1) reorganises the material in the first sentence of paragraph 71(4). In sub-paragraph (2)(c), the expression “PAYE obligations” is defined in paragraph 99(1) of this Schedule.
Paragraph 75: Duty to give notice of award of shares etc.
3172.This paragraph provides that the trust instrument must require the trustees to give various notices to employees. The paragraph derives from paragraph 70 of Schedule 8.
3173.Sub-paragraph (3) now has three paragraphs, as opposed to the corresponding provision in the source legislation, which had two paragraphs, one of which had two sub-paragraphs of its own. This enables sub-paragraphs (2), (3) and (4) to be brought into better alignment.
3174.Sub-paragraph (6) reproduces the definition of “foreign cash dividend” in paragraph 129(1) of Schedule 8. Although that definition is expressed to apply for the whole of Schedule 8, it is only needed for the purposes of this paragraph; and it has, accordingly, been moved.
Paragraph 76: Power of trustees to borrow
3175.This paragraph states that the trust instrument may provide the trustees with powers to borrow. The paragraph derives from paragraph 69 of Schedule 8.
Paragraph 77: Power of trustees to raise funds to subscribe for rights issue
3176.This paragraph gives the trustees powers to deal with rights arising under a rights issue. The paragraph derives from paragraph 72(1) of Schedule 8; and it gives a separate sub-paragraph to each sentence in that earlier provision.
3177.The expression “rights arising under a rights issue”, the subject of paragraph 72(2) of Schedule 8, occurs in more than one place; and, accordingly, has now been defined for the purposes of the SIP code generally (in paragraph 99(1) of this Schedule).
Paragraph 78: Acquisition by trustees of shares from employee share ownership trust
3178.This paragraph contains provisions that apply where the SIP acquires shares from an employee share ownership trust. The paragraph derives from paragraph 76 of Schedule 8.
3179.Sub-paragraph (2) is now organised slightly differently; and sub-paragraph (2)(a) contains additional words explaining the reference to “relevant shares”, a term left unexplained in the source legislation. See Note 65(C) in Annex 2.
Paragraph 79: Meeting by trustees of PAYE obligations
3180.This paragraph sets out the requirement that the SIP must make provision to ensure that trustees meet their PAYE obligations. The paragraph derives from paragraph 73 of Schedule 8.
3181.The title to this paragraph has been amended to include a reference to the trustees.
3182.Sub-paragraph (1) now has three paragraphs, as opposed to the corresponding provision in the source legislation, which had two paragraphs, one of which had two sub-paragraphs of its own.
3183.Sub-paragraph (4) is explanatory only; but is retained in order to assist the reader.
Paragraph 80: Other duties of trustees in relation to tax liabilities
3184.This paragraph provides that the trust instrument must set out other duties of trustees in relation to tax liabilities.
3185.The paragraph derives from paragraph 75 of Schedule 8 (in sub-paragraphs (1) to (3)) and paragraph 90 of Schedule 8 (in sub-paragraph (4)).
3186.The material in this paragraph has now been arranged rather differently and in particular the two duties placed on the trustees by the trust instrument have now been separated to become sub-paragraphs (1) and (3).
3187.Sub-paragraphs (4) and (5) deal with administrative matters and derive from provisions in paragraphs 90, 92 and 93 of Schedule 8.
Part 10: Approval of plans
3188.It was mentioned, in the overview to the explanatory notes for this Schedule, that the contents of this Schedule could be divided into three categories. Parts 2 to 9 of this Schedule deal with the first category: the requirements that must be met before a SIP may be “approved” for the purposes of the SIP code. This Part deals with the second category: procedural matters relating to the obtaining of approval and the withdrawal of approval. In doing so, this Part brings together material in Parts 1 and 13 of Schedule 8.
Paragraph 81: Application for approval
3189.This paragraph deals with the mechanics of the application for approval of a SIP. The paragraph derives from paragraph 4 of Schedule 8.
3190.This paragraph makes two changes to the law. The first change is in sub-paragraph (2), where it is provided that the application must be in writing. This requirement is not contained in Schedule 8, but there is such a requirement for the SAYE and CSOP schemes. The second change is in sub-paragraph (3), which is new. It provides that once the Inland Revenue have decided whether or not to approve the plan, they must give notice of their decision to the company. See Change 164 in Annex 1.
Paragraph 82: Appeal against refusal of approval
3191.This paragraph provides that a company may appeal to the Special Commissioners if the Inland Revenue refuse to approve the SIP. It derives from paragraph 5 of Schedule 8.
3192.Sub-paragraphs (3) and (4) divide the material in paragraph 5(3) of Schedule 8.
Paragraph 83: Withdrawal of approval
3193.This paragraph contains provisions relating to the withdrawal of approval of an approved SIP.
3194.The paragraph is the first of two rewriting paragraph 118 of Schedule 8. Paragraph 118 is lengthy, and has been divided for ease of comprehension. This paragraph derives from sub-paragraphs (1) and (7) of paragraph 118 and deals with the mechanics and implications of the withdrawal of approval. The withdrawal of approval depends on the occurrence of a “disqualifying event”; and paragraph 84 deals with the meaning of this expression.
3195.Sub-paragraph (2)(b) makes it clear that the “later time” must be a time specified in the notice. Sub-paragraphs (3) and (4) rewrite paragraph 118(7) of Schedule 8, providing a separate sub-paragraph for each proposition.
Paragraph 84: Disqualifying events for purposes of paragraph 83
3196.This paragraph specifies what is meant by a “disqualifying event”.
3197.The paragraph is the second of two rewriting paragraph 118 of Schedule 8. It derives from sub-paragraphs (2) to (6) of that paragraph.
3198.Sub-paragraph (1)(f) and (g) constitute a splitting of the material to be found in paragraph 118(2)(f) of Schedule 8.
3199.Sub-paragraph (6) extends the scope of the expression “key feature”. In paragraph 118 there is a definition of this expression (in sub-paragraph (3)(a)). This definition, however, applies only for the purposes of sub-paragraph (2)(b), but the expression is used again, without explanation, in sub-paragraph (6)(a)(i). The scope of this definition has been expanded so that it now applies to the whole of this paragraph. See Note 65(D) in Annex 2.
Paragraph 85: Appeal against withdrawal of approval
3200.This paragraph provides that a company may appeal to the Special Commissioners if the Inland Revenue withdraw approval of a SIP.
3201.The paragraph derives from paragraph 119 of Schedule 8. Sub-paragraphs (1) and (2) reorganise the material from that paragraph to a certain extent.
Part 11: Supplementary provisions
3202.It was mentioned, in the overview to the explanatory notes for this Schedule, that the contents of this Schedule could be divided into three categories. Parts 2 to 9 of this Schedule deal with the first category (the requirements that must be met before a SIP may be “approved” for the purposes of the SIP code) and Part 10 with the second category (procedural matters). This is the eleventh and final Part of this Schedule, and deals with the third category (supplementary provisions). This Part of this Schedule is derived from material in Part 13 of Schedule 8.
Paragraph 86: Company reconstructions
3203.This paragraph deals with company reconstructions, and is the first of two that derive from paragraph 115 of Schedule 8. This paragraph derives from sub-paragraphs (1) and (2) of paragraph 115, and deals with the meaning of the expression “company reconstruction”. The consequences of company reconstructions are dealt with in paragraph 87 of this Schedule.
3204.Sub-paragraph (3)(a) is new; and specifies the consequences of the making of what is now termed an “excluded issue of shares”. This material is not contained in the source legislation; but the new material is merely declaratory of the law in order to make those consequences explicit. See Note 67 in Annex 2.
3205.In sub-paragraph (4), the label “excluded issue of shares” is new.
Paragraph 87: Consequences of company reconstructions
3206.This paragraph deals with the consequences of company reconstructions, and is the second of two that derive from paragraph 115 of Schedule 8. This paragraph derives from sub-paragraphs (3) to (8) of paragraph 115.
3207.This paragraph presents the legislation in a somewhat different order; and, in particular, the sub-paragraph containing definitions (sub-paragraph (7)) has been placed at the end. As a result of the rewriting of the legislation contained in the SIP code, sub-paragraph (2)(d) has wording that differs from that to be found in the source legislation.
3208.In this paragraph, the label “corresponding shares” has been replaced by the label “corresponding old shares”.
Paragraph 88: Treatment of shares acquired under rights issue
3209.This paragraph contains provisions that apply where the trustees exercise rights arising under a rights issue. The paragraph derives from paragraph 116 of Schedule 8.
3210.The order in which the material is presented has been changed substantially. Sub-paragraph (1) now specifies the circumstances in which this paragraph applies; and sub-paragraph (2) now deals with the “basic” case (where the rights are exercised), leaving later sub-paragraphs to deal with other cases.
3211.In paragraph 116 of Schedule 8, paragraph 116(5) is concerned with the meaning of the expression “rights arising under a rights issue”, and provides a cross-reference to another provision in Schedule 8. This expression is now defined in paragraph 99(1) of this Schedule for the purposes of the SIP code generally.
Paragraph 89: Termination of plan
3212.This paragraph contains provisions relating to the termination of a plan; and this may be done if the company issues a plan termination notice. The paragraph derives from paragraph 120 of Schedule 8.
3213.Sub-paragraph (2) now has four paragraphs, as opposed to the corresponding provision in the source legislation which had three paragraphs, one of which had two sub-paragraphs of its own. In paragraph (d) the word “into” has been added after the word “entered”.
Paragraph 90: Effect of plan termination notice
3214.This paragraph deals with the effect of a plan termination notice. The paragraph derives from paragraph 121 of Schedule 8.
3215.The first sentence of paragraph 121(3) has been rewritten as sub-paragraph (3). The second sentence of paragraph 121(3) has, however, been omitted, on the basis that it is unnecessary.
3216.Sub-paragraph (7) has been rewritten, to bring the subject, verb and direct object of this sentence closer together.
3217.In sub-paragraph (8) the words “doing the following in the case of each participant” have been added.
3218.Sub-paragraph (9) has been amended to provide that where a participant has died, the references to a participant in the entirety of this paragraph (as opposed to sub-paragraph (8)) are to the participant’s personal representatives. See Change 165 in Annex 1.
Paragraph 91: Jointly owned companies
3219.This paragraph contains provisions that apply in the case of a jointly owned company, an expression defined in sub-paragraph (5). The paragraph derives from paragraph 127 of Schedule 8, a paragraph that has been amended by section 39(5) of FA 2002.
Paragraph 92: Determination of market value
3220.This paragraph explains how market value is determined for the purposes of the SIP code. The paragraph derives from paragraph 125 of Schedule 8.
3221.Each proposition in this paragraph now appears in its own sub-paragraph.
3222.In sub-paragraph (3), the constituent parts of the sentence have been rearranged; and this sub-paragraph concludes with a reference to agreed matters “stated” in the agreement.
Paragraph 93: Power to require information
3223.This paragraph is concerned with information powers. It derives from paragraph 117 of Schedule 8.
3224.Sub-paragraph (1) reorganises the material in paragraph 117(1). The reorganisation includes the addition of paragraphing.
3225.Sub-paragraph (3) has been redrafted, with a view to clarifying the period within which information must be provided.
3226.Paragraph 117(4) of Schedule 8 has not been rewritten in this Schedule. The matter dealt with in that sub-paragraph, the addition of an entry in the table in section 98 of TMA 1970, is dealt with by means of consequential amendment to that section in Schedule 6 to this Act.
Paragraph 94: Meaning of “associated company”
3227.This paragraph explains the meaning of the expression “associated company” for the purposes of the SIP code. The paragraph derives from paragraph 126 of Schedule 8. The words “at a given time” have been added in sub-paragraph (1).
Paragraph 95: Meaning of participant ceasing to be in relevant employment
3228.This paragraph explains the meaning of a participant ceasing to be in relevant employment for the purposes of the SIP code. The paragraph derives from paragraph 123 of Schedule 8.
3229.The words “for the purposes of the SIP code” have been added in sub-paragraphs (1) and (2); and the word order has been changed in sub-paragraph (3).
Paragraph 96: Meaning of shares being withdrawn from plan
3230.This paragraph explains when shares are withdrawn from a plan for the purposes of the SIP code.
3231.This paragraph is the first of two that derive from paragraph 122 of Schedule 8. That paragraph is lengthy, and with a view to making its provisions more accessible, it has been divided for the purposes of this Act. This paragraph derives from sub-paragraphs (1) and (2) of paragraph 122.
Paragraph 97: Meaning of shares ceasing to be subject to plan
3232.This paragraph explains when shares cease to be subject to a plan for the purposes of the SIP code.
3233.This paragraph is the second of two that derive from paragraph 122 of Schedule 8, deriving in this case from sub-paragraphs (3) to (5) and (7) of that paragraph. (Paragraph 122(6) of Schedule 8 has been rewritten as section 508.)
3234.Sub-paragraph (2) derives from paragraph 122(4) of Schedule 8. This material has been reorganised, and paragraphs have been added.
Paragraph 98: Meaning of "the specified retirement age"
3235.This paragraph provides for a new definition (that of “the specified retirement age”) to apply for the purposes of the SIP code. This new provision derives from paragraph 87(4) of Schedule 8.
Paragraph 99: Minor definitions
3236.This paragraph contains minor definitions. It derives from paragraph 129 of Schedule 8.
3237.In sub-paragraph (1), amendments have been made to the detail of the wording of the definition of “plan shares”.
3238.The definition of “provision for forfeiture” is now in sub-paragraph (1), having been moved from paragraph 65(6) of Schedule 8.
3239.The definition of “redundancy” is also now in sub-paragraph (1), having been moved from paragraph 87(3) of Schedule 8.
3240.There is also a new definition of “rights arising under a rights issue” in sub-paragraph (1). This definition brings together the partial definitions that may be found in different places in Schedule 8.
3241.The definition of “foreign cash dividend”, which may be found in paragraph 129(1) of Schedule 8, has been removed. That definition is used only once (see paragraph 75 of this Schedule), and is dealt with there.
Paragraph 100: Index of defined expressions
3242.This paragraph consists of an index of expressions defined or explained for the purposes of the SIP code. It is in the same form as the index in paragraph 130 of Schedule 8.
Schedule 3: Approved Saye Option Schemes
Overview
3243.This Schedule, which is introduced in Chapter 7 of Part 7, deals with the rules relating to approved SAYE option schemes. The legislation relating to SAYE option schemes, which is contained in Chapter 7 of Part 7 and in this Schedule, is called “the SAYE code”, a term introduced in section 516. Chapter 7 of Part 7 deals with the tax exemptions available for participants in an approved SAYE option scheme.
3244.The legislation relating to these schemes derives from Schedule 9 to ICTA: many of the definitions are supplied by section 187 of ICTA.
3245.This Schedule contains further provisions relating to SAYE option schemes. After the introductory Part (Part 1) it deals with the following matters:
it specifies the requirements that a SAYE option scheme must meet in order to be “approved” for the purposes of the SAYE code (in Parts 2 to 7);
it deals with the procedural aspects of the approval of schemes and the withdrawal of approval (in Part 8); and
it deals with supplementary matters (in Part 9).
3246.The majority of the provisions in this Schedule are therefore concerned with the various requirements that SAYE option schemes must meet before they may be “approved”. On this topic the general policy has been to place the various Parts in an order consistent with that to be found in the legislation relating to other share schemes. The various requirements have been placed in a different order from that found in Schedule 9 to ICTA. Part 2 of this Schedule accordingly deals with the general requirements that apply in all cases; Part 3 with the requirements relating to the eligibility of individual employees; and Part 4 with the types of shares to which schemes can apply. The following Parts then deal with requirements relating to linked savings schemes (Part 5), share options (Part 6) and the exchange of options (Part 7).
3247.Where it seems helpful the opportunity has been taken to list the requirements relevant for a Part. This procedure is the same as that adopted in Schedule 2 for the SIP code and Schedule 5 for the EMI codes, where the procedure represents a development of layout in Schedule 8 and Schedule 14 to FA 2000.
3248.Share options are described as being granted rather than obtained in most contexts. This ties in with the terminology in EMI.
3249.Where appropriate references have been changed from “person” to “individual”.
Part 1: Introduction
Paragraph 1: Approval of SAYE option schemes
3250.This paragraph indicates the contents of this Schedule (in sub-paragraph (1)) and the sub-paragraphs into which it is divided (in sub-paragraphs (2) to (4)). It mirrors the opening paragraphs of Schedules 2, 4 and 5. The paragraph has no counterpart in the present legislation. The intention is to help users to understand the subject matter of the Schedule and to locate relevant material.
Paragraph 2: SAYE option schemes
3251.This paragraph contains definitions that apply generally for the purposes of the SAYE code. It derives from section 185(2) of ICTA and also from various paragraphs of Schedule 9 to ICTA, including paragraph 8, and continues the introductory theme.
3252.Sub-paragraph (1) contains the central definition of “SAYE option scheme”, set out earlier in section 516(4).
3253.Sub-paragraph (2) contains the definition of the word “participate”, and derives from paragraph 26 of Schedule 9 to ICTA. This sub-paragraph also introduces the term “scheme organiser”. It is preferable to the term “grantor” (the term used in ICTA) as the company that sets up the scheme does not have to be the person who actually grants the option. There is also a definition of “participant”.
Paragraph 3: Group schemes
3254.This paragraph is concerned with group schemes, and derives from paragraph 1(3) and (4) of Schedule 9 to ICTA.
3255.Sub-paragraph (1) provides that a SAYE option scheme established by a company that controls other companies (a “parent company”) may extend to all or any of those other companies. If the scheme does so extend, it is called a “group scheme”, as before (see sub-paragraph (2)).
3256.In sub-paragraph (3), the term “constituent company” replaces the term “participating company”. This change, which reflects corresponding changes made in Schedules 2 and 4, has been made on the basis that these Schedules necessarily make numerous references to “participants” and to people who “participate”, so that the use of another term is advantageous.
