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Income Tax (Earnings and Pensions) Bill


Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 3 — Qualifying companies

    448

 

Excluded activities: provision of facilities for another business

  23      (1)      This paragraph applies where a company (“the service provider”) provides

services or facilities for a business carried on by another person.

          (2)      Providing those services or facilities is an excluded activity if—

              (a)             the business consists to a substantial extent in carrying on excluded

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activities within any of sub-paragraphs (a) to (k) of paragraph 16,

and

              (b)             a controlling interest in the business is held by a person (other than a

company of which the service provider is a subsidiary) who also has

a controlling interest in the business carried on by the service

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provider.

          (3)      Sub-paragraphs (4) to (6) explain what is meant by a controlling interest in a

business for the purposes of sub-paragraph (2)(b).

          (4)      In the case of a business carried on by a company, a person (“P”) has a

controlling interest in the business if—

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              (a)             P controls the company,

              (b)             the company is a close company and P, or an associate of P’s, is a

director of the company and either—

                    (i)                   is the beneficial owner of more than 30% of the ordinary

share capital of the company, or

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                    (ii)                  is able (directly or through the medium of other companies or

by any other indirect means) to control more than 30% of that

share capital, or

              (c)             not less than half of the business could, in accordance with section

344(2) of ICTA (company reconstructions: supplemental), be

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regarded as belonging to him for the purposes of section 343 of that

Act (company reconstructions without a change of ownership).

          (5)      In any other case, a person has a controlling interest in a business if that

person is entitled to not less than half—

              (a)             of the assets used for the business, or

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              (b)             of the income arising from it.

          (6)      For the purposes of sub-paragraph (4)(a) the question whether a person

controls a company is to be determined in accordance with section 416(2) to

(6) of ICTA (“control” in the context of close companies).

          (7)      For the purposes of this paragraph any rights or powers of a person who is

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an associate of another person are to be attributed to that other person.

          (8)      In this paragraph—

               “associate” has the meaning given in section 417(3) and (4) of ICTA

(expressions relating to close companies), except that in those

subsections as they apply for the purposes of this paragraph

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“relative” does not include a brother or sister;

               “business” includes any trade, profession or vocation;

               “director” is to be construed in accordance with section 417(5) of ICTA

(expressions relating to close companies).

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 4 — Eligible employees

    449

 

Part 4

Eligible employees

Eligible employees: introduction

  24       An individual is an “eligible employee” in relation to the relevant company

if the requirements of this Part of this Schedule as to the following are met at

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the appropriate time—

                    employment (see paragraph 25),

                    commitment of working time (see paragraphs 26 and 27), and

                    having no material interest (see paragraphs 28 to 33).

The employment requirement

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  25       To be an eligible employee in relation to the relevant company an individual

must be an employee—

              (a)             of that company, or

              (b)             if that company is a parent company, of that company or a qualifying

subsidiary of that company.

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The requirement as to commitment of working time

  26      (1)      For an individual (“the employee”) to be an eligible employee in relation to

the relevant company the average amount per week of the employee’s

committed time must equal or exceed the statutory threshold, that is—

              (a)             25 hours a week, or

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              (b)             if less, 75% of the employee’s working time (see paragraph 27).

          (2)      The employee’s “committed time” means the time that the employee is

required, as an employee in relevant employment, to spend—

              (a)             on the business of the relevant company, or

              (b)             if the relevant company is a parent company, on the business of the

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group.

          (3)      It includes any time which the employee would have been required to spend

as mentioned in sub-paragraph (2) but for—

              (a)             injury, ill-health or disability,

              (b)             pregnancy, childbirth, maternity or paternity leave or parental leave,

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              (c)             reasonable holiday entitlement, or

              (d)             not being required to work during a period of notice of termination

of employment.

          (4)      In this paragraph “relevant employment” means employment—

              (a)             by the relevant company, or

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              (b)             where the relevant company is a parent company, by any member of

the group.

Meaning of “working time”

  27      (1)      In paragraph 26 “working time” means—

              (a)             time spent on remunerative work as an employee or self-employed

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person, or

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 4 — Eligible employees

    450

 

              (b)             time which would have been so spent but for any of the reasons set

out in paragraph 26(3)(a) to (d).

          (2)      In sub-paragraph (1)(a) “remunerative work”, in the context of work

undertaken as an employee, means work the earnings from which—

              (a)             are general earnings to which section 15 or 21 applies (earnings for

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year when employee resident or ordinarily resident in the United

Kingdom), or

              (b)             would be general earnings within paragraph (a) if the employee

were resident and ordinarily resident in the United Kingdom.

          (3)      In sub-paragraph (1)(a) “remunerative work”, in the context of work

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undertaken as a self-employed person, means work which is undertaken

with a view to profit and the profits (if any) from which—

              (a)             are (or would be) chargeable to tax under Case I or II of Schedule D,

or

              (b)             would be so chargeable if the employee were resident and ordinarily

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resident in the United Kingdom.

The “no material interest” requirement

  28      (1)      An individual is not an eligible employee in relation to the relevant company

if the individual has a material interest—

              (a)             in that company, or

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              (b)             if that company is a parent company, in any member of the group.