3257.ESC B27 enables certain jointly owned companies to participate in group schemes. Sub-paragraph (4) is a signpost to paragraph 46, which gives statutory effect to that concession.
3258.In order to distinguish the meaning from more usual uses of “parent company”, the top company in a group scheme has the label “parent scheme company”.
Part 2: General requirements for approval
Paragraph 4: General requirements for approval: introduction
3259.This paragraph derives from part of paragraph 1(1) of Schedule 9 to ICTA. The difference stems from the new approach of providing its own introduction to each type of requirement. This new layout is also a feature of the succeeding Parts of this Schedule.
Paragraph 5: General restriction on contents of scheme
3260.This paragraph derives from paragraph 2(1) of Schedule 9 to ICTA. It sets out the proposition in that sub-paragraph (that a scheme must not contain features, which are neither essential nor reasonably incidental to the specified purpose of the scheme).
Paragraph 6: All-employee nature of scheme
3261.This paragraph derives from paragraph 2(3)(a) and part of paragraph 26(1) of Schedule 9 to ICTA. As a whole the new paragraph makes it clear that a SAYE scheme has to be open to a wide category of employees and directors but can be even more comprehensive in its approach.
3262.The new entry in sub-paragraph (2)(d) contains a cross-reference to paragraph 11. This makes it clear that a scheme must not allow participation by anyone with a material interest.
3263.In sub-paragraph (3) the words “any description of employees or former employees” have been replaced by “any description of persons” who meet or have met the conditions in sub-paragraph (2). The inclusion of former employees covers circumstances where the employee has left a group scheme company for an associated company, which is not within the group scheme. The wording confirms that the provision applies to directors and secondly makes it clear that former employees can meet the required conditions. See Change 166 in Annex 1.
3264.Sub-paragraph (4) emphasises the “let-out” in paragraph 2(3)(a) of Schedule 9 to ICTA. The words “any provision required or authorised” by the provisions of this Schedule may also be found in the SIP code (see Schedule 2) and more properly reflect the various ways the rules are expressed.
Paragraph 7: Participation on similar terms
3265.This paragraph derives from the final part of paragraph 26(1) and from paragraph 26(2) of Schedule 9 to ICTA.
3266.This paragraph provides that there must be similar terms for every person who participates in the scheme, but that certain factors, such as length of service, may be taken into account. The definition of “participate” is in paragraph 2(2).
3267.Although, in general, references to “rights” have been changed to “share options”, in the context of sub-paragraph (2) “rights” has been retained to make it clear that this covers the full participatory rights, that is the rights to obtain as well as to exercise share options.
Paragraph 8: No preferential treatment for directors and senior employees
3268.This paragraph derives from paragraph 2(3)(b) and (4) Schedule 9 to ICTA. The provision is intended to prevent a group of companies from arranging among its members to set up a scheme to favour the highly paid. These are described in the heading as “senior” to avoid the confusion with earlier benefits legislation, which referred to higher paid employees.
3269.The arrangement envisaged here is the setting up of a scheme in which the only group companies participating would be those employing the persons in the group whom it was designed to benefit on a selective basis. The wide definition of “a group of companies” in sub-paragraph (2) (rewriting paragraph 2(4) of Schedule 9 to ICTA) may accordingly go beyond the group companies in the group scheme.
Part 3: Eligibility of individuals to participate in scheme
Paragraph 9: Requirements relating to the eligibility of individuals: introduction
3270.This paragraph lists the two requirements relating to the eligibility of individuals and partly derives from paragraph 1(1) of Schedule 9 to ICTA.
Paragraph 10: The employment requirement
3271.This paragraph derives from paragraph 26(3) of Schedule 9 to ICTA and provides that the individual must be a director or an employee of the scheme organiser (or a constituent company in a group scheme) at the time of participation in the scheme. The effect of ESC B27, which is now codified in paragraph 46 of this Schedule, is that employment in jointly owned companies as defined there can also qualify.
3272.There are exceptions to this rule. Paragraphs 19 and 21(1)(e) and (f) of Schedule 9 to ICTA are applied so that rights under the scheme may be exercised after changes have occurred which would otherwise mean the requirement was not met. No reference is made in the source legislation to paragraph 18 of Schedule 9 to ICTA. This paragraph which is rewritten as paragraph 32 of this Schedule, allows the option to be exercised up to one year after the option holder dies.
3273.It is the practice to treat schemes as if paragraph 18 of Schedule 9 to ICTA did not infringe the requirement. The scope of the disregard is made clear in sub-paragraph (2) by stating that this requirement is not infringed by a provision required or authorised by this Schedule. See Note 68 in Annex 2.
Paragraph 11: The “no material interest” requirement
3274.This paragraph derives from paragraph 8 of Schedule 9 to ICTA and from section 187(3) of ICTA and there are some drafting changes.
3275.It is the introductory provision which precludes admission into the scheme of an individual with a “material” interest in a close company whose shares are subject to the option or its parent company (or certain members of a consortium).
3276.The exact length of the preceding 12-month period has been clarified. It is expressed so as to include the “trigger date”, that is the date when the test is made. By so including it explicitly, the period is shorter by one day and so in favour of the taxpayer.
3277.The interests of the option holder are aggregated with those of any associates. “Associate” is defined in paragraphs 14 to 16 of this Schedule.
3278.The definition of close companies is subject to sections 414 and 415 of ICTA and there is now a short explanatory summary of those sections.
Paragraph 12: Meaning of “material interest”
3279.The definition of material interest is imported here from section 187(3) of ICTA. The capped percentage is applied to both the straightforward control through share capital and other more indirect routes. The layout mirrors the similar rules in the new (FA 2000) schemes.
3280.Unlike in the new (FA 2000) schemes this provision applies to close companies only, see paragraph 11(1). Redundant wording in section 187(3) of ICTA has been removed (the reference to “where the company is a close company”).
Paragraph 13: Material Interest: options and interests in SIPs
3281.This paragraph extends the previous paragraph; shares subject to an option are to be counted for the material interest test. This derives from paragraph 38 of Schedule 9 to ICTA. Under sub-paragraph (3) if the shares of an option holder which have not yet been issued are taken into account the total share capital is similarly increased.
3282.A disregard has been introduced for the unappropriated shares held by trustees of a SIP trust on the lines of the EMI code and similar to that contained in paragraph 39 of Schedule 9 to ICTA for approved profit sharing (APS) schemes. See Change 167 in Annex 1.
3283.Paragraph 39 of Schedule 9 to ICTA (the disregard for shares held in APS schemes) has not been reproduced in this Schedule. It is contained in Part 8 of Schedule 7 (Transitionals and savings).
Paragraph 14: Meaning of “associate”
3284.This paragraph also supplements paragraph 12 of this Schedule. It contains the definition of “associate”; and is in its turn supplemented by paragraphs 15 and 16 of this Schedule. The paragraph derives from sections 187(3) and 417(3) and (4) of ICTA (in the first two cases, parts of those subsections), and continues the pattern of bringing into the main text the ancillary explanations needed to understand the expression “material interest”.
3285.The company in sub-paragraph (1)(c) is identified as the company mentioned in paragraph 11(2) of this Schedule. This is also copied in later paragraphs to which it is relevant. This makes explicit both interpretation and practice, thereby limiting the scope of the definition of associate in the case of a trust or estate. The term “personal representatives” is defined in section 721(1). See Change 159 in Annex 1.
3286.In sub-paragraph (3), the definition of “relative” has been slightly amended.
Paragraph 15: Meaning of “associate”: trustees of employee benefit trust
3287.This paragraph supplements paragraph 14 of this Schedule and contains provisions that apply where an individual is interested as a beneficiary of an employment benefit trust. The paragraph derives from paragraph 40 of Schedule 9 to ICTA.
3288.This paragraph has counterparts in Schedules 2, 4 and 5 to this Act. Chapter 11 of Part 7 (Supplementary provisions) defines the expression “employee benefit trust”, and deals with further matters arising when payments from employee benefit trusts are made. There are references to provisions in that Chapter in the later provisions of this paragraph.
3289.Sub-paragraph (3) is new. It is modelled on EMI and SIP and amplifies the approach in paragraph 40(1) of Schedule 9 to ICTA, now reflected in sub-paragraph (2) of this paragraph. This ensures that the test in sub-paragraph (2) works satisfactorily.
Paragraph 16: Meaning of “associate”: trustees of discretionary trust
3290.This derives from paragraph 37 of Schedule 9 to ICTA (and sub-paragraph (3) of section 187(4) of ICTA) and provides a disregard from association where an individual disclaims an interest in a discretionary trust.
3291.Paragraph 37(2) of Schedule 9 to ICTA and the reference to 14 November 1986 in paragraph 37(3) have not been rewritten as these are spent.
3292.The references to disclaimers or releases executed “under seal” (from sub-paragraphs (3) and (5) of the paragraph 37) have been omitted, because section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 abolished the requirement for a seal in the case of deeds executed by an individual.
Part 4: Shares to which schemes can apply
Paragraph 17: Requirements relating to shares that may be subject to share options: introduction
3293.This is the introductory paragraph to this Part derived from but also elaborating on paragraph 9 of Schedule 9 to ICTA. These requirements relate to the type of shares that can be subject to approved options within the scheme.
3294.In sub-paragraph (2), a new label is attached to these shares, “eligible” shares. The shares are those “which may be acquired by the exercise of” the options. This is in line with the reference to acquisition in paragraph (9)(1) of Schedule 9 to ICTA, (and the SIP definition of eligible shares).
Paragraph 18: Shares must be ordinary shares of certain companies
3295.This paragraph provides that eligible shares must form part of the ordinary share capital of a company with characteristics specified in this paragraph. The paragraph derives from paragraph 10 of Schedule 9 to ICTA.
Paragraph 19: Requirements as to listing
3296.This follows paragraph 11 of Schedule 9 to ICTA, but the interpretation of paragraph 11(c) is assisted by its division into sub-paragraph (1)(c) and (2) which introduces a new label, “a listed company”.
3297.Eligible shares have to be in a listed company, a company under the control of a listed company or in an independent company.
Paragraph 20: Shares must be fully paid up and not redeemable
3298.This paragraph provides that eligible shares must be fully paid up and not redeemable. It derives from part of paragraph 12(1) of Schedule 9 to ICTA.
Paragraph 21: Only certain kinds of restriction allowed
3299.This paragraph takes the material from the rest of paragraph 12 of Schedule 9 to ICTA and covers the rules about the kind of restrictions permitted for eligible shares.
3300.Broadly restrictions are not allowed unless they apply to all shares in the same class. There is an exception. This is contained in sub-paragraphs (2) and (3) and derives from sub-paragraphs (2) and (3) of paragraph 12 of Schedule 9 to ICTA. This allows companies to require ex-employees to dispose of their shares; this will usually be to the existing shareholders.
3301.In sub-paragraph (2)(a) and (b) “or offered for sale” covers the situation in which employees cannot actually secure the sale of their shares. See Change 168 in Annex 1.
3302.In sub-paragraph (5) a reference to section 74(4) of the Financial Services and Markets Act 2000 has been inserted to update the reference to the Model Code issued by the Stock Exchange, in paragraph 13(2) of Schedule 9 to ICTA. See also Change 168 in Annex 1.
3303.Sub-paragraph (6) enacts the contents of a Revenue Press Release, concerning the “directors veto”, issued on 11 June 1985. See also Change 168 in Annex 1.
3304.There is a new sub-paragraph (7), which gives statutory effect to the Inland Revenue’s interpretation of the reference in paragraph 12 of Schedule 9 to ICTA to “articles of association”. See also Change 168 in Annex 1, which refers to Note 44 in Annex 2.
Paragraph 22: Requirements as to other shareholdings
3305.This paragraph imposes a requirement relating to the majority of the issued share capital of the same class as the eligible shares. The paragraph derives from paragraph 14(1) and (3) of Schedule 9 to ICTA. Its purpose is to prevent the manipulation of a company’s share capital.
3306.This paragraph provides that the majority of the shares in the same class as the eligible shares must be either “employee-control shares” or “open market shares”. The label “open market shares” is new, and has been introduced to help understanding. Paragraph 14(2) has not been rewritten as it is concerned with APS.
Part 5: Requirement for linked savings scheme
Paragraph 23: Requirements as to linked savings scheme: introduction
3307.This paragraph lists the requirements relating to linked savings schemes that must be met before a SAYE option scheme may be approved. This is partly derived from paragraph 1(1) of Schedule 9 to ICTA.
Paragraph 24: Payment for shares to be linked to approved savings schemes
3308.This paragraph derives from paragraph 16(1) of Schedule 9 to ICTA. It introduces the link with a certified contractual savings scheme, “the CCS scheme”, defined in sub-paragraph (2). The money used to exercise an option cannot exceed the repayments and interest from the CCS scheme.
3309.The contents of sub-paragraphs (2) and (3) of paragraph 16 of Schedule 9 to ICTA are spent.
3310.The words “to them”, which carried no obvious meaning and are therefore redundant, have been deleted.
Paragraph 25: Requirements as to contributions to savings schemes
3311.This paragraph derives from paragraph 24 of Schedule 9 to ICTA. It supplements the previous paragraph by ensuring that the contributions under the CCS scheme will result in a repayment that will meet the option price. It also sets a maximum and caps a minimum for monthly contributions.
3312.“The option price” has been defined as “the amount payable” to reflect the overall cost of the acquisition of shares on exercise of the option. A further clarification has been introduced, the reference to “the maximum number of shares” that can be acquired under the option, to identify the option price more precisely.
Paragraph 26: Repayments under a savings scheme: whether bonuses included
3313.This paragraph derives from part of paragraph 17 of Schedule 9 to ICTA. It also supplements paragraph 24 of this Schedule by determining what happens to the bonus element of repayments.
3314.There is a reference to the distinction between the maximum and other bonuses, which helps understanding of the application of paragraph 30 of this Schedule.
3315.To deal with any potential confusion in the references to schemes, a SAYE option scheme has been identified in sub-paragraph (3).
Part 6: Requirements etc. relating to share options
Paragraph 27: Requirements etc. relating to share options: introduction
3316.This is another introductory paragraph, based on paragraph 1(1) of Schedule 9 to ICTA. It lists the requirements relating to share options.
Paragraph 28: Requirements as to price for acquisition of shares
3317.This paragraph derives from paragraph 25 of Schedule 9 to ICTA; and contains the rule that the exercise price for the option must be not less than 80% of the market value of the shares at the time of the grant of the option. Sub-paragraph (2) allows this price to be fixed in advance of the grant if agreed between the Inland Revenue and the scheme organiser.
3318.The decision was taken to retain “manifestly” in sub-paragraph (1). The word is interpreted to mean variations of “evidently”, “clearly” and “obviously”.
3319.Sub-paragraph (3) extends the scope for changes, which are permitted to occur as a result of a variation in the share capital. Paragraph 25 of Schedule 9 to ICTA refers only to price, but in reality the number and description of the shares may be affected. This and the necessity of getting Inland Revenue approval in advance (sub-paragraph (4)) have been recognised in practice. See Change 169 in Annex 1.
Paragraph 29: Share options must not be transferable
3320.This paragraph provides that the participant may not transfer share options. It derives from part of paragraph 22 of Schedule 9 to ICTA.
3321.There is a new sub-paragraph (2) which provides a signpost to paragraph 32 which deals with the position after the death of a participant.
Paragraph 30: Time for exercising options: general
3322.This paragraph derives from the remaining parts of paragraphs 17 and 22 of Schedule 9 to ICTA. It sets out the start and the end of the period during which an option must be exercised, and then indicates the various exceptions to this rule.
Paragraph 31: Requirement to have a “specified age”
3323.This paragraph, which derives from paragraph 8A of Schedule 9 to ICTA, explains what is meant by the expression “specified age” and indicates the paragraphs of this Schedule where this definition is relevant.
Paragraph 32: Exercise of options: death
3324.This paragraph derives from paragraph 18 of Schedule 9 to ICTA. The paragraph allows the exercise of an option after the option holder’s death.
3325.The reference to the period of six months after the bonus date in sub-paragraph (b) now makes it clear that this rule applies to a death on the bonus date.
Paragraph 33: Exercise of options: reaching specified age without retiring
3326.This paragraph applies where an option holder reaches the specified age, but has not retired. The paragraph derives from paragraph 20 of Schedule 9 to ICTA and also part of paragraph 22 of that Schedule.
Paragraph 34: Exercise of options: scheme-related employment ends
3327.This paragraph derives from paragraphs 19 and 21(1)(e) of Schedule 9 to ICTA, and draws on material in paragraph 22 of that Schedule.
3328.The paragraph deals with the various circumstances in which an employee may leave “scheme-related employment”, a term defined in sub-paragraph (7).
3329.The effect of the various situations has been clarified and one more significant revision to the situation set out in former paragraph 21(1)(e). This is to link new sub-paragraph (5) to sub-paragraph (4), to emphasise that this provision is required to enable the option to be exercised within the first three years (though income tax relief is not available in these circumstances).
3330.Paragraph 21(3) of Schedule 9 to ICTA is spent.
Paragraph 35: Time when scheme-related employment ends
3331.This derives from paragraph 23 of Schedule 9 to ICTA. The import of the definition of associated company derives from section 187(2) of ICTA.
3332.This is in part an anti-avoidance provision and complex in application. The position has been clarified: an employee is not regarded as leaving the group scheme until that employee has left any associated company of the scheme organiser.
3333.As regards sub-paragraph (3), the reference in paragraph 23 of Schedule 9 to ICTA to a company under the grantor’s control has been omitted, because such a company is also an “associated company”.
3334.There is a new sub-paragraph (5), to make it quite clear that paragraph 32 of this Schedule, rather than the rules in this paragraph, govern the situation after the death of an option holder.
Paragraph 36: Exercise of options: employment in associated company at bonus date
3335.This paragraph derives from paragraph 21(1)(f) of Schedule 9 to ICTA. It enables a person who, on the bonus date, is an employee of a company that is an associated company but not a constituent company to exercise the options within six months of that date. Paragraph 21(4) has not been rewritten. It is covered by the transitional provisions in Schedule 7 to this Act.
Paragraph 37: Exercise of options: company events
3336.This paragraph derives from the remaining parts of paragraph 21 of Schedule 9 to ICTA. It deals with a number of events, which can occasion early exercise of an option.
3337.This paragraph brings out more clearly when the relevant date occurs in relation to these events. The expression “the relevant date” is introduced in sub-paragraph (1).
Part 7: Exchange of share options
Paragraph 38: Exchange of options on company reorganisation
3338.This paragraph is the first of two that rewrite paragraph 15 of Schedule 9 to ICTA. The remainder of that paragraph is rewritten in paragraph 39 of this Schedule.
3339.This paragraph explains the circumstances in which there may be a “rollover” of share options. The layout is similar to that in paragraph 39 of Schedule 5 to this Act (EMI).
3340.Sub-paragraphs (5) to (8) of paragraph 15 of Schedule 9 to ICTA have not been rewritten as they are spent.
Paragraph 39: Requirements about share options granted in exchange
3341.This completes the picture introduced in paragraph 38 of this Schedule and reproduces the part of paragraph 15 of Schedule 9 to ICTA which sets out the rules on the new options that can be received on exchange.
3342.Paragraph 15(4) of Schedule 9 to ICTA has been divided, and has been rewritten as sub-paragraphs (5) and (6) of this paragraph.
3343.The cross-reference to paragraph 10(b) and (c) of Schedule 9 to ICTA at the end of paragraph 15(1) of that Schedule has been replaced by a cross-reference to paragraph 18 in sub-paragraph (2)(b) and the meaning of this has been clarified. The new options can relate to shares in the acquiring company or in a company which controls the acquiring company.
Part 8: Approval of schemes
Paragraph 40: Application for approval
3344.This paragraph deals with the mechanics of the application for approval of a SAYE option scheme. The paragraph derives from part of paragraph 1(1) and paragraph 1(2) of Schedule 9 to ICTA.
3345.Sub-paragraph (3) states that, after the Inland Revenue have reached their decision, they must give notice of their decision to the scheme organiser. See Change 170 in Annex 1.
Paragraph 41: Appeal against refusal of approval
3346.This paragraph derives from most of paragraph 5 of Schedule 9 to ICTA. (Sub-paragraph (c) of paragraph 5 relates to approved profit sharing schemes.) The procedure, in paragraph 5 of Schedule 9 to ICTA, is that a “matter” is referred to the Special Commissioners for them to “hear and determine the matter in like manner as an appeal” if the Inland Revenue refuse to approve the scheme. Sub-paragraph (1) provides that the scheme organiser may appeal to the Special Commissioners.
3347.The change to a straightforward appeal procedure is intended to simplify matters. Section 48(2) of TMA 1970 provides that various provisions of that Act, as regards proceedings before the Commissioners, apply to “appeals other than appeals against assessments” and to “proceedings…to be heard and determined in the same way as an appeal”. For the purposes of this paragraph of Schedule 3, there is therefore no real difference in law or practice between provisions that refer to an appeal and those that refer to proceedings where the Special Commissioners shall “hear and determine the matter in like manner as an appeal”. See Change 171 in Annex 1.
3348.Sub-paragraphs (3) and (4) now provide that the Special Commissioners may specify the date from which the scheme is to be treated as approved. See Change 171 in Annex 1.
Paragraph 42: Withdrawal of approval
3349.This paragraph derives from paragraph 3(1) of Schedule 9 to ICTA. The rewritten legislation includes the use of a new label, a “disqualifying event”. This expression does not occur in Schedule 9 to ICTA, but it does occur in the SIP code and in the EMI code.
3350.Sub-paragraph (1) has been expanded to include a requirement that the Inland Revenue give notice of their withdrawal of approval. See Change 170 in Annex 1.
3351.In sub-paragraph (3), it is made clear that SAYE option holders are protected in relation to their existing approved options if approval of a scheme is withdrawn.
3352.Paragraphs 3(2) and (3) of Schedule 9 to ICTA relate to approved profit sharing schemes.
Paragraph 43: Approval ineffective after unapproved alteration
3353.This paragraph derives from paragraph 4 of Schedule 9 to ICTA. An unapproved alteration to an approved SAYE option scheme is ineffective after the date of the alteration. The rule is clarified by the addition of the words “of the scheme” in the final line of sub-paragraph (1).
3354.Sub-paragraph (2) is new. It introduces an express requirement for the Inland Revenue to notify the scheme organiser of their decision to approve or not to approve an alteration. See Change 170 in Annex 1.
Paragraph 44: Appeal against withdrawal of approval etc.
3355.This paragraph derives from paragraph 5 of Schedule 9 to ICTA.
3356.As in the case of paragraph 41, sub-paragraph (2) provides that the scheme organiser may appeal to the Special Commissioners, as opposed to requiring the Special Commissioners to “hear and determine the matter in like manner as an appeal”. See Change 171 in Annex 1.
3357.The change to a straightforward appeal procedure is intended to simplify matters. Section 48(2) of TMA 1970 provides that various provisions of that Act, as regards proceedings before the Commissioners, apply to “appeals other than appeals against assessments” and to “proceedings…to be heard and determined in the same way as an appeal”. For the purposes of this paragraph of Schedule 3, there is therefore no real difference in law or practice between provisions that refer to an appeal and those that refer to proceedings where the Special Commissioners shall “hear and determine the matter in like manner as an appeal”.
3358.The contents of paragraph 5(b) of Schedule 9 to ICTA have not been reproduced. This provision refers to the situation where the Board approved a SAYE scheme subject to a condition and considers that the condition has not been met. There is no longer any reference in the legislation to a conditional approval and no practical experience of paragraph 5(b) operating.
Part 9: Supplementary provisions
Paragraph 45: Power to require information
3359.This paragraph derives from paragraph 6 of Schedule 9 to ICTA and gives the Inland Revenue power to obtain information. The words “think necessary” have been replaced with “reasonably require”. See Change 172 in Annex 1.
3360.This provision, as set out in sub-paragraph (2)(a)(ii), also covers liability to capital gains tax.
3361.Sub-paragraph (3) clarifies the operation of the time limit for providing information by making the period run from the date of the notice. Also the period has been extended from 30 days to 3 months. See Change 172 in Annex 1.
Paragraph 46: Jointly owned companies
3362.This paragraph gives statutory effect to ESC B27, so far as it relates to SAYE option schemes. It corresponds to paragraph 34 in Schedule 4 to this Act, for CSOP schemes. See Change 173 in Annex 1.
Paragraph 47: Meaning of “associated company”
3363.This paragraph derives from the definition of associated company in section 187(2) of ICTA.
Paragraph 48: Minor definitions
3364.This paragraph takes definitions from section 187(2) and (7) of ICTA.
Paragraph 49: Index of defined expressions
3365.This paragraph consists of an index of expressions defined or explained for the purposes of the SAYE code.
Schedule 4: Approved Csop Schemes
Overview
3366.This Schedule, which is introduced in Chapter 8 of Part 7, deals with the rules relating to approved CSOP option schemes. The legislation relating to CSOP option schemes, which is contained in Chapter 8 of Part 7 and in this Schedule, is called “the CSOP code”, a term introduced in section 521. Chapter 8 of Part 7 deals with the tax exemptions available for participants in an approved CSOP option scheme.
3367.The legislation relating to these schemes derives from Schedule 9 to ICTA; many of the definitions are supplied by section 187 of ICTA.
3368.This Schedule contains further provisions relating to CSOP option schemes. After the introductory Part (Part 1) it deals with the following matters:
it specifies the requirements that a CSOP option scheme must meet in order to be “approved” for the purposes of the CSOP code (in Parts 2 to 6);
it deals with the procedural aspects of the approval of schemes and the withdrawal of approval (in Part 7); and
it deals with supplementary matters (in Part 8).
3369.The majority of the provisions in this Schedule are therefore concerned with the various requirements that CSOP option schemes must meet before they may be “approved”. On this topic the general policy has been to place the various Parts in an order consistent with that to be found in the legislation relating to other share schemes. The various requirements have been placed in a different order from that found in Schedule 9 to ICTA. Part 2 of this Schedule deals with the general requirements that apply in all cases; Part 3 with the requirements relating to the eligibility of individual employees; and Part 4 with the types of shares to which schemes can apply. The following Parts then deal with requirements relating to share options (Part 5) and the exchange of options (Part 6).
3370.Where it seems helpful the opportunity has been taken to list the requirements relevant for a Part. This procedure is the same as that adopted in Schedule 2 for the SIP code and Schedule 5 for the EMI codes, where the procedure represents a development of layout in Schedule 8 and Schedule 14 to FA 2000.
3371.Share options are described as being granted rather than obtained in most contexts. This ties in with the terminology in EMI.
3372.Where appropriate references have been changed from “person” to “individual”.
Part 1: Introduction
Paragraph 1: Approval of CSOP schemes
3373.This paragraph indicates the contents of this Schedule (in sub-paragraph (1)) and the sub-paragraphs into which it is divided (in sub-paragraphs (2)to (4)). It mirrors the opening paragraphs of Schedules 2, 3 and 5. This paragraph has no counterpart in the present legislation. The intention is to help users to understand the subject matter of the Schedule and to locate relevant material.
Paragraph 2: CSOP schemes
3374.This paragraph contains definitions that apply generally for the purposes of the CSOP code. It derives from section 185(2) of ICTA and also from various paragraphs of Schedule 9 to ICTA, including paragraph 8, and continues the introductory theme.
3375.Sub-paragraph (1) contains the central definition of a “CSOP scheme”, set out earlier in section 521(4).
3376.Sub-paragraph (2) contains the definition of “participate” and derives from paragraph 26 of Schedule 9 to ICTA, for SAYE. This sub-paragraph also introduces the term “scheme organiser”. It is preferable to the term “grantor” (used in ICTA) as the company that sets up the scheme does not have to be the person who actually grants the option. There is also a definition of “participant”.
Paragraph 3: Group Schemes
3377.This paragraph is concerned with group schemes, and derives from paragraph 1(3) and (4) of Schedule 9 to ICTA.
3378.Sub-paragraph (1) provides that a CSOP option scheme established by a company that controls other companies (a “parent company”) may extend to all or any of those other companies. If the scheme does so extend, it is called a “group scheme” as before (see sub-paragraph (2)).
3379.In sub-paragraph (3), the term “constituent company” replaces the term “participating company”. This change, which reflects corresponding changes made in Schedules 2 and 3, has been made on the basis that these Schedules necessarily make numerous references to “participants” and to people who “participate”, so that the use of another term is advantageous.
3380.ESC B27 enables certain jointly owned companies to participate in group schemes. Sub-paragraph (4) is a signpost to paragraph 34, which gives statutory effect to that concession.
3381.In order to distinguish the meaning from more usual uses of “parent company”, the top company in a group scheme has the label “parent scheme company”.
Part 2: General requirements for approval
Paragraph 4: General requirements for approval: introduction
3382.This paragraph derives from part of paragraph 1(1) of Schedule 9 to ICTA. The difference stems from the new approach of providing its own introduction to each type of requirement. This new layout is also a feature of the succeeding Parts of this Schedule.
Paragraph 5: General restriction on contents of scheme
3383.This paragraph derives from paragraph 2(1) of Schedule 9 to ICTA. It sets out the proposition in that sub-paragraph (that a scheme must not contain features, which are neither essential nor reasonably incidental to the specified purpose of the scheme).
Paragraph 6: Limit on value of shares subject to options
3384.This paragraph derives from paragraph 28 of Schedule 9 to ICTA. It caps the total value of options, which a person can obtain under CSOP schemes, at £30,000.
3385.In contrast to limits imposed in the EMI option scheme, if an option takes someone over the £30,000 limit, none of the option can qualify.
3386.In sub-paragraph (2), it is made clear that options which have already been exercised do not have to be included in the £30,000 limit.
Part 3: Eligibility of Individuals to participate in Scheme
Paragraph 7: Requirements relating to the eligibility of individuals: introduction
3387.This paragraph lists the two requirements relating to the eligibility of individuals and partly derives from paragraph 1(1) of Schedule 9 to ICTA.
Paragraph 8: The employment requirement
3388.This paragraph derives from paragraph 27 of Schedule 9 to ICTA (part of sub-paragraph (1) and sub-paragraph (4) of that paragraph). It requires a CSOP scheme to be only open to qualifying employees, defined in sub-paragraph (2) as employees other than directors, and to full-time directors of a company in the group scheme. The reference to the qualifying employee (who is not required to work full-time) has been made clearer by inserting an “a” before qualifying employee in sub-paragraph (1).
3389.The effect of ESC B27, now codified by paragraph 34 of this Schedule, is that employment in a jointly owned company as defined there can also qualify.
Paragraph 9: The “no material interest” requirement
3390.This paragraph derives from paragraph 8 of Schedule 9 to ICTA and from section 187(3) of ICTA and there are some drafting changes.
3391.It is the introductory provision, which precludes admission into the scheme of an individual with a “material” interest in a close company whose shares are subject to the option or its parent company (or certain members of a consortium).
3392.The exact length of the preceding 12-month period has been clarified. It is expressed so as to include the “trigger date”, that is the date when the test is made. By so including it explicitly, the period is shorter by one day and so in favour of the taxpayer.
3393.The interests of the option holder are aggregated with those of any associates. “Associate” is defined in paragraphs 12 to 14 of this Schedule.
3394.The definition of close companies is subject to sections 414 and 415 of ICTA and there is now a short explanatory summary of those sections.
Paragraph 10: Meaning of “material interest”
3395.The definition of material interest is imported here from section 187(3) of ICTA. The capped percentage is applied to both the straightforward control through share capital and other more indirect routes. The layout mirrors the similar rules in the new (FA 2000) schemes.
3396.Unlike in the new (FA 2000) schemes this provision applies to close companies only, see paragraph 9(1) of this Schedule. Redundant wording in section 187(3) of ICTA has been removed (the reference to “where the company is a close company”).
Paragraph 11: Material Interest: options and interests in SIPs
3397.This paragraph extends the previous paragraph; shares subject to an option are to be counted for the material interest test. This derives from paragraph 38 of Schedule 9 to ICTA. Under sub-paragraph (3) if the shares of an option holder which have not yet been issued are taken into account the total share capital is similarly increased.
3398.A disregard has been introduced for the unappropriated shares held by trustees of a SIP trust on the lines of that in the EMI code and similar to that contained in paragraph 39 of Schedule 9 to ICTA for approved profit sharing schemes (APS). See Change 167 in Annex 1.
3399.Paragraph 39 of Schedule 9 to ICTA, the disregard for shares held in APS, has not been reproduced in this Schedule. It is contained in Part 8 of Schedule 7 to this Act (Transitionals and savings).
Paragraph 12: Meaning of “associate”
3400.This paragraph also supplements paragraph 10 of this Schedule. It contains the definition of “associate”; and is in its turn supplemented by paragraphs 13 and 14 of this Schedule. The paragraph derives from sections 187(3) and 417(3) and (4) of ICTA (in the first two cases, parts of those subsections), and continues the pattern of bringing into the main text the ancillary explanations needed to understand the expression “material interest”.
3401.The company in sub-paragraph (1)(c) is identified as the company mentioned in paragraph 9(2) of this Schedule. This is also copied in later paragraphs to which it is relevant. This makes explicit both interpretation and practice, thereby limiting the scope of the definition of “associate” in the case of a trust or estate. The term “personal representatives” is defined in section 721(1). See Change 159 in Annex 1.
3402.In sub-paragraph (3), the definition of “relative” has been slightly amended.
Paragraph 13: Meaning of “associate”: trustees of employee benefit trust
3403.This paragraph supplements paragraph 14 of this Schedule and contains provisions that apply where an individual is interested as a beneficiary of an employee benefit trust. The paragraph derives from paragraph 40 of Schedule 9 to ICTA.
3404.This paragraph has counterparts in Schedules 2, 3 and 5 to this Act. Chapter 11 of Part 7 (Supplementary provisions) defines the expression “employee benefit trust”, and deals with further matters arising when payments from employee benefit trusts are made. There are references to provisions in this Chapter in the later provisions of this paragraph.
3405.Sub-paragraph (3) is new. It is modelled on EMI and SIP and amplifies the approach in paragraph 40(1) of Schedule 9 to ICTA, now reflected in sub-paragraph (2) of this paragraph. This ensures that the test in sub-paragraph (2) works satisfactorily.
Paragraph 14: Meaning of “associate”: trustees of discretionary trust
3406.This derives from paragraph 37 of Schedule 9 to ICTA (and sub-paragraph (3) of section 187(4) of ICTA) and provides a disregard from association where the individual disclaims an interest in a discretionary trust.
3407.Paragraph 37(2) of Schedule 9 to ICTA and the reference to 14 November 1986 in paragraph 37(3) of that Schedule have not been rewritten as these are spent.
3408.The references to disclaimers or releases executed “under seal” (from paragraph 37(3) and (5) of Schedule 9 to ICTA) have been omitted, because section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 abolished the requirement for a seal in the case of deeds executed by an individual.
Part 4: Shares to which schemes can apply
Paragraph 15: Requirements relating to shares that may be subject to share options: introduction
3409.This is the introductory paragraph to this Part derived from but also elaborating on paragraph 9 of Schedule 9 to ICTA. These requirements relate to the type of shares that can be subject to approved options within the scheme.