          (2)      For the purposes of this paragraph an individual is to be regarded as having

a material interest in a company if—

              (a)             the individual,

              (b)             the individual together with one or more of the individual’s

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associates, or

              (c)             any such associate, with or without any other such associates,

                            has a material interest in the company.

          (3)      This paragraph is supplemented—

              (a)             as regards the meaning of “material interest”, by paragraphs 29 and

30

30; and

              (b)             as regards the meaning of “associate” by paragraph 31 (read with

paragraphs 32 and 33).

Meaning of “material interest”

  29      (1)      In paragraph 28 (the “no material interest” requirement) references to a

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“material interest” in a company are to—

              (a)             a material interest in the share capital of the company, or

              (b)             where it is a close company, a material interest in its assets.

          (2)      A material interest in the share capital of a company means—

              (a)             beneficial ownership of, or

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              (b)             the ability to control (directly or through the medium of other

companies or by any other indirect means),

                   more than 30% of the ordinary share capital of the company.

          (3)      A material interest in the assets of a close company means—

              (a)             possession of, or

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Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 4 — Eligible employees

    451

 

              (b)             an entitlement to acquire,

                   such rights as would, in the event of the winding up of the company or in

any other circumstances, give an entitlement to receive more than 30% of the

assets that would then be available for distribution among the participators.

          (4)      In this paragraph—

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               “close company” includes a company that would be a close company

but for—

                     (a)                    section 414(1)(a) of ICTA (exclusion of companies not

resident in the United Kingdom), or

                     (b)                    section 415 of ICTA (exclusion of certain quoted

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companies);

               “participator” has the meaning given by section 417(1) of ICTA

(expressions relating to close companies).

          (5)      This paragraph is supplemented by paragraph 30 (options and interests in

SIPs).

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Material interest: options and interests in SIPs

  30      (1)      This paragraph applies for the purposes of paragraph 29 (meaning of

“material interest”).

          (2)      A right to acquire shares (however arising) is to be treated as a right to

control them.

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          (3)      However, shares that an individual may acquire under a qualifying option

are to be left out of account until such time as they are actually acquired.

          (4)      Sub-paragraph (5) applies in a case where—

              (a)             the shares to be attributed to an individual consist of or include

shares which the individual or another person has a right to acquire,

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and

              (b)             the circumstances are such that, if that right were to be exercised, the

shares acquired would be shares which were previously unissued

and which the company would be contractually bound to issue in the

event of the exercise of the right.

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          (5)               In determining at any time prior to the exercise of the right whether the

number of shares to be attributed to the individual exceeds 30% of the

ordinary share capital of the company, that ordinary share capital is to be

treated as increased by the number of unissued shares referred to in sub-

paragraph (4)(b).

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          (6)      The references in sub-paragraphs (4) and (5) to the shares to be attributed to

an individual are to the shares which—

              (a)             for the purposes of paragraph 29(2) (material interest in share

capital), and

              (b)             in accordance with paragraph 28(2) (material interest can consist of

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or include that of individual’s associates),

                   fall to be brought into account in the individual’s case so that it can be

determined whether their number exceeds 30% of the company’s ordinary

share capital.

          (7)      In applying paragraph 29 the following are to be disregarded—

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              (a)             the interest of the trustees of any share incentive plan approved

under Schedule 2 (SIPs) in any shares which are held by them in

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 4 — Eligible employees

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              (a)             accordance with the plan but which have not been appropriated to,

or acquired on behalf of, an individual, and

              (b)             any rights exercisable by the trustees as a result of that interest.

Meaning of “associate”

  31      (1)      In paragraph 28(2) (the “no material interest” requirement) “associate”, in

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relation to an individual, means—

              (a)             any relative or partner of that individual,

              (b)             the trustee or trustees of any settlement in relation to which that

individual, or any of that individual’s relatives (living or dead), is or

was a settlor, and

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              (c)             where that individual is interested in any shares or obligations of the

company mentioned in paragraph 28(2) which are subject to any

trust, or are part of the estate of a deceased person—

                    (i)                   the trustee or trustees of the settlement concerned, or

                    (ii)                  the personal representatives of the deceased,

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                              as the case may be.

          (2)      Sub-paragraph (1)(c) needs to be read with paragraphs 32 and 33 (which

relate to employee benefit trusts and discretionary trusts).

          (3)      In this paragraph—

               “relative” means—

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                     (a)                    spouse, or

                     (b)                    parent, child or remoter relation in the direct line;

               “settlor” and “settlement” have the same meaning as in Chapter 1A of

Part 15 of ICTA (see section 660G(1) and (2)).

Meaning of “associate”: trustees of employee benefit trust

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  32      (1)      This paragraph applies for the purposes of paragraph 31(1)(c) (meaning of

“associate”: trustees of settlement) where the individual is interested as a

beneficiary of an employee benefit trust in shares or obligations of the

company mentioned in paragraph 28(2).