3410.In sub-paragraph (2), a new label is attached to these shares, “eligible” shares. The shares are those “which may be acquired by the exercise of” the options. This is in line with the reference to acquisition in paragraph (9)(1) of Schedule 9 to ICTA, (and the SIP definition of eligible shares).
Paragraph 16: Shares must be ordinary shares of certain companies
3411.This paragraph provides that eligible shares must form part of the ordinary share capital of a company with characteristics specified in this paragraph. The paragraph derives from paragraph 10 of Schedule 9 to ICTA.
Paragraph 17: Requirements as to listing
3412.This follows paragraph 11 of Schedule 9 to ICTA, but the interpretation of paragraph 11(c) is assisted by its division into sub-paragraph (1)(c) and (2) which introduces a new label, “a listed company”.
3413.Eligible shares have to be in a listed company, a company under the control of a listed company or in an independent company.
Paragraph 18: Shares must be fully paid up and not redeemable
3414.This paragraph provides that eligible shares must be fully paid up and not redeemable. It derives from part of paragraph 12(1) of Schedule 9 to ICTA.
Paragraph 19: Only certain kinds of restriction allowed
3415.This paragraph takes the material from the rest of paragraph 12 of Schedule 9 to ICTA and covers the rules about the kind of restrictions permitted for eligible shares.
3416.Broadly restrictions are not allowed unless they apply to all shares in the same class. There is an exception. This is contained in sub-paragraphs (2) and (3) and derives from sub-paragraphs (2) and (3) of paragraph 12 of Schedule 9 to ICTA. This allows companies to require ex-employees to dispose of their shares; this will usually be to the existing shareholders.
3417.In sub-paragraph (2)(a) and (b) “or offered for sale” covers the situation in which employees cannot actually secure the sale of their shares. See Change 168 in Annex 1.
3418.In sub-paragraph (5) a reference to section 74(4) of the Financial Services and Markets Act 2000 has been inserted to update the reference to the Model Code issued by the Stock Exchange, in paragraph 13(2) of Schedule 9 to ICTA. See also Change 168 in Annex 1.
3419.In CSOP there is a provision in sub-paragraph (6) dating from FA 1988 ensuring that certain terms of loans are not regarded as a restriction on shares. This provision was not applied to SAYE.
3420.Sub-paragraph (7) enacts the contents of a Revenue Press Release, concerning the “directors veto”, issued on 11 June 1985. See also Change 168 in Annex 1.
3421.There is a new sub-paragraph (8), which puts into the legislation the Inland Revenue’s interpretation of the reference in paragraph 12 of Schedule 9 to ICTA to “articles of association”. See also Change 168 in Annex 1, which refers to Note 44 in Annex 2.
Paragraph 20: Requirements as to other shareholdings
3422.This paragraph imposes a requirement relating to the majority of the issued share capital of the same class as the eligible shares. The paragraph derives from paragraph 14(1) and (3) of Schedule 9 to ICTA. Its purpose is to prevent the manipulation of a company’s share capital.
3423.This paragraph provides that the majority of the shares in the same class as the eligible shares must be either “employee-control shares” or “open market shares”. The label “open market shares” is new, and has been introduced to help understanding. Paragraph 14(2) has not been rewritten as it is concerned with APS.
Part 5: Requirements etc. relating to share options
Paragraph 21: Requirements etc. relating to share options: introduction
3424.This is another introductory paragraph, based on paragraph 1(1) of Schedule 9 to ICTA. It lists the requirements relating to share options. The “etc.” refers to the voluntary provisions, which are authorised by paragraphs 24 and 25 of this Schedule.
Paragraph 22: Requirements as to price for acquisition of shares.
3425.This paragraph derives from paragraph 29 of Schedule 9 to ICTA and contains the rule that the exercise price must be not less than the market value of the shares at the time of the grant of the option. Sub-paragraph (2) allows this price to be fixed in advance of the grant if agreed between the Inland Revenue and the scheme organiser.
3426.The word “manifestly” is retained in sub-paragraph (1). The word is interpreted to mean variations of “evidently”, “clearly” and “obviously”.
3427.Sub-paragraph (3) extends the scope for changes, which are permitted to occur as a result of a variation in the share capital. Paragraph 25 of Schedule 9 to ICTA refers only to price, but in reality the number and description of the shares may be affected. This and the necessity of getting Inland Revenue approval in advance (sub-paragraph (4)) have been recognised in practice. See Change 169 in Annex 1.
Paragraph 23: Share options must not be transferable
3428.This paragraph provides that the participant may not transfer share options. It derives from part of paragraph 27(2) of Schedule 9 to ICTA.
3429.There is a new sub-paragraph (2) which provides a signpost to paragraph 25 of this Schedule which deals with the position after the death of a participant.
Paragraph 24: Exercise of options: ceasing to be director or employee
3430.This derives from part of paragraph 27(1) of Schedule 9 to ICTA and permits a scheme to allow an option holder to exercise options after ceasing to be a full-time director or qualifying employee.
Paragraph 25: Exercise of options: death
3431.This derives from the other part of paragraph 27(2) of Schedule 9 to ICTA (part is reflected in paragraph 23 of this Schedule). It allows a scheme to provide for the exercise of an option after the option holder dies.
Part 6:Exchange of share options
Paragraph 26: Exchange of options on company reorganisation
3432.This paragraph is the first of two that rewrite paragraph 15 of Schedule 9 to ICTA. The remainder of that paragraph is rewritten in paragraph 27 of this Schedule.
3433.This paragraph explains the circumstances in which there may be a “rollover” of share options. The layout is similar to that in paragraph 39 of Schedule 5 to this Act (EMI).
3434.Sub-paragraphs (5) to (8) of paragraph 15 of Schedule 9 to ICTA have not been rewritten as they are spent.
Paragraph 27: Requirements about share options granted in exchange
3435.This completes the picture introduced in paragraph 26 of this Schedule and reproduces the part of paragraph 15 of Schedule 9 to ICTA which sets out the rules on the new options that can be received on exchange.
3436.Paragraph 15(4) of Schedule 9 to ICTA has been divided, and has been rewritten as sub-paragraphs (5) and (6) of this paragraph.
3437.The cross-reference to paragraph 10(b) and (c) of Schedule 9 to ICTA at the end of paragraph 15(1) of that Schedule has been replaced by a cross-reference to paragraph 16 in sub-paragraph (2)(b) and the meaning of this has been clarified. The new options can relate to shares in the acquiring company or in a company which controls the acquiring company.
Part 7: Approval of schemes
Paragraph 28: Application for approval
3438.This paragraph deals with the mechanics of the application for approval of a CSOP option scheme. The paragraph derives from part of paragraph 1(1) and paragraph 1(2) of Schedule 9 to ICTA.
3439.Sub-paragraph (3) states that, after the Inland Revenue have reached their decision, they must give notice of their decision to the scheme organiser. See Change 170 in Annex 1.
Paragraph 29: Appeal against refusal of approval
3440.This paragraph derives from most of paragraph 5 of Schedule 9 to ICTA. (Sub-paragraph (c) of paragraph 5 relates to approved profit sharing schemes.) The procedure, in paragraph 5 of Schedule 9 to ICTA, is that a “matter” is referred to the Special Commissioners for them to “hear and determine the matter in like manner as an appeal” if the Inland Revenue refuse to approve the scheme. Sub-paragraph (1) provides that the scheme organiser may appeal to the Special Commissioners.
3441.The change to a straightforward appeal procedure is intended to simplify matters. Section 48(2) of TMA 1970 provides that various provisions of that Act, as regards proceedings before the Commissioners, apply to “appeals other than appeals against assessments” and to “proceedings…to be heard and determined in the same way as an appeal”. For the purposes of this paragraph, there is therefore no real difference in law or practice between provisions that refer to an appeal and those that refer to proceedings where the Special Commissioners shall “hear and determine the matter in like manner as an appeal”. See Change 171 in Annex 1.
3442.Sub-paragraphs (3) and (4) now provide that the Special Commissioners may specify the date from which the Scheme is to be treated as approved. See Change 171 in Annex 1.
Paragraph 30: Withdrawal of approval
3443.This paragraph derives from paragraph 3(1) of Schedule 9 to ICTA. The rewritten legislation includes the use of a new label, a “disqualifying event”. This expression does not occur in Schedule 9 to ICTA, but it does occur in the SIP code and in the EMI code.
3444.Sub-paragraph (1) has been expanded to include a requirement that the Inland Revenue give notice of their withdrawal of approval. See Change 170 in Annex 1.
3445.Paragraphs 3(2) and (3) of Schedule 9 to ICTA relate to approved profit sharing schemes.
Paragraph 31: Approval ineffective after unapproved alteration
3446.This paragraph derives from paragraph 4 of Schedule 9 to ICTA. An unapproved alteration to an approved CSOP option scheme is ineffective after the date of the alteration. The rule is clarified by the addition of the words “of the scheme” in the final line of sub-paragraph (1).
3447.Sub-paragraph (2) is new. It introduces an express requirement for the Inland Revenue to notify the scheme organiser of their decision to approve or not to approve an alteration. See Change 170 in Annex 1.
Paragraph 32: Appeal against withdrawal of approval etc.
3448.This paragraph derives from paragraph 5 of Schedule 9 to ICTA.
3449.As in the case of paragraph 29 of this Schedule, sub-paragraph (2) provides that the scheme organiser may appeal to the Special Commissioners, as opposed to requiring the Special Commissioners to “hear and determine the matter in like manner as an appeal”. See Change 171 in Annex 1.
3450.The change to a straightforward appeal procedure is intended to simplify matters. Section 48(2) of TMA 1970 provides that various provisions of that Act, as regards proceedings before the Commissioners, apply to “appeals other than appeals against assessments” and to “proceedings…to be heard and determined in the same way as an appeal”. For the purposes of this paragraph, there is therefore no real difference in law or practice between provisions that refer to an appeal and those that refer to proceedings where the Special Commissioners shall “hear and determine the matter in like manner as an appeal”.
Part 8: Supplementary provisions
Paragraph 33: Power to require information
3451.This paragraph derives from paragraph 6 of Schedule 9 to ICTA and gives the Inland Revenue power to obtain information. The words “think necessary” have been replaced with “reasonably require”. See Change 172 in Annex 1.
3452.This provision, as set out in sub-paragraph (2)(a)(ii), also covers liability to capital gains tax.
3453.Sub-paragraph (3) clarifies the operation of the time limit for providing information by making the period run from the date of the notice. Also the period has been extended from 30 days to 3 months. See Change 172 in Annex 1.
Paragraph 34: Jointly owned companies
3454.This paragraph gives statutory effect to ESC B27, so far as it relates to CSOP schemes. It corresponds to paragraph 46 of Schedule 3 to this Act, for SAYE option schemes. See Change 173 in Annex 1.
Paragraph 35: Meaning of “associated company”
3455.This paragraph derives from the definition of associated company in section 187(2) of ICTA.
Paragraph 36: Minor definitions
3456.This paragraph takes definitions from section 187(2) and (7) of ICTA.
Paragraph 37: Index of defined expressions
3457.This paragraph consists of an index of expressions defined or explained for the purposes of the CSOP code.
Schedule 5: Enterprise Management Incentives
Overview
3458.This Schedule, which is introduced in Chapter 9 of Part 7, deals with the rules relating to qualifying options for the purposes of “the EMI code”. The legislation relating to EMI, which is contained in Chapter 9 of Part 7 and in this Schedule, is called “the EMI code”. This term was introduced in section 527. Chapter 9 of Part 7 deals with the tax exemptions available in connection with a qualifying EMI option.
3459.The legislation relating to these schemes derives from Schedule 14 to FA 2000 (introduced by section 62 of FA 2000). This Schedule was amended by Schedule 14 to FA 2001 and by SI 2001 No 3799.
3460.This Schedule contains further provisions relating to EMI. After the introductory Part (Part 1) it deals with the following matters:
it specifies the requirements that must be met in relation to a qualifying EMI option (in Parts 2 to 6);
it deals with the notification processes (in Part 7); and
it deals with supplementary matters (in Part 8).
3461.EMI is different from SAYE, CSOP and SIPs in that it is not a “scheme” or a “plan”, with an approval procedure and the administrative structure that goes with it. Nevertheless this Schedule follows the pattern in Schedules 8 and 14 to FA 2000 which has been developed in the Schedules in this Act for SAYE, CSOP and SIPs. So where it seems helpful the opportunity has been taken to list the requirements relevant for a Part in an introductory paragraph.
Part 1: Introduction
Paragraph 1: Enterprise management incentives: qualifying options
3462.This paragraph is a scene-setting paragraph explaining how the Schedule applies to determine what share options qualify under EMI and where within the Schedule the various requirements may be found. It derives from paragraph 1(1) and (2) of Schedule 14 to FA 2000.
3463.The connection between “relevant company” and “qualifying company” has been clarified in sub-paragraph (3)(b).
3464.Also there is a new definition of “appropriate time” in sub-paragraph (4). This term is used in the opening paragraphs in Parts 2 to 5 of this Schedule to demonstrate clearly that the requirements have to be met, when the option is granted. There is also a link back to this phrase in paragraph 44(7) of this Schedule, which provides the same clarification for Part 7. Part 6, which deals with company reorganisations, has its own timing rules in paragraph 43 of this Schedule.
Paragraph 2: Meaning of “the relevant company” and “the employer company”
3465.This paragraph defines the EMI terms “the relevant company” and “the employer company”. It derives from paragraph 1(3) of Schedule 14 to FA 2000.
Part 2: General requirements
Paragraph 3: General requirements: introduction
3466.This paragraph is introductory and derives from paragraph 8 of Schedule 14 to FA 2000.
Paragraph 4: Purpose of granting the option
3467.This section derives from paragraph 9 of Schedule 14 to FA 2000.
Paragraph 5: Maximum entitlement of employee: financial limit on unexercised options
3468.This paragraph derives from paragraph 10(1) to (3) and (6) to (8) of Schedule 14 to FA 2000 and sets out a limit of £100,000 on the value of shares in respect of which “unexercised qualifying options” are held by each individual employee. If the grant of an option causes this limit to be exceeded, then the option does not qualify under EMI so far as it relates to that excess. If the limit is already exceeded at the time that further options are granted, those further options do not qualify.
3469.There is no guidance in the legislation on the tax treatment when an option, that includes a qualifying element and a non-qualifying element, is partially exercised. The option agreement itself may provide guidance on this. Otherwise, in practice, the person exercising the option will be able to decide which part of the option was exercised, enabling the relief to be taken in the way that suits the option holder.
3470.This paragraph also contains information about how to arrive at the share values. Sub-paragraph (6)(a) makes it clear that the value of the shares for the £100,000 test is frozen at the time when the option is granted. This was the intention of the original clause and is the way the provision has been interpreted. As this is part of the definition of “unexercised qualifying options” it has an impact on the test in paragraph 7(1) of this Schedule and in turn on paragraphs 41 and 43 as well. See Change 177 in Annex 1.
Paragraph 6: Maximum entitlement of employee: further limit of 3 years
3471.This paragraph derives from paragraph 10(4) to (8) of Schedule 14 to FA 2000. If the limit set out in paragraph 5 has been reached, no further qualifying option can be granted for three years from the date of the grant of the last qualifying option.
Paragraph 7: Maximum value of options in respect of relevant company’s shares
3472.This paragraph sets out the limit on the value of shares in the relevant company that can be the subject of unexercised qualifying options. That limit is £3 million. This paragraph derives from paragraph 11 of Schedule 14 to FA 2000.
3473.There is a cross-reference in sub-paragraph (6) to the rules about the valuation of the shares subject to the option in paragraph 5(6) to (8) of this Schedule.
Part 3: Qualifying companies
3474.There is a considerable overlap in this Part between EMI and the investment schemes EIS, VCT and CVS, (the Enterprise Investment Scheme, Venture Capital Trusts and the Corporate Venturing Scheme).
Paragraph 8: Qualifying companies: introduction
3475.This paragraph is introductory and derives from paragraph 12 of Schedule 14 to FA 2000.
Paragraph 9: The independence requirement
3476.In order to qualify under EMI, a company must not be under the control of another company. This paragraph sets out the criteria for this independence requirement and derives from paragraph 13 of Schedule 14 to FA 2000.
Paragraph 10: The qualifying subsidiaries requirement
3477.This paragraph stipulates that if a company controls other companies, all the companies that it controls must be “qualifying subsidiaries”, as defined in paragraph 11 of this Schedule. This requirement derives from paragraph 14 of Schedule 14 to FA 2000.
Paragraph 11: Meaning of “qualifying subsidiary”
3478.This paragraph derives from paragraph 15 of Schedule 14 to FA 2000.
3479.This paragraph sets out the conditions that must be met if a company is to be a qualifying subsidiary of the company that controls it. The parent company cannot have ownership of less than 75% of a subsidiary.
3480.Sub-paragraph (3) extends the reference to “holding company” in sub-paragraph (2). See Change 174 in Annex 1.
3481.The paragraph also sets out how this requirement applies to particular circumstances such as when a subsidiary company is being wound up.
Paragraph 12: The gross assets requirement
3482.This paragraph sets out the gross assets test that a company must satisfy in order to qualify under EMI. It derives from paragraph 16 of Schedule 14 to FA 2000.
3483.The wording of this gross assets test is very brief. Inland Revenue Statement of Practice 2/00 expands upon it, explaining that gross assets are all the assets shown in a company’s balance sheet without any deductions for liabilities, and providing information about the application of United Kingdom accounting practice and which balance sheets should be used.
3484.The test in sub-paragraph (3) makes it clear that the computation requires the addition of the value of the gross assets of each member of the group.
Paragraph 13: The trading activities requirement: single company
3485.This paragraph specifies that a single company can only qualify under EMI if it is carrying on (or preparing to carry on) a qualifying trade, and that must be the only purpose for the company’s existence, aside from any incidental purpose. The paragraph also makes it clear that the holding and managing of property for the purposes of a qualifying trade may be disregarded. Sub-paragraph (3) includes signposts to the definition of “qualifying trade” in paragraph 15 of this Schedule and to the provisions regarding excluded activities in paragraphs 16 to 23 of this Schedule.
3486.The paragraph derives from paragraph 17(1), (4) and (7) of Schedule 14 to FA 2000.
Paragraph 14: The trading activities requirement: parent company
3487.This paragraph derives from the remainder of paragraph 17 of Schedule 14 to FA 2000. It contains the detail of the trading activities requirement for a parent company, which looks at the business of the whole group.
3488.The way “non-qualifying activities” is defined in paragraph 14(5)(c) has enabled the provisions in paragraphs 18 and 19 of this Schedule to be expressed in a positive way.
Paragraph 15: Meaning of “qualifying trade”
3489.This paragraph provides the definition of a qualifying trade as:
being carried on wholly or mainly in the United Kingdom;
being carried on with a view to making profits; and
not including (to any substantial degree) any excluded activities.
3490.The paragraph also explains to what extent research and development activities may be included.
3491.The material derives from paragraph 18 of Schedule 14 to FA 2000.
Paragraph 16: Excluded activities
3492.This paragraph lists the various activities that are excluded activities for the purposes of EMI. Some of these activities are described more fully in subsequent paragraphs of this Schedule, and this paragraph includes signposts to those subsequent explanatory provisions. It derives from paragraph 19 of Schedule 14 to FA 2000.
Paragraph 17: Excluded activities: wholesale and retail distribution
3493.This is an interpretative paragraph which draws the boundary around what may be considered as a wholesale or retail distribution activity. It derives from paragraph 20 of Schedule 14 to FA 2000.
Paragraph 18: Excluded activities: leasing of certain ships
3494.This derives from paragraph 21 of Schedule 14 to FA 2000.
3495.One of the excluded activities listed in paragraph 16 of this Schedule is leasing (including letting ships on charter). This paragraph relaxes this exclusion in specified circumstances. This material derives from paragraph 21 of Schedule 14 to FA 2000. A qualifying trade can include certain kinds of short-term ship leasing, provided that the conditions set out in this paragraph are met. This relaxation does not apply to oil rigs or pleasure craft, the leasing of which remains an excluded activity.
3496.The additional material in sub-paragraph (2) makes it clear that the requirements of sub-paragraph (4) do not have to be met in relation to oil rigs and pleasure craft.
3497.An error in sub-paragraph (4) of paragraph 21 of Schedule 14 to FA 2000 has been corrected. This part of the rule in Schedule 14 is unworkable in that it is not possible for both the owner and the charterer to be subsidiaries of the company carrying on the trade, which has necessarily to be the owner of the ship.
3498.Sub-paragraph (6) is modelled on the approach taken in section 297(7) of ICTA (the Enterprise Investment Scheme). See Change 175 in Annex 1.
Paragraph 19: Excluded activities: receipt of royalties or licence fees
3499.Another excluded activity listed in paragraph 16 of this Schedule is the receipt of royalties or licence fees. Paragraph 19, which derives from paragraph 22 of Schedule 14 to FA 2000, relaxes this line somewhat and allows a qualifying trade to include the receipt of royalties or licence fees in respect of certain intangible assets as described in this paragraph.
3500.Alterations to paragraph 14 of this Schedule have enabled this provision to be expressed positively.
3501.The reference to “normal accounting practice” has been replaced by “generally accepted accounting practice” in sub-paragraph (7). This is in line with the definition in section 103(1) of FA 2002.
Paragraph 20: Excluded activities: property development
3502.This is an interpretative paragraph, which draws the boundary around what may be considered as property development, one of the excluded activities listed in paragraph 16 of this Schedule. It derives from paragraph 23 of Schedule 14 to FA 2000.
Paragraph 21: Excluded activities: hotels and comparable establishments
3503.One of the excluded activities listed in paragraph 16 of this Schedule is the operation or management of a hotel or comparable establishment (or the management of property used as such). Paragraph 21,which derives from paragraph 24 of Schedule 14 to FA 2000, supplements the rule in paragraph 16.
Paragraph 22: Excluded activities: nursing homes and residential care homes
3504.Another excluded activity listed in paragraph 16 of this Schedule is the operation of a nursing home or a residential care home establishment (or the management of property used as such). Paragraph 22, which derives from paragraph 25 of Schedule 14 to FA 2000, supplements the rule in paragraph 16.
Paragraph 23: Excluded activities: provision of facilities for another business
3505.This paragraph adds to the list of excluded activities given in paragraph 16 of this Schedule, the provision of services to a business carried on by someone else. The exclusion applies if the business receiving the services consists largely of excluded activities (from the paragraph 16 list) and the person with a controlling interest in that business also has a controlling interest in the company providing the services. This material derives from paragraph 26 of Schedule 14 to FA 2000.
3506.To achieve the connection with excluded activities, in paragraph 26(1)(a) of Schedule 14 to FA 2000 there is a reference back to the term in paragraph 19(1) of Schedule 14. A problem with this is that in theory this could encompass activities, described as such in paragraph 19(1), but then “carved out” of this general exclusion (eg certain leasing of ships). It has been made clear that the excluded activities referred to in sub-paragraph (2)(a) are those activities after the “carve out” of those which can qualify (such as the leasing of ships in paragraph 18).
Part 4: Eligible employees
Paragraph 24: Eligible employees: introduction
3507.This paragraph is introductory and derives from paragraph 27 of Schedule 14 to FA 2000.
Paragraph 25: The employment requirement
3508.This paragraph derives from paragraph 28 of Schedule 14 to FA 2000 and explains that eligible employees must be employees of the relevant company or of a qualifying subsidiary company (if the relevant company is a parent company).
Paragraph 26: The requirement as to commitment of working time
3509.This paragraph sets out that eligible employees must spend at least 25 hours a week (or at least 75% of their working time, if less) on the business of the relevant company (or of the group if the relevant company is a parent company). Time off for illness and other types of leave are disregarded for the purposes of this test. This paragraph derives from paragraph 29(1) to (4) of Schedule 14 to FA 2000.
3510.One change from the material in paragraph 29 of Schedule 14 to FA 2000 is the reference to the employee as an “individual”, in both this and paragraph 27 of this Schedule. It is not possible for anyone other than an individual to be a qualifying employee.
3511.There is also no mention in this paragraph of the closing words of paragraph 29(4) of Schedule 14 to FA 2000, about an employee ceasing to be in relevant employment. These words have been rewritten in section 535(1)(a), with a cross-reference to paragraph 25 of this Schedule.
3512.There is a change to the wording of the “statutory threshold” in sub-paragraph (1), in the reference to the average amount per week of the employee’s committed time. See Change 176 in Annex 1 and the parallel change to section 535, Change 130.
3513.Another minor change to the law concerns the 75% element of the “statutory threshold”. The wording of paragraph 29(1) of Schedule 14 to FA 2000 did not make it clear that the reference to 75% is a minimum. See Change 176 in Annex 1.
Paragraph 27: Meaning of “working time”
3514.This paragraph derives from paragraph 29(5) and (6) of Schedule 14 to FA 2000. It sets out what is meant by “working time” for the purposes of paragraph 26 of this Schedule.
Paragraph 28: The “no material interest” requirement
3515.This paragraph sets out that to be “eligible” under EMI, employees cannot have a material interest in the relevant company (or any group company if the relevant company is a parent company). Nor may any associate of the employee have such a material interest if the employee is to be an “eligible employee”. This paragraph derives from paragraph 30(1), (2) and (4) of Schedule 14 to FA 2000.
Paragraph 29: Meaning of “material interest”
3516.This paragraph derives from paragraph 31 of Schedule 14 to FA 2000. It sets out what is meant by “material interest” for the purposes of paragraph 28 of this Schedule.
Paragraph 30: Material interest: options and interests in SIPs
3517.This paragraph explains what rights to acquire shares should be taken into consideration in deciding whether an employee has a material interest, and how and when such rights should be counted. It derives from paragraphs 30(3), 32 and 33 of Schedule 14 to FA 2000.
3518.This paragraph includes the part of paragraph 33 of Schedule 14 to FA 2000, which relates to SIPs. The rest of that paragraph that refers to APS (the profit sharing schemes approved under Schedule 9 to ICTA) has not been reproduced in this Schedule. It is contained in Part 8 of Schedule 7 to this Act (Transitionals and savings).
Paragraph 31: Meaning of “associate”
3519.This paragraph derives from paragraph 34 of Schedule 14 to FA 2000. It sets out what is meant by “associate” for the purposes of paragraph 28. The same definition is used for the different share schemes, and has been rewritten in the same way in each of Schedules 2, 3, 4 and 5 to this Act.
3520.The company in sub-paragraph (1)(c) is identified as the company mentioned in paragraph 28(2) of this Schedule. This is also copied in later paragraphs to which it is relevant. This makes explicit both interpretation and practice, thereby limiting the scope of the definition of “associate” in the case of a trust or estate.
3521.Sub-paragraph (2) is new. It links this paragraph with the two that follow.
3522.The definition of “relative” in sub-paragraph (3) reflects the meaning given to this term in paragraph 26(7) of Schedule 14 to FA 2000.
Paragraph 32: Meaning of “associate”: trustees of employee benefit trust
3523.The material interest test in paragraph 28 of this Schedule applies to a wide range of associates. Where an employee has an interest in shares subject to a trust, this includes the trustees of that settlement. If that settlement is an employment benefit trust, paragraph 32 ensures the trustees of that employment benefit trust do not count as associates (unless they do so because of some other link). This paragraph derives from paragraph 35 of Schedule 14 to FA 2000.
3524.Chapter 11 of Part 7 defines the expression “employee benefit trust”, and deals with further matters arising when payments from employee benefit trusts are made.
Paragraph 33: Meaning of “associate”: trustees of discretionary trust
3525.The material interest test in paragraph 28 of this Schedule is applied to a wide range of associates including, potentially, the trustees of a settlement. This paragraph applies where the company shares are held in a discretionary trust (ordinary meaning) of which the employee is a beneficiary but with only a very remote expectation of receiving anything from the trust. In such a case the trustees of that discretionary trust do not count as associates (unless they do so because of some other link). This paragraph derives from paragraph 36 of Schedule 14 to FA 2000.
Part 5: Requirements relating to options
Paragraph 34: Requirements relating to options: introduction
3526.This paragraph is introductory and derives from paragraph 37 of Schedule 14 to FA 2000.
Paragraph 35: Type of shares that may be acquired
3527.This paragraph sets out the requirement that, to qualify, an option may only be capable of being exercised to acquire shares that are:
part of the ordinary share capital of the company in question;
fully paid-up; and
not redeemable.
3528.This paragraph derives from paragraph 38 of Schedule 14 to FA 2000.
Paragraph 36: Option to be capable of exercise within 10 years
3529.This paragraph sets out the requirement that, in order to qualify under EMI, the option must be capable of being exercised within ten years. There is no minimum exercise period. This paragraph derives from paragraph 39 of Schedule 14 to FA 2000.
Paragraph 37: Terms of option to be agreed in writing
3530.This paragraph sets out the requirement that the option must take the form of a written agreement between the grantor of the option and the employee. It goes on to elaborate on the specific types of terms that have to be covered in that agreement. It derives from paragraph 40 of Schedule 14 to FA 2000.
Paragraph 38: Non-assignability of rights
3531.This paragraph explains that in order to qualify under EMI an option must not include any transferable rights. If the option includes a right for it to be exercised after the employee’s death, the right may not extend for more than one year after the employee’s death. It is not clear from the source legislation whether the one-year period includes any part or indeed the whole of the day on which the employee died. Sub-paragraph (b) clarifies this by referring to “one year after the date of the death” so if, for example, the employee dies at 2 pm on 1 May 2003, the option must be exercised before 2 May 2004.
3532.This paragraph derives from paragraph 41 of Schedule 14 to FA 2000.
Part 6: Company reorganisations
Paragraph 39: Company reorganisations: introduction
3533.This paragraph introduces the provisions in the rest of this Part of this Schedule and explains the term “company reorganisation”. In this context a “company reorganisation” is broadly where a company acquires control of another company whose shares are subject to an unexercised qualifying share option. This paragraph derives from paragraph 59 of Schedule 14 to FA 2000.
Paragraph 40: Meaning of “qualifying exchange of shares”
3534.Among the ways listed in paragraph 39 of this Schedule for a company to acquire control of another company is by a “qualifying exchange of shares”. Paragraph 40 sets out that a “qualifying exchange of shares” is an arrangement under which the new company issues shares in itself in exchange for acquiring all the shares in the old company, subject to certain conditions laid down in this paragraph. This paragraph derives from paragraph 60 of Schedule 14 to FA 2000.
Paragraph 41: Grant of replacement option
3535.Paragraph 41 derives from paragraph 61 of Schedule 14 to FA 2000. It sets out how, if a company reorganisation meets the required criteria set out in the preceding paragraph, a qualifying share option in the old company (“the old option”) is exchanged for an equivalent share option in the new company, “the new option”, to form a “replacement option”. The replacement option must meet certain conditions and must be granted within the time limit outlined in paragraph 42 of this Schedule.
3536.The new sub-paragraph (6) makes it clear that when valuing the shares that are subject to the replacement option, for the purpose of the tests in paragraphs 5 to 7 of this Schedule, the value of the shares in the acquired company, at the time when the old option was granted, is the measure of the valuation of the shares subject to the new option. See Change 177 in Annex 1.
Paragraph 42: Period within which replacement option must be granted
3537.This paragraph outlines the time limit on granting the replacement option mentioned in the preceding paragraph. That time limit depends on the circumstances under which the new company acquires control of the old company. The various possibilities are covered in sub-paragraphs (2) to (4).
3538.In sub-paragraphs (2) and (3) there is a six-month period time limit. The wording in the source legislation does not make it clear whether or not the six months start running on the day that the change in control occurs, or on the day after. Sub-paragraphs (2) and (3) clarify this by referring to “6 months after the date on which…”. So if, for example, the new company acquires control of the old company at 2pm on 1 January 2004, the replacement option must be granted before 2 July 2004.
3539.This paragraph derives from paragraph 62 of Schedule 14 to FA 2000.
Paragraph 43: Further requirements to be met as to replacement option
3540.This paragraph sets out various other conditions that must be met if the new option is to qualify as a replacement option for the purposes of EMI. This paragraph derives from paragraph 63 of Schedule 14 to FA 2000.
3541.As noted above, in relation to paragraphs 5 and 41 of this Schedule, the test in sub-paragraph (3)(b) (the maximum value of options under paragraph 7) should be applied to the new option and the acquiring company but the shares to be valued are those in the acquired company at the date of the grant of the old option. This is made clear in sub-paragraph (4). See Change 177 in Annex 1.
Part 7: Notification of option to Inland Revenue
Paragraph 44: Notice of option to be given to Inland Revenue
3542.A further requirement for an option to be a qualifying option is that its grant must be notified to the Inland Revenue within 92 days. This paragraph sets out this requirement, along with particulars of what information has to be included in that notification and who must make it. The wording in the source legislation does not make it clear whether the day upon which the option is granted is counted in the period of 92 days. Sub-paragraph (1) clarifies that the 92-day period only starts running the day after the date upon which the option is granted.
3543.This paragraph derives from paragraph 2 of Schedule 14 to FA 2000.
3544.In sub-paragraph (7) there is a cross- reference to the term “appropriate time”. This is a new definition in paragraph 1 of this Schedule and is helpful in this Part with, for example, the application of paragraph 46(3).
Paragraph 45: Correction of notice by Inland Revenue
3545.This paragraph gives the Inland Revenue authority to amend a notice given to it under the preceding paragraph. This paragraph also sets out how and when such a correction may be made. It derives from paragraph 3 of Schedule 14 to FA 2000.
3546.This paragraph sets out the time within which the Inland Revenue may amend a notice and the time within which the employer company may reject such a correction. The source legislation gives these time limits as “nine months after the day on which the notice…was given” and “three months from the date of issue of the notice of correction”. The time limit in each case starts running from the day after the day mentioned. Sub-paragraph (4) make this clearer for the time limit for the employer company by referring to “3 months after the date of issue of the notice”.
3547.The wording in sub-paragraph (4) of paragraph 3 of Schedule 14 to FA 2000 states that the employer company can give notice rejecting a correction without saying to whom the notice should be given. A reference to the Inland Revenue has been added in sub-paragraph (4). See Change 178 in Annex 1.
Paragraph 46: Notice of enquiry
3548.This paragraph gives the Inland Revenue authority to enquire whether an option is qualifying or not after a notice has been given under paragraph 44 of this Schedule. The paragraph describes the procedure that should be followed by the Inland Revenue in opening such an enquiry and the time limits for doing so. This paragraph derives from paragraph 4 of Schedule 14 to FA 2000.
3549.Sub-paragraph (5) of paragraph 46 of this Schedule makes it clear that a notice of enquiry can be given before the end of the 92-day notification period if the option is notified to the Inland Revenue before then. The closing date remains 12 months after the end of the 92-day period. See Change 178 in Annex 1.
Paragraph 47: Completion of enquiry: closure notices
3550.This paragraph sets out what happens when an enquiry as described in the preceding paragraph is completed. It provides for the issue of a closure notice, which must include details of the Inland Revenue’s decision as to whether the option in question qualifies under EMI. It also sets out how, to whom and when such a closure notice should be issued. This paragraph derives from paragraph 5(1) to (5) of Schedule 14 to FA 2000.