          (2)      The trustees of the employee benefit trust are not to be regarded as associates

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of the beneficiary by reason only of the individual’s being so interested if

neither—

              (a)             the individual, nor

              (b)             the individual together with one or more of the individual’s

associates, nor

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              (c)             any such associate, with or without any other such associates,

                            has at any time after 13th March 1989 been the beneficial owner of, or able

(directly or through the medium of other companies or by any other indirect

means) to control, more than 30% of the ordinary share capital of the

company.

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          (3)      In sub-paragraph (2)(b) and (c) “associate” has the meaning given by

paragraph 31(1), but does not include the trustees of an employee benefit

trust as a result only of the individual’s having an interest in shares or

obligations of the trust.

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 5 — Requirements relating to options

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          (4)      Chapter 11 of Part 7 of this Act (which deals with the attribution of interests

in companies to beneficiaries of employee benefit trusts) applies for the

purposes of sub-paragraph (2).

          (5)      In this paragraph “employee benefit trust” has the same meaning as in that

Chapter (see sections 550 and 551).

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Meaning of “associate”: trustees of discretionary trust

  33      (1)      This paragraph applies for the purposes of paragraph 31(1)(c) (meaning of

“associate”: trustees of settlement) where—

              (a)             the individual (“the beneficiary”) is one of the objects of a

discretionary trust,

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              (b)             the property subject to the trust has at any time consisted of or

included shares or obligations of the company mentioned in

paragraph 28(2),

              (c)             the beneficiary has ceased to be eligible to benefit under the trust as

a result of—

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                    (i)                   an irrevocable disclaimer or release executed by the

beneficiary, or

                    (ii)                  the irrevocable exercise by the trustees of a power to exclude

the beneficiary from the objects of the trust,

              (d)             immediately after the beneficiary ceased to be so eligible, no

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associate of the beneficiary was interested in the shares or

obligations of the company which were subject to the trust, and

              (e)             during the period of 12 months ending with the date on which the

beneficiary ceased to be so eligible, neither the beneficiary nor any

associate of the beneficiary received any benefit under the trust.

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          (2)               The beneficiary is not, as a result only of the matters mentioned in sub-

paragraph (1)(a) and (b), to be regarded as having been interested in the

shares or obligations of the company at any time during that period of 12

months.

          (3)      In sub-paragraph (1) “associate” has the meaning given by paragraph 31, but

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with the omission of sub-paragraph (1)(c) of that paragraph (trusts and

estates).

Part 5

Requirements relating to options

Requirements relating to options: introduction

35

  34       A share option is not a qualifying option unless the requirements of this Part

of this Schedule as to the following are met at the appropriate time—

                    the type of shares that may be acquired (see paragraph 35),

                    when the option is capable of being exercised (see paragraph 36),

                    the terms being agreed in writing (see paragraph 37), and

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                    the non-assignability of rights (see paragraph 38).

Type of shares that may be acquired

  35      (1)      The option must confer a right to acquire shares that—

 

 

Income Tax (Earnings and Pensions) Bill
Schedule 5 — Enterprise management incentives
Part 5 — Requirements relating to options

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              (a)             form part of the ordinary share capital of the relevant company,

              (b)             are fully paid up, and

              (c)             are not redeemable.

          (2)      Shares are not fully paid up for the purposes of sub-paragraph (1)(b) if there

is any undertaking to pay cash to the relevant company at a future date.

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          (3)      For the purposes of sub-paragraph (1)(c) “redeemable” shares include shares

that may become redeemable at a future date.

Option to be capable of exercise within 10 years

  36      (1)      The option must be capable of being exercised within the period of 10 years

beginning with the date on which it is granted.

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          (2)      Where the exercise of the option is dependent on the fulfilment of

conditions, the option is to be taken to be capable of being exercised within

the period mentioned in sub-paragraph (1) if the conditions may be fulfilled

within that period.

Terms of option to be agreed in writing

15

  37      (1)      The option must take the form of a written agreement between the person

granting the option and the employee which meets the following

requirements.

          (2)      The agreement must state—

              (a)             the date on which the option is granted;

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              (b)             that it is granted under the provisions of this Schedule;

              (c)             the number, or maximum number, of shares that may be acquired;

              (d)             the price (if any) payable by the employee to acquire them, or the

method by which that price is to be determined; and

              (e)             when and how the option may be exercised.

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          (3)      The agreement must set out any conditions, such as performance conditions,

affecting the terms or extent of the employee’s entitlement.

          (4)      The agreement must contain details of any restrictions attaching to the

shares.

          (5)      Where the shares that may be acquired by the employee are subject to risk of

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forfeiture, the agreement must contain details of the conditions.

          (6)      For the purposes of sub-paragraph (5) shares are “subject to risk of

forfeiture” if the interest that may be acquired is only conditional within the

meaning of section 424 (conditional interests in shares).

Non-assignability of rights

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  38       The terms on which the option is granted—

              (a)             must prohibit the person to whom it is granted from transferring any

of that person’s rights under it, and

              (b)             if they permit it to be exercised after that person’s death, must not

permit it to be exercised more than one year after the date of the

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death.

 

 

 
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