Paragraph 48: Completion of enquiry: application for closure notice to be given
3551.This paragraph derives from paragraph 5(6) to (9) of Schedule 14 to FA 2000. It sets out that the employer company (or in certain circumstances the individual concerned) has a right to apply to the Commissioners for a direction requiring the Inland Revenue to issue a closure notice as described in paragraph 47 of this Schedule.
Paragraph 49: Effect of enquiry
3552.This paragraph sets out how an enquiry impacts on the qualification of an option under EMI. The Inland Revenue’s decision given in the closure notice determines whether an option qualifies, although that decision may be subject to an appeal under paragraph 50 of this Schedule. The paragraph also explains the procedure if there is no enquiry. In this circumstance the option is taken as being a qualifying option under EMI. This paragraph derives from paragraph 6 of Schedule 14 to FA 2000.
Paragraph 50: Appeals
3553.This paragraph sets out that there is a right of appeal to the Commissioners against a decision by the Inland Revenue that either the grant of an option was not properly notified in accordance with paragraph 44 of this Schedule or that the option does not qualify under EMI. The right of appeal lies with the employer company, although if the decision concerns the “commitment of working time” test in paragraph 26 of this Schedule, it is also open to the individual concerned to appeal. This paragraph derives from paragraph 7 of Schedule 14 to FA 2000.
3554.The replacement of employer company or individual in sub-paragraph (3) with “appellant” makes it clear that only the appellant has the right to elect that the appeal is heard by the Special Commissioners.
3555.The appeal must be made within a 30 day time limit. The source legislation does not make it clear whether or not the 30 day period starts running on the day that the closure notice is given to the employer company or on the day after. Sub-paragraph (3) clarifies this by referring to “within 30 days after the date when the closure notice is given”. So if, for example, the closure notice is given during the course of the day on 1 March 2004 any appeal must be made before 1 April 2004.
Part 8: Supplementary provisions
Paragraph 51: Power to require information
3556.In order to carry out an enquiry as described in paragraph 46 of this Schedule, the Inland Revenue may require further information. This paragraph provides the Inland Revenue with the authority to issue a notice to a person requiring that person to provide such information.
3557.In sub-paragraph (2)(b), the authority also extends to cover information required to determine the tax liability of a person who has been granted a qualifying option. This covers liability to capital gains tax.
3558.There is a penalty for non-compliance with a notice issued under this paragraph. The consequential amendment to section 98 of TMA 1970 is contained in Schedule 6 to this Act.
3559.In sub-paragraph (1)(a) the words “reasonably require” replace the words “think necessary” in sub-paragraph (1)(a) of paragraph 64 of Schedule 14 to FA 2000. This change brings the terminology into line with SIPs (and with comparable provisions in Corporation Tax Self Assessment, known as CTSA). See Change 179 in Annex 1.
3560.Sub-paragraph (3) clarifies the operation of the time limit for providing information by making the minimum three month period start after the date of the notice.
3561.This paragraph derives from paragraph 64 of Schedule 14 to FA 2000.
Paragraph 52: Annual returns
3562.This paragraph sets out that a company must make a return to the Inland Revenue for any year during which its shares are subject to a qualifying option, prescribes when it should make the return and that the return should contain such information as the Inland Revenue may require. It derives from paragraph 65 of Schedule 14 to FA 2000.
3563.The time limit has been changed to “before 7 July” in line with the practice in this Act where it helps to refer to an exact date following the end of the tax year.
3564.As with paragraph 64 of Schedule 14 to FA 2000, there is a penalty for non-compliance with a notice issued under this paragraph. The consequential amendment to section 98 of TMA 1970 is contained in Schedule 6 to this Act.
Paragraph 53: Compliance with time limits
3565.This paragraph allows an extension to the various time limits mentioned throughout the EMI provisions if the person failing to meet a particular time limit has a reasonable excuse for doing so. It derives from paragraph 70 of Schedule 14 to FA 2000.
Paragraph 54: Power to amend by Treasury order
3566.This paragraph allows the Treasury to make an order amending the terms of the trading activities tests for a qualifying company or amending the monetary limits on share values and on a company’s gross assets. This paragraph derives from paragraph 69 of Schedule 14 to FA 2000.
3567.The power to amend by Treasury order, as set out in paragraph 69 of Schedule 14 to FA 2000, did not include any power to amend the £100,000 limit on unexercised employee options. Employee options are defined in section 536(2). That limit, which appears in paragraph 47(1)(g) of that Schedule, has been rewritten as section 536(1)(e). The power to amend by Treasury order has been extended to include that £100,000 limit. See Change 180 in Annex 1.
3568.In practice this limit is only likely to be increased but the new sub-paragraph (2) further protects the taxpayer by explicitly matching changes in the paragraph 5 and 6 limits with that in section 536(1)(e).
Paragraph 55: Meaning of “market value” of shares
3569.This paragraph sets out that the “market value” of shares should have the same meaning as in TCGA 1992, subject to the special rule on the valuation of shares subject to restriction or risk of forfeiture in paragraph 5(7) of this Schedule.
3570.Paragraph 55 derives from paragraph 66(1) of Schedule 14 to FA 2000.
Paragraph 56: Determination of market value of shares
3571.Under this paragraph, if a market value has to be determined for the purposes of the EMI provisions, the company and the Inland Revenue may agree upon that market value and the dates by reference to which it must be determined. Alternatively the Inland Revenue have to decide what that market value is, and issue a notice to the company detailing its decision. The employer company has a right to pre-empt that decision by the Inland Revenue and refer the question instead to the Commissioners for their decision. This paragraph derives from paragraphs 66(2) and 67(1), (4) and (5) of Schedule 14 to FA 2000.
Paragraph 57: Appeal against determination of market value of shares
3572.Where the Inland Revenue have decided on a market value of shares under paragraph 56 of this Schedule, and issued a notice setting out that decision, the employer company may appeal against that decision. This paragraph sets out that right of appeal, saying to whom it must be made and when.
3573.The appeal must be made within a 30 day time limit. The wording in the source legislation does not make it clear whether or not the 30 day period starts running on the day that the notice of determination is given to the employer company or on the day after. Sub-paragraph (2) clarifies this by referring to “within 30 days after the date when notice of their determination is given”. So if, for example, the notice of determination is given during the course of the day on 1 March 2004 any appeal must be made before 1 April 2004.
3574.This paragraph derives from paragraph 67(2), (3) and (5) of Schedule 14 to FA 2000.
Paragraph 58: Minor definitions
3575.This paragraph provides a number of definitions of terms used throughout the EMI provisions. It derives from paragraph 71(1) of Schedule 14 to FA 2000.
3576.There is one new term included in this list of definitions: “group of companies”. This new term has been used in section 539(2)(b) and in paragraphs 5(1)(b)(ii) and (4)(b), and 6(2)(b) and (3) of this Schedule. See Note 69 in Annex 2.
Paragraph 59: Index of defined expressions
3577.This paragraph shows where various terms used in the EMI code are defined. The equivalent list for Schedule 14 to FA 2000 is in paragraph 72 of that Schedule.
Schedule 6: Consequential Amendments
General
3578.This Schedule makes consequential amendments to other legislation. Many of those amendments are matters of detail, which do not require commentary; but there are also other amendments that are more substantial.
3579.A number of the more substantial amendments in this Schedule are connected with the provisions of Part 7 of this Act (employment income: share related income and exemptions). The majority of the provisions in the SIP code (deriving from Schedule 8 to FA 2000) and in the EMI code (deriving from Schedule 14 to that Act) are concerned with employment income; and, accordingly, appear in this Act – but not all of those provisions fall into this category. The view has been taken that it is more appropriate to move those remaining provisions to other destinations in the Tax Acts than to leave them where they are (see sections 515 and 527(3)). This Schedule makes provision accordingly.
Part 1: Income and Corporation Taxes Act 1988
Paragraph 2
3580.This paragraph substitutes a new section 1(1) of ICTA (the charge to income tax). As a result of the passing of this legislation the charge to income tax will consist in part of Schedules A, D and F, as set out in ICTA, and in part of the new categories of employment income, pension income and social security income for which this Act provides (together with other amounts which, under the Income Tax Acts, are charged to income tax).
Paragraph 4
3581.This paragraph amends section 9 of ICTA, which deals with the computation of income for corporation tax purposes, to reflect the repeal of Schedule E.
Paragraph 5
3582.This paragraph amends section 18 of ICTA so as to re-establish the boundary between income charged under this Act and income charged under ICTA.
3583.In section 18(1)(b) of ICTA the reference to Schedule E is replaced by a reference to the three types of income charged under this Act. This will include some pension and social security income that is charged under Schedule D by ICTA. The amendment ensures that the income is charged only under this Act. A similar amendment is made to the definition of Case VI.
3584.In the definition of Case V the phrase “income consisting of emoluments of any office or employment” is replaced by a general reference to “employment income”. Although the latter term covers both the charge on emoluments taxed by paragraph 1 of section 19(1) of ICTA and the free-standing Schedule E charges taxed by paragraph 5 of section 19(1), the amendment respects the principle that Schedule D is the residual Schedule. Despite using the broader term, Schedule D Case V still covers all of a person’s income from abroad except income that is specifically chargeable under other provisions.
Paragraph 6
3585.This paragraph provides for the repeal of section 19 of ICTA, which delineates the charge to income tax under Schedule E.
Paragraph 10
3586.This paragraph inserts three new sections (68A, 68B and 68C) into ICTA. The new sections, which are part of the SIP code, provide for a charge to income tax under Case V of Schedule D where an individual receives benefits under a SIP consisting of foreign cash dividends or dividend shares acquired with such dividends cease to be subject to the plan within three years of acquisition. The new sections derive from material in paragraphs 92 and 93 of Schedule 8 to FA 2000.
Paragraph 12
3587.This paragraph inserts a new section 85B (approved share incentive plans) into ICTA 1988. The purpose of the new section is to introduce Schedule 4AA into ICTA; and the contents of that new Schedule are set out in paragraph 109 of this Schedule.
Paragraph 16
3588.This paragraph amends section 138 of ICTA. That section has itself been repealed, but still applies in respect of shares acquired before 26 October 1987. The two amendments simply adopt appropriate new language for references to “Schedule E”.
Paragraph 22
3589.This paragraph provides for the omission of various provisions that are rewritten in this Act. Section 150(a) of ICTA taxes allowances paid under schemes set up under the Job Release Act 1977. The last Order authorising payments under the Job Release Act 1977 was 1987 SI 1339, which extended the effect of the Act to 29 September 1988. So this rule is spent and is not rewritten.
Paragraph 26
3590.This paragraph amends section 186 of ICTA which concerns approved profit sharing (“APS”) schemes.
3591.Section 49 of FA 2000 envisages the phasing out of APS schemes. (No new schemes can be approved after 6 April 2001 and the tax advantages cease for shares appropriated after 31 December 2002.) However, the legislation relating to APS schemes needs to be preserved for existing schemes; and the view has been taken that the better approach is to not repeal the APS legislation but to leave it in sections 186 and 187 of, and Schedules 9 and 10 to, ICTA. Those provisions which have continuing effect are being amended as necessary by this Schedule to reflect the new language introduced in this Act. Outdated references are not being amended where, for all realistic purposes, the provisions are spent.
3592.Sub-paragraph (4) amends section 186(5) of ICTA. The amendment is necessary because that provision looks backward and after 5 April 2003 will need to cover charges under both the old and new forms of section 186(3).
Paragraph 28
3593.This paragraph provides for the omission of various provisions that are rewritten in this Act. Section 191 of ICTA exempts some allowances paid under schemes set up under the Job Release Act 1977. The last Order authorising payments under the Job Release Act 1977 was 1987 SI 1339, which extended the effect of the Act to 29 September 1988. So this section is spent and is not rewritten.
Paragraph 34
3594.This paragraph inserts four new sections (251A, 251B, 251C and 251D) into ICTA. The four new sections, which, like sections 68A to 68C of ICTA (see paragraph 10 of this Schedule) are part of the SIP code, provide for charges to income tax under Schedule F where an individual receives benefits under a SIP consisting of UK cash dividends or dividend shares acquired with such dividends cease to be subject to the plan within three years of acquisition. The new sections also derive from material in paragraphs 92 and 93 of Schedule 8 to FA 2000.
Paragraph 36
3595.This paragraph derives from section 595(1)(b) of ICTA and related provisions in sections 595 and 596. The charge to tax in section 595(1)(a) and related provisions have been rewritten in Chapter 1 of Part 6 of the Act. The relief under section 595(1)(b) is being preserved by inserting a new section 266A into ICTA. Sections 595 and 596 of ICTA are being repealed.
Paragraph 44
3596.This paragraph amends section 322 of ICTA so that the section continues to include the foreign income that ICTA charges under Schedule D Case V but which this Act charges under the pension and social security income Parts.
Paragraph 47
3597.This paragraph amends section 332 of ICTA so that the section applies only in respect of deductions against the profits or fees of a minister of religion chargeable under Schedule D and expenses incurred in earning those profits or fees. Section 332(3) provides that particular expenses incurred in connection with an employment, profession or vocation as a minister are deductible from the profits or employment income of a minister. This amendment permits such expenses to be deducted in calculating Schedule D profits only if they relate to an appointment as a minister that is taxable under Schedule D and are incurred in earning those profits. See Change 90 in Annex 1.
Paragraph 48
3598.This paragraph amends section 336 of ICTA so that the section continues to include the income that ICTA charges under Schedule D but which this Act charges under the pension and social security income Parts.
Paragraph 55
3599.This paragraph amends section 418 of ICTA. Most of the amendments are straightforward.
3600.The amendment to section 418(2)(a) is necessary because of the way the benefits code has been rewritten in this Act. The benefits code applies to all employees unless they are in “lower paid employment” as defined in section 217 of this Act. If they are in lower paid employment some Chapters of Part 3 are excluded from applying to them. The employments for which this exclusion does not apply are those within Chapter II of Part V of ICTA.
Paragraph 65
3601.This paragraph amends section 580A(7)(b) of ICTA. Section 580A exempts annual payments paid under certain types of ill health and employment risk insurance policy. Subsection (7) extends the exemption to income taxed under Schedule E if the payee pays or contributes to the premiums due under a policy taken out by another person on the payee’s behalf. This has been amended to refer to employment income and pension income. The effect of the amendment is that the exemption will apply to foreign pensions. See Change 181 in Annex 1.
Paragraphs 67 to 70
3602.These paragraphs amend sections 588 to 589B of ICTA. These sections provided for an exemption from tax under Schedule E for retraining courses and outplacement counselling, which is rewritten at sections 310 to 312 in this Act. It is rewritten there with several minor changes (including removal of the requirement that the services in question should be provided in the United Kingdom). See Change 72 in Annex 1.
3603.Sections 588 to 589B also provide for a deduction under Schedule D if the expenses incurred would not otherwise be deductible (sections 588(3) and 589A(8)). They also provide for the expenses to be allowed as expenses of an investment company on a similar basis to allowing for a Schedule D deduction.
3604.Paragraphs 67 to 69 amend those parts of section 588 to 589B that deal with the deduction for Schedule D/management expenses to tie in to the exemptions now contained in sections 310 to 312 of this Act.
3605.This approach allows those parts of sections 588 to 589B which deal with the Schedule E exemptions to appear only in this Act and not in ICTA.
Paragraphs 72 and 73
3606.These two paragraphs amend sections 592(7) and 594(1) of ICTA. Relief for contributions is now expressed as a deduction from employment income and there is a signpost to these provisions in section 327(5). See Change 154 in Annex 1.
Paragraph 100
3607.This paragraph inserts two new sections (686B and 686C) into ICTA. The new sections, which like sections 68A to 68C of ICTA (see paragraph 10 of this Schedule) are part of the SIP code, provide that section 686 of ICTA (special rates of tax for accumulation and discretionary trusts) has only a limited application to dividend income received by the trustees of an approved SIP. The two new sections derive from paragraph 88 of Schedule 8 to FA 2000.
Paragraph 108
3608.This paragraph amends section 833 of ICTA. The amendments to subsections (4) and (5) of the section concern earned income.
3609.The concept of earned income is nearly obsolete, the last general use for it being to identify a wife’s earned income before independent taxation was introduced in 1990. But the concept has a continuing relevance to retirement annuity relief (section 623 of ICTA) and personal pension relief (section 644 of ICTA).
3610.All the remuneration and pensions listed in paragraph (a) of subsection (4) of section 833 are charged to tax under the Act.
3611.All the pensions, annuities and social security payments listed in paragraphs (a) to (d) of subsection (5) of section 833 are charged to tax under the Act.
3612.So the two lists are replaced by a single reference to the Act.
3613.But the Act charges two sorts of income that are not earned income in section 833. These are:
returned surplus employee additional voluntary contributions (charged under Schedule D Case VI in ICTA); and
jobseeker’s allowance (charged under section 151A of ICTA, which is not mentioned in paragraph (c) of subsection (5) of section 833).
Paragraph 109
3614.This paragraph inserts a new Schedule 4AA into ICTA. The new Schedule, which like sections 68A to 68C of ICTA (see paragraph 10 of this Schedule) is part of the SIP code, deals with corporation tax deductions relating to the setting up and administration of an approved SIP. The new Schedule has 13 paragraphs, which derive from Part 11 (paragraphs 105 to 114) of Schedule 8 to FA 2000. In the new Schedule 4AA, paragraphs 4(9), 9, 10 and 12 derive from provisions inserted in Schedule 8 to FA 2000 by the Employee Share Schemes Act 2002 with effect from 6 April 2003.
3615.The new Schedule 4AA is introduced by the new section 85B of ICTA (see paragraph 12 of this Schedule). Section 85B falls within Part 4 of ICTA; and in this way the definition of the expression “investment company” in section 130 of ICTA will apply to the new Schedule (see Note 70 in Annex 2).
Paragraphs 112 and 113
3616.These paragraphs amend and preserve Schedules 9 and 10 to ICTA in relation to approved profit sharing schemes. The retention of this legislation is referred to in the notes on paragraph 26.
3617.The amendments are those necessary to reflect the new language introduced in this Act.
Part 2: Other enactments
Paragraph 126
3618.This paragraph amends section 15 of TMA 1970. The amendments are straightforward and replace terms used in ICTA with those used in this Act.
Paragraph 127
3619.This paragraph substitutes a new section 16A of TMA 1970. This section applies section 15 of TMA 1970, the return of employees’ earnings, to agency workers. The new wording accords with the language in this Act and there are signposts to Chapter 7 of Part 2, sections 44 to 47. The change in structure reflects the increased focus on the agency contract in these sections.
Paragraph 137
3620.This paragraph makes certain amendments to the table at the end of section 98 of TMA 1970 (penalties: special returns). Most are self-explanatory.
3621.Sub-paragraph (4)(e) deletes a reference to section 313(5) of ICTA from the second column of that table. Section 73 of FA 1988 replaced what were subsections (1) to (5) of section 313 of ICTA with subsections (1) to (4). As a result there was no longer any subsection (5). The consequential amendment to the table in section 98 of TMA 1970 was missed. This amendment, while not arising from the rewrite of section 313(5), corrects that oversight.
Paragraph 147
3622.This paragraph amends section 24 FA 1974, which extends the Inland Revenue’s right to call for a return of the emoluments derived from duties performed in the United Kingdom.
3623.A return issued under section 24 FA 1974 can call for particulars of emoluments “whether or not tax is chargeable on them”. This could be read as requiring the taxpayer to include details of emoluments that would be exempt, even in the case of a UK resident taxpayer working on UK duties for a UK employer. This paragraph removes any uncertainty about the meaning of “whether or not tax is chargeable on them” to make it clear the provision concerns the employee’s “general earnings” (whether or not chargeable to tax) and that the return does not have to include income that is exempt.
Paragraphs 157 and 158
3624.These paragraphs amend sections 43 and 44 of FA 1989.
3625.Sections 43 and 44 were introduced as part of the changes made to put the assessment of employment income on a receipts basis. Broadly, they prevent a deduction for employees’ pay unless it is paid during the period of account or within nine months after its end. As such, they align more closely the timing of the trading or investment company deduction with that of the charge to tax on the employee.
3626.Both sections contain numerous references to “emoluments”.
3627.Rather than making a whole series of consequential amendments replacing the term “emoluments” wherever it occurs in sections 43 and 44 FA 1989 these paragraphs replace each of these two sections with a complete rewrite.
Paragraphs 169 to 185
3628.These paragraphs make amendments to the Social Security Contributions and Benefits Act 1992 (“SSCBA”). Most of the amendments change the ICTA references to Schedule E to the terms used in this Act for employment income and are straightforward.
3629.The term “emoluments” is used in many of the provisions and has been replaced with “general earnings”.
3630.The replacement of section 10(7) of SSCBA 1992 with subsections (7), (7A) and (7B) provides the equivalent provision through this Act which ensures that Class 1A NICs are applied only to those benefits which remain chargeable to income tax.
3631.The definitions of all the terms have been placed in section 122 of SSCBA 1992.
Paragraphs 190 to 204
3632.These paragraphs make amendments to the Social Security Contributions and Benefits (Northern Ireland) Act 1992 corresponding to those made to the Social Security Contributions and Benefits Act 1992 by paragraphs 169 to 185 of this Schedule.
Paragraph 210
3633.This paragraph amends section 120 of TCGA 1992 which treats certain amounts chargeable to income tax in relation to shares as additional consideration for the acquisition of those shares under section 38 of TCGA 1992. The amendments mainly reflect the new language and update references.
3634.Sub-paragraph (2) expands and rearranges section 120(1) to clarify how it operates and brings in material from FA 1988 so that the second paragraph of section 120(1) can be omitted. The words after the semi-colon in the first paragraph of section 120(1) are thought to be there in order that the relief given by the opening words of section 120(1) works in cases within section 83(1) of FA 1988 (where the shares are acquired by a person connected with the employee). This is made clear in the rewritten provision. The view is taken that no modification of the relief is required in cases to which section 83(2) of FA 1988 applies. See Note 72 in Annex 2.
3635.Sub-paragraph (7) provides for the omission of section 120(6) of TCGA 1992. That provision effectively duplicated section 185(7) of ICTA. It also set out the transitional provisions. The effect of both subsections together with the transitionals now appears in new Schedule 7D to TCGA 1992.
Paragraph 212
3636.This paragraph derives from section 68(4) of FA 1988. It inserts a new section 149C into TCGA 1992 relating to the capital gains treatment of priority share allocations. The income tax provisions are rewritten in Chapter 10 of Part 7 of this Act.
Paragraph 216
3637.This paragraph inserts a new section 238A (approved share schemes and share incentives) into TCGA 1992. The purpose of the new section is to introduce Schedule 7D to TCGA 1992; and the contents of that new Schedule are set out in paragraph 221 of this Schedule.
Paragraph 217
3638.This paragraph inserts a new section 263ZA (former employees: employment-related liabilities) into TCGA 1992. It derives from section 92(6) to (8) of FA 1995.
3639.Subsections (1) to (3) of the new section 263ZA provide that if a former employee is entitled to deduct an amount under section 555 of the Act (former employee entitled to deduction from total income) but has insufficient total income to absorb the amount deductible, then the excess may be treated as an allowable loss for the purposes of capital gains tax.
3640.Subsections (4) and (5) set a limit to the amount that can be so deducted.
3641.Subsection (6) introduces a small administrative change. It enables a single claim to cover relief against both total income and capital gains. See Change 182 in Annex 1.
Paragraph 221
3642.This paragraph inserts a new Schedule 7D into TCGA 1992; and the new Schedule deals with the capital gains tax aspects of approved share schemes and share incentives.
3643.Part 1 of the new Schedule deals with the capital gains tax aspects of approved SIPs. This Part forms part of the SIP code and derives from paragraphs 74, 97 to 102 and 104 of Schedule 8 to FA 2000. In this Part of this Schedule, paragraphs 2(4) and 4(6) derive from provisions inserted by the Employee Share Schemes Act 2002 with effect from 6 April 2003.
3644.Part 2 of the new Schedule deals with the capital gains tax aspects of approved SAYE option schemes. This Part forms part of the SAYE code and derives from provisions in section 185 of ICTA.
3645.Part 3 of the new Schedule deals with the capital gains tax aspects of approved CSOP schemes. This Part forms part of the CSOP code and derives from provisions in section 185 of ICTA. It may be noted that section 185(7) of ICTA has been rewritten here together with the transitional provisions in section 120(6) of TCGA 1992. Section 120(6) of TCGA 1992 is now being repealed.
3646.Part 4 of the new Schedule deals with the capital gains tax aspects of enterprise management initiatives. This Part forms part of the EMI code and derives from paragraphs 56 to 58 of Schedule 14 to FA 2000.
Paragraph 241
3647.This paragraph amends paragraph 10(1) of Schedule 2 to the Tax Credits Act 1999. That amended section 71(8) of the Social Security Administration Act 1992 and section 69(8) of the Social Security Administration (Northern Ireland) Act 1992 in order to allow overpayments of tax credits to be collected through PAYE. This amendment replaces the reference to the legislation for PAYE in ICTA with a reference to “PAYE regulations” (defined in section 674(8) of this Act). It includes a minor change: see Change 183 in Annex 1.
Paragraph 257
3648.This paragraph substitutes a new section 95 of FA 2001. This section provides for exemptions from stamp duty and stamp duty reserve tax in relation to approved SIPs; and the new section is accordingly part of the SIP code. Section 95 of FA 2001 originally operated by inserting a new paragraph 116A in Schedule 8 to FA 2000; but in this substituted version the exemptions have been removed from that Schedule and made free standing.
Paragraphs 268 and 269
3649.These paragraphs set out the consequential amendments that may be needed to some future Northern Ireland legislation. The amendments to the legislation that applies in Great Britain are set out earlier in the Schedule. Paragraphs 183 and 184 apply to legislation introduced by the Employment Act 2002. The enactment of the Northern Ireland provision corresponding to that legislation has been affected by the suspension of the Northern Ireland Assembly.
Schedule 7: Transitionals and Savings
Part 1: Continuity of the law
Paragraphs 1 to 7
3650.These paragraphs ensure continuity of the law, despite the fact that this Act repeals and rewrites provisions. Paragraph 2 is included to ensure that provisions in the Act which change the law are not subject to the general proposition about continuity in paragraph 1.
Part 2: Employment income: charge to tax
Paragraph 8
3651.Section 202A(2)(a) of ICTA states that the provisions determining what emoluments are chargeable in a particular year apply “whether or not the emoluments are for that year or for some other year of assessment”. The charging provisions in Chapters 4 and 5 of Part 2 of this Act give effect to this statement in the various sections determining taxable earnings in a tax year.
3652.This paragraph ensures that where those charging provisions apply to general earnings for “some other tax year” the reference to some other tax year can include years before 2003-04.
3653.Sub-paragraphs (3) and (4) derive from the transitional provisions in sections 36 and 39 of FA 1989 which amended Case III of Schedule E as well as inserting paragraph (4A) into section 19(1) of ICTA. They preserve continuity of tax treatment for any general earnings for a tax year before 1989-90 that are remitted to the UK in 2003-04 or later if those earnings would have been within Case III of Schedule E before it was amended in FA 1989.
Paragraphs 9 to 11
3654.A claim to relief for delayed remittances made under section 35 could include delayed remittances relating to earnings for tax years before 2003-04 and the claimant may elect under section 36 to have those delayed remittances attributed to particular earlier years. Paragraphs 9 to 11 deal with the fact that this Act changes the terminology used to describe the income making up the delayed remittances and the charge to tax on them.
Paragraph 12
3655.This paragraph deals with the treatment of disputes as to domicile or ordinary residence which arise after the commencement of this Act, but which relate to income to be charged to tax in the tax year 2002-03 or any earlier tax year. The effect of this transitional is that such disputes will be governed by section 207 of ICTA, and not by sections 42 and 43 of this Act.
Paragraph 13
3656.This paragraph sets out how the provisions in Chapter 7 of Part 2 should be read in relation to times before 6 April 2003, by reference to the ICTA terminology rather than the language of this Act.
Paragraph 14
3657.This paragraph reflects the fact that the changes made to the treatment of construction industry workers in section 134 of ICTA by section 55 of FA 1998 only have effect with regard to payments for services provided on or after 6 April 1998.
Part 3: Employment income: earnings and benefits etc. treated as earnings
Paragraph 15
3658.This paragraph preserves the effectiveness of notifications made before 6 April 2003 for tax years beginning on or after that date. It carries forward the transitional provisions in section 166 of ICTA. It also deals with the change in terminology between the source legislation and this Act where, in the latter, the notification is called a “dispensation”. That reflects the commonly used description of the notification. The provisions in the following paragraph may modify the scope of those dispensations.
Paragraph 16
3659.This paragraph modifies the effect of any dispensation that was in force before 6 April 2002 to preserve the modifications that were made to such dispensations by section 58 of FA 2001. Those modifications arose from the enactment of the provisions for mileage allowance payments and mileage allowance relief. From that date any element in a pre-existing dispensation relating to payments made, or benefits or facilities provided, in respect of expenses incurred in connection with the use of a vehicle by an employee for business travel was revoked. This paragraph ensures that such a revocation is retained in the operation of the dispensation on and after 6 April 2003.
Paragraph 17
3660.Section 168(2) of ICTA applies the provisions of Chapter 2 of Part 5 of that Act only to an employment the emoluments of which fall to be assessed under Schedule E. That proviso is also imported into the rules for living accommodation by section 145(8)(b). A similar proviso is contained in section 144(5) of ICTA for vouchers and credit-tokens.
3661.The concept of an employment the emoluments of which fall to be assessed under Schedule E has been reproduced for the purposes of the benefits code in this Act as “a taxable employment under Part 2”, defined in section 66(3). In cases where it is necessary to consider whether there is a “taxable employment” before 6 April 2003, paragraph 17 of this Schedule explains how to translate this concept back into the rules in ICTA from which it derives.
Paragraph 18
3662.The general transitional provision for “employment” and related expressions in paragraph 17 does not provide the correct continuity for the use of employment in section 89(1)(c). This paragraph provides the correct replacement terms to ensure continuity.
Paragraph 19
3663.This paragraph concerns notices under section 144(1) of ICTA. It preserves the effectiveness of existing notifications (described as “dispensations” in this Act), subject to the modifications in paragraph 20.
Paragraph 20
3664.This paragraph derives from section 58 of FA 2001. It preserves the modifications that those provisions make to the effectiveness of existing notifications to take account of the introduction of mileage allowance payments and mileage allowance relief.
Paragraph 21
3665.This paragraph derives from section 146(8) of ICTA, which disapplies section 146(6) in cases where the employee first occupied the living accommodation in question before 31 March 1983.
Paragraphs 22
3666.This paragraph deals with capital contributions made by an employee before 6 April 2003 towards the cost of a car, other than a classic car (as dealt with in section 147) or accessories attached to it. The paragraph ensures that those contributions continue to be taken into account in calculating the cash equivalent of the benefit of the car for appropriate tax years beginning on or after that date. The paragraph also deals with changes in terminology between the source legislation and this Act.
Paragraph 23
3667.This paragraph deals with capital contributions made by an employee before 6 April 2003 towards the cost of a classic car (as dealt with in section 147) or accessories attached to it. The paragraph ensures that those contributions continue to be taken into account in calculating the cash equivalent of the benefit of the car for appropriate tax years beginning on or after that date. The paragraph also deals with changes in terminology between the source legislation and this Act.
Paragraph 24
3668.This paragraph deals with the consequences of the changes in terminology between the source legislation and this Act where a van is available to only one employee for a period exceeding 30 days that straddles 6 April 2003. The paragraph ensures that the relevant provisions apply irrespective of that employee’s level of earnings (“emoluments” in the source legislation language).
Paragraph 25
3669.Sub-paragraph (1) ensures that loans may be employment-related regardless of when they were made, even if that was before FA 1976 (which introduced the beneficial loans provisions) was passed. It derives from section 160(7) of ICTA.
3670.Sub-paragraph (2) derives from section 161(7) of ICTA. It has the effect that the provisions of section 188 which apply to “stop loss” arrangements do not apply in the case of a holding of shares acquired before 6 April 1976.
Paragraph 26
3671.This paragraph deals with the change described in Change 28 in Annex 1 (using Y for the number of days in the tax year in place of 365 days). It prevents the change applying where section 183 applies in relation to section 177 (the fixed rate loan exception) in the case of loans made in a leap year and before 6 April 2003.
Paragraph 27
3672.The charge to tax under section 188 may be in respect of a loan made before 2003-04. This paragraph deals with the fact that this Act changes the terminology used to describe the beneficial loan arrangements and the charge to tax on them, so that a loan made before 2003-04 may be an employment-related loan.
Paragraph 28
3673.This paragraph, deriving from section 162(1) of ICTA makes it clear that Chapter 8 of Part 3 of this Act applies only in relation to shares acquired after 6 April 1976.
Paragraph 29
3674.This paragraph ensures continuity of the law in respect of events prior to 6 April 2003.
3675.Sub-paragraphs (2)and (3) provide the continuity of the law in the case of an acquisition of shares prior to 6 April 2003 which gave rise to a notional loan within section 162(1) of ICTA. The amount of the notional loan initially outstanding remains the amount under section 162(1) and is to be used to arrive at the amount of the notional loan outstanding at any subsequent time after 6 April 2003. in accordance with section 194(3).
3676.Sub-paragraph (4) translates the reference in section 195(3)(c) to “excluded employment” to the term “an employment to which Chapter 2 of Part 5 of ICTA applies” in the case of a notional loan which first arose before 6 April 2003.
Paragraph 30
3677.This paragraph, deriving from section 162(6) of ICTA, makes it clear that Chapter 9 of Part 3 of this Act applies only in relation to shares acquired after 6 April 1976.
Paragraph 31
3678.The charge to tax under section 199 of this Act may be in respect of a loan made before the tax year 2003-04. This paragraph translates the reference in section 199(4)(b) to “excluded employment” to the term “an employment to which Chapter 2 of Part 5 of ICTA applies” in the case where the shares were acquired before 6 April 2003.
Paragraph 32
3679.Sub-paragraph (2) makes sure that the reference in section 206 of this Act to the cost of a benefit includes the cost of any benefit determined under section 156(5) of ICTA.
3680.Sub-paragraph (3) prevents the provisions by which the cash equivalent of the benefit of certain scholarships is chargeable to tax as earnings from applying to scholarships awarded before section 165 of ICTA came into effect in 1983.
Part 4: Employment income: exemptions
Paragraphs 33 and 34
3681.These paragraphs ensure that the overall exemption limit in section 241 operates correctly in respect of a qualifying period of absence which straddles 6 April 2003.
Paragraph 35
3682.This paragraph ensures that amounts in respect of benefits provided or expenses incurred before 6 April 2003 in connection with an employee’s change of residence count towards the £8,000 limit on such amounts in tax years beginning on or after that date.
Paragraph 36
3683.This paragraph preserves the effectiveness of any direction that was made before 6 April 2003 as to what is the “relevant day”. That direction remains effective for determining what will be the “limitation day” for the purposes of this Act. The paragraph thereby also deals with the change in terminology between the source legislation and this Act.
Paragraph 37
3684.This paragraph preserves the recovery of tax and information powers of section 588(5) to (7) of ICTA, as the section applies before the date on which this Act comes into force, for cases where:
the employee’s or the employer’s liability to tax for a year has been determined in accordance with sections 588 and 589 as those sections apply before that date, and
the failure referred to in section 588(5)(a) and (b), as that section apply before that date, occurs on or after that date.
3685.The paragraph works by disregarding in such circumstances the amendment of section 588(6), and the repeal of sections 588(5)(a) and 589(3) and (4), in Schedules 6 (consequential amendments) and 8 (repeals and revocations) respectively.
Paragraph 38
3686.This paragraph ensures that awards made under ESC A57 are taken into account in calculating the “permitted maximum” under section 322(3), where a financial benefit award under section 321is made for the same suggestion.
Part 5: Employment income: deductions
Paragraph 39
3687.Section 353 provides that a deduction is allowed from earnings charged on remittance where (among other matters) certain expenses are paid in the tax year or in an earlier tax year in which the employee has been resident in the United Kingdom. This paragraph contains provisions designed to ensure continuity where the earlier tax year ended before 6 April 2003, but the deductions fall to be allowed in the tax year 2003-04 or in a later tax year.
Paragraph 40
3688.Sections 373 and 374 provide, in certain circumstances, for deductions from earnings for travel costs and expenses of a non-domiciled employee or of members of his family. The travel in question must end on, or during the period of five years beginning with a date that is a “qualifying arrival date” in relation to the employee. This paragraph contains provisions to ensure that the deductions may be given where the qualifying arrival date was before 6 April 2003, but the costs and expenses of the travel relate to the tax year 2003-04 or to a later tax year.
Part 6: Employment income: income which is not earnings or share-related
Paragraph 41
3689.This paragraph applies to benefits provided by non-approved retirement benefits schemes that were entered into before 1 December 1993 and have not been varied since so as to affect the benefits provided. It derives from the original version of section 596A of ICTA introduced by paragraphs 1, 9 and 18(7) of Schedule 6 to FA 1989.
3690.Section 596A of ICTA was subject to major changes introduced by section 108 FA 1994. Those changes are reflected in the rewrite of section 596A in Chapter 2 of Part 6 of this Act. But the changes do not apply to schemes that existed at 1 December 1993 unless the scheme has been varied with a view to changing the benefits provided. Unaltered pre-December 1993 schemes continue to be taxed by the old rules.
3691.Sub-paragraph (1) gives the conditions for the paragraph to apply.
3692.Sub-paragraph (2) disapplies section 393(2). That subsection provides that the charge in Chapter 2 of Part 6 of this Act does not apply to pension income. This rule does not appear in the original section 596A of ICTA. In practice there would not be a double charge. If a non-approved retirement benefits scheme paid a pension it would be taxed as a pension. It is more likely that the scheme would provide a lump sum that the recipient would use to buy an annuity that would be taxed under Schedule D Case III.
3693.Sub-paragraph (3) disapplies section 394(5). That subsection provides that the charge in Chapter 2 of Part 6 of this Act takes priority over any other charge in the Act. That rule does not appear in the original section 596A of ICTA.
3694.Sub-paragraph (4) provides two sections to be substituted for sections 395, 396 and 397 in Chapter 2 of Part 6 of this Act.
3695.Section 394A derives from subsections (8) and (9) of the original version of section 596A of ICTA. Tax is not charged on any lump sum financed by contributions paid by the employer provided that the employee has been taxed on those contributions. The difference between this provision and section 396 is that under the original version of section 596A of ICTA there is no requirement for the scheme income and gains to be brought into charge to tax.
3696.Section 394B derives from subsections (6) and (7) of the original version of section 596A of ICTA. In the original version of section 596A those subsections deal with a benefit that is also an amount taxed by paragraph 1 of the charge to income tax under Schedule E in section 19(1) of ICTA. Subsection (6) provides that the paragraph 1 charge takes priority. But if the charge under section 596A is greater than the charge as an emolument the additional amount is charged under section 596A.
3697.The new section 394B preserves this effect by comparing the charge under Chapter 2 of Part 6 of this Act with the charge on general earnings.
Paragraph 42
3698.This paragraph ensures that any payments or benefits which were charged under section 148 of ICTA as it was before the changes made in section 58(4) of FA 1998 are not chargeable by virtue of Chapter 3 of Part 6 if the payments continue to be made or the benefits provided after 6 April 2003.
Paragraph 43
3699.This paragraph ensures that the balance of the £30,000 threshold remaining at 5 April 2003 is carried forward to the tax year 2003-04, or, if it has all been used, nothing more is available.
Part 7: Employment income: share-related income
Paragraph 44
3700.This paragraph reflects the fact that when inserting sections 140A to 140C into ICTA, section 50(4) of FA 1998 provided that those sections should only have effect for interests acquired after 16 March 1998.
Paragraph 45
3701.This paragraph adapts section 425(1) of this Act so that it makes sense in relation to times before 6 April 2003. In relation to those times the office or employment in question must be one in respect of which the person is chargeable to tax under Case 1 of Schedule E. This is the same requirement as under section 140H(3) of ICTA.
Paragraph 46
3702.This paragraph ensures that, in computing the amount of the charge under section 428, the amounts which would have been deducted under section 140A(7) of ICTA in respect of charges arising before 6 April 2003 are still allowed.
Paragraph 47
3703.This paragraph provides that the time limit in section 140G of ICTA requiring information about the provision of conditional interests in shares during the tax year 2002-03 to be notified within 30 days of the end of that year of assessment still applies. The extended time limit in section 432 comes into force in respect of conditional interests provided after 5 April 2003. The paragraph also makes it clear that notification is not now required if it has already been given under the corresponding provision in ICTA.
Paragraph 48
3704.This paragraph provides that the time limit in section 140G of ICTA requiring information about potential charges under section 140A of ICTA during the tax year 2002-03 to be notified within 30 days of the end of that year of assessment still applies. The extended time limit in section 433 comes into force in respect of events occurring after 5 April 2003. The paragraph also makes it clear that notification is not now required if it has already been given under the corresponding provision in ICTA.
Paragraph 49
3705.This paragraph reflects the fact that, when inserting sections 140D to 140F into ICTA, section 51(3) of FA 1998 provided that those sections should only have effect in relation to shares acquired after 16 March 1998.
Paragraph 50
3706.This paragraph adapts section 437(1) of the Act so that it makes sense in relation to times before 6 April 2003. In relation to those times the office or employment in question must be one in respect of which the person is chargeable to tax under Case 1 of Schedule E. This is the same requirement as under section 140H(3) of ICTA.
Paragraph 51
3707.This paragraph ensures that, in computing the amount of the charge under section 439, the amounts which would have been deducted under section 140D(6) of ICTA in respect of charges arising before 6 April 2003 are still allowed.
Paragraph 52
3708.This paragraph ensures that the rules specifying what are deductible amounts in section 439 operate correctly where there have been a series of conversions at least one of which occurred before 6 April 2003.
Paragraph 53
3709.This paragraph provides that the time limit in section 140G of ICTA requiring information about potential charges under section 140D of ICTA during the tax year 2002-03 to be notified within 30 days of the end of that year of assessment still applies. The extended time limit in section 445 comes into force in respect of conversions taking place after 5 April 2003. The paragraph also makes it clear that notification is not now required if it has already been given under the corresponding provision in ICTA.
Paragraphs 54 to 56
3710.Paragraph 54 derives from section 77 of FA 1988 which specifies that Chapter 2 of Part 3 of FA 1988 applies to acquisitions of shares, or interests in shares on or after 26 October 1987. There are variations in that general commencement provision and these are rewritten in paragraphs 55 and 56.
Paragraph 57
3711.This paragraph provides that the similar legislation in ICTA to that rewritten in Chapter 4 of Part 7 continues to apply to acquisitions before 26 October 1987.
Paragraph 58
3712.This paragraph ensures that the condition in section 77(2) of FA 1988, which requires earnings from the employment in respect of which the shares are issued to be within Case I of Schedule E, still applies to acquisitions before 6 April 2003. It also reflects the fact that the exemption from this Chapter for certain priority share allocations only applies from 16 January 1991 (by virtue of section 77(4) of FA 1988 which was inserted by section 44 of FA 1991).
Paragraph 59
3713.This paragraph ensures that, in computing the amount of the charge under section 455, the amounts which would have deducted under section 79(6A) and (6B) of FA 1988 in respect of charges arising under section 140A or section 140D of ICTA before 6 April 2003 are still allowed.
Paragraph 60
3714.This paragraph provides that the time limit in section 85(1) of FA 1988 requiring information about acquisitions during the tax year 2002-03 to be notified within 92 days of the end of that year of assessment still applies. It has been rewritten here as “before 7th July 2003”. The paragraph also makes it clear that notification is not now required if it has already been given under any of the specified shares provisions in FA 1988 or in ICTA.
Paragraph 61
3715.This paragraph provides that the time limit in section 85(2) of FA 1988 requiring information about chargeable events and chargeable benefits in the 60-day period prior to 6 April 2003 to be notified within 60 days still applies. The extended time limit in section 466 comes into force in respect of chargeable events occurring and chargeable benefits being received after 5 April 2003. The paragraph also makes it clear that notification is not now required if it has already been given under the corresponding provision in FA 1988.
Paragraph 62
3716.This paragraph reflects the fact that the number of years referred to in section 135(2) and (5) of ICTA was changed from seven to ten by section 49 of FA 1998 in relation to share options obtained after 5 April 1998.
Paragraph 63
3717.This paragraph adapts section 473(1) of this Act so that it makes sense in relation to times before 6 April 2003. In relation to those times the office or employment in question must be one in respect of which the person is chargeable to tax under Case 1 of Schedule E. This is the same requirement as under section 140(1) of ICTA.
Paragraphs 64 to 66
3718.These three paragraphs ensure that all amounts that have been chargeable to tax on the receipt of an option before 6 April 2003 are deducted in calculating the taxable amount under section 478 of this Act or the amount of the gain under section 479 or 480 of this Act, where the option is exercised, assigned or released after that date.
Paragraph 67
3719.This paragraph ensures that section 486 of this Act applies where the matter occurred in the tax year 2002-2003 and that in such a case the particulars may be supplied to any officer of the Board of Inland Revenue, not just an inspector as required by section 136(6) of ICTA. The paragraph also makes it clear that notification is not now required if it has already been given under section 136(6) of ICTA or paragraph 2 of Schedule 14 to FA 2000.
Paragraph 68
3720.This paragraph contains provisions to ensure that an employee share ownership plan which, before 6 April 2003, was approved under Schedule 8 to FA 2000, is treated as a share incentive plan approved under Schedule 2 to this Act.
Paragraph 69
3721.This paragraph contains provisions to ensure continuity of treatment as references to an employee share ownership plan approved under Schedule 8 to FA 2000 are replaced by references to a share incentive plan approved under Schedule 2 to this Act.
Paragraph 70
3722.This paragraph provides that a jointly owned company that was a constituent company in a group scheme immediately before the enactment of FA 2002 may remain a constituent company in that group scheme, and accordingly re-enacts section 39(8) of FA 2002. Section 39(5) of FA 2002 amended the definition of a “jointly owned company” that applies for the purposes of the SIP code.
Paragraph 71
3723.This paragraph contains provisions to ensure that a savings-related share option scheme which, before 6 April 2003, was approved under Schedule 9 to ICTA is treated as an SAYE option scheme approved under Schedule 3 to this Act. This approval has effect even if the scheme does not fully meet the requirements of Schedule 3 so long as it meets the approval requirements of Schedule 9 to ICTA.
3724.Under sub-paragraph (5) the effect of the provisions of Schedule 9 to ICTA are preserved, including superseded rules, for a savings-related share option scheme approved before 6 April 2003.
3725.A savings-related share option scheme is defined in sub-paragraph (6).
Paragraph 72
3726.This paragraph ensures that, for the period before 6 April 2003, a reference to a share option granted in accordance with the provisions of an approved SAYE option scheme includes a reference to a right to acquire shares obtained in accordance with the provisions of a savings-related share option scheme.
3727.Sub-paragraph (2) reflects the removal from this Act of references to Case I of Schedule E in ICTA. Here the reference is to “earnings” in paragraph 6(2)(c) of Schedule 3 to this Act.
Paragraph 73
3728.This paragraph contains provisions to ensure that a discretionary share option scheme, which, before 6 April 2003, was approved under Schedule 9 to ICTA is treated as a CSOP scheme approved under Schedule 4 to this Act. This approval has effect even if the scheme does not fully meet the requirements of Schedule 4 so long as it meets the approval requirements of Schedule 9 to ICTA.
3729.Under sub-paragraph (5) the effect of the provisions of Schedule 9 to ICTA is preserved, including superseded rules, for a discretionary share option scheme approved before 6 April 2003.
3730.A discretionary share option scheme is defined in sub-paragraph (6).
Paragraph 74
3731.This paragraph ensures that, for the period before 6 April 2003, a reference to a share option granted in accordance with the provisions of an approved CSOP scheme includes a reference to a right to acquire shares obtained in accordance with the provisions of a discretionary share option scheme.
Paragraph 75
3732.This paragraph preserves the effect of section 114(9) of and Schedule 16 to FA 1996, in relation to a discretionary share option scheme, as defined in sub-paragraph (5), which was approved before 29 April 1996.
Paragraph 76
3733.This paragraph preserves the effect of section 115 of FA 1996 for rights obtained under a discretionary share option scheme as defined in sub-paragraph (3) in the period from 17 July 1995 to 28 April 1996.
Paragraph 77
3734.This paragraph contains provisions to ensure that where, a share option was a qualifying option for the purposes of Schedule 14 to FA 2000 immediately before 6 April 2003, the share option is treated as a qualifying option for the purposes of the EMI code. This applies even where the requirements that had to be met differ from those set out in Schedule 5.
Paragraph 78
3735.This paragraph reflects the change in approach to a disqualifying event arising in relation to the requirement as to commitment of working time. The new approach operates for the tax year 2003-04 onwards.
3736.Sub-paragraph (2) reflects the method of determining such an event in paragraph 52 (3) of Schedule 14 to FA 2000.
Paragraphs 79 and 80
3737.These paragraphs, which relate to section 536 and 537 respectively, reflect the fact that the amendments made to the EMI code by Schedule 14 to FA 2001 have effect only after the passing of that Act.
Paragraph 81
3738.This paragraph ensures that the revised wording of section 540 will work satisfactorily in connection with options granted before 6 April 2003.
Paragraph 82
3739.This paragraph reflects changes in statutory references in section 541 (effects on other income tax charges). The changes apply to the provision that sets out the relief in the calculation of a charge on conditional and convertible shares.
Paragraph 83
3740.This paragraph ensures that the new sub-paragraph 41(6) of Schedule 5 applies to replacement options whenever granted.
Paragraph 84
3741.This paragraph provides for continuity in the definition of “employee” for the purposes of Chapter 11 of Part 7 of this Act (employee benefits trusts).
Part 8: Approved profit sharing schemes
Paragraph 85
3742.This paragraph ensures that the requirement for trustees to notify a participant of the facts relating to his tax liability will have effect after 5 April 2003 in a modified form to reflect the new language introduced in this Act.
Paragraph 86
3743.This paragraph preserves the capital gains tax advantages that are available where the trustees of an approved share incentive plan acquire shares from the trustees of an approved profit sharing scheme. It is derived from paragraph 103 of Schedule 8 to FA 2000 and is not being rewritten in Schedule 2 because of the phasing out of APS schemes (see the notes relating to paragraph 26 of Schedule 6 to this Act).
Paragraph 87
3744.An individual who participates in any of the share schemes etc dealt with in Schedules 2 to 5 to this Act must not have a material interest in the company in question. This paragraph provides that, in calculating whether or not such an individual has such a material interest, the interest of the trustees of any approved profit sharing scheme in any shares in the company which have not been appropriated to an individual are to be disregarded, as are any rights exercisable by the trustees as a result of that interest. The provision made by this paragraph has been placed in this Schedule because approved profit sharing schemes are being phased out (see section 49 of FA 2000 and the notes relating to paragraph 26 of Schedule 6 to this Act).
Part 9: Social security income
Paragraph 88
3745.This paragraph has effect if, in relation to certain provisions (listed in sub-paragraph (3)), the repeals made by the Tax Credits Act 2002 have not come fully into force.
Part 10: PAYE
Paragraph 89
3746.This paragraph derives from part of section 203(10) of ICTA which provides part of the powers for PAYE regulations to deal with electronic filing. Sections 132 and 133 of FA 1999 introduced new powers to provide for use of electronic communications. As a consequence part of section 203(10) will be repealed by Schedule 20 to FA 1999 when a Treasury order is made under section 133(4) of that Act. Section 684(2), item 5, anticipates this repeal. This paragraph preserves the position until the order is made.
Part 11: Consequences for corporation tax
Paragraphs 90 to 92
3747.These paragraphs explain how this Act will have effect for the purposes of corporation tax.
3748.A company’s accounting period affected by the provisions of this Act may straddle the beginning of the tax year 2003-04. Paragraph 91 provides that in such a case, the company may elect for the law as it stood before 6 April 2003 to apply for the duration of that straddling accounting period.
3749.Most transitional provisions made by this Schedule operate by reference to 6 April 2003 (the beginning of the tax year 2003-04) which is the date on which the Act will first have effect for income tax purposes. Paragraph 91 provides that, in a case where this Act applies for a company’s accounting period that begins before 6 April 2003, those transitional provisions will instead operate by reference to the beginning of that accounting period.
3750.Paragraph 92 provides the one exception to this: the existing provisions about corporation tax deductions in relation to SIPs, SAYE option schemes and CSOPs (Part 12 of Schedule 8 to FA 2000 and section 84A of ICTA) will continue to operate until the provisions of this Act come into force on 6 April 2003, regardless of when the company’s accounting period begins.
Schedule 8: Repeals and Revocations
3751.This Schedule contains repeals and revocations. Part 1 of the Schedule lists the enactments repealed, and Part 2 the subordinate legislation revoked.
