House of Lords - Explanatory Note
Income Tax (Earnings And Pensions) Bill - continued          House of Lords

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Clause 486: Duty to notify matters relating to share options

1998.     This clause derives from section 136(6) to (8) of ICTA. The time limit of 92 days after the end of the year of assessment has been rewritten as "before 7th July" in line with the new practice in Chapters 2 to 5 of this Part. The particulars are now to be given to the Inland Revenue rather than to the inspector. See Change 158 in Annex 1.

Clause 487: Minor definitions

1999.     This clause brings together minor definitions from section 136(5) of ICTA and others from section 187A of ICTA in connection with the deductions for National Insurance contributions.

2000.     The definition of shares in section 136(5)(d) of ICTA includes stock "in so far as the context permits". This rider has been omitted as unnecessary since there does not appear to be anywhere in this Chapter where the context would not so permit.

Chapter 6: Approved share incentive plans

Background

2001.     This Chapter, together with Schedule 2, derives from the legislation relating to share incentive plans (or "SIPs" for short). SIPs were previously known as employee share ownership plans (or "ESOPs" for short). The SIPs legislation is the result of a policy designed to bring share ownership in a company to the whole of that company's workforce.

2002.     Nearly all the SIPs legislation is contained in Schedule 8 to FA 2000 (introduced by section 47 of that Act). Schedule 8 to FA 2000 was amended, to a certain extent, by Schedule 13 to FA 2001 (introduced by section 61 of that Act), and also by section 95 of that Act. Further amendments to Schedule 8 of FA 2000 were made by section 39 of FA 2002 and also by the Employee Share Schemes Act 2002.

2003.     The new legislation relating to SIPs, the majority of which is contained in this Chapter and Schedule 2, is called "the SIP code" - a term introduced in clause 488.

2004.     The core of the SIP code is that a company establishing a share incentive plan must offer either "free shares" or "partnership shares" (or both) to its employees. Two other types of shares - "matching shares" and "dividend shares" - are dealt with in the SIP code; and either or both of these may also be offered to employees - although this is not essential. And if a SIP is to be "approved" for the purposes of the legislation (and thus obtain the tax advantages available to an approved SIP), there are general requirements to be met, and also further requirements relating to the eligibility of individuals, to the types of shares that may be awarded, and to the trustees.

2005.     The SIP code, accordingly, has a number of distinguishable components:

  • it specifies requirements that a SIP must meet before it may be "approved" for the purposes of the SIP code;

  • it deals with the procedural aspects relating to the approval of plans and the withdrawal of approval;

  • it specifies the tax advantages that an approved SIP possesses;

  • it specifies the tax charges that may arise in certain circumstances (for example, when shares cease to be subject to the plan); and

  • it deals with supplementary matters (including interpretation).

2006.     Of the components listed in the last paragraph, this Chapter deals with the tax advantages that an approved SIP possesses, and with the tax charges that may arise.

2007.     Schedule 2 deals with the other components listed in that paragraph. After the introduction (in Part 1), that Schedule deals with the requirements that a SIP must meet before it may be "approved" for the purposes of the SIP code (in Parts 2 to 9); with the approval of plans and the withdrawal of approval (in Part 10); and with supplementary matters (in Part 11).

2008.     Schedule 8 to FA 2000 also contained other provisions relating to corporation tax, capital gains tax and stamp duty. These other provisions are dealt with in Schedule 6 to this Bill (consequential amendments). Schedule 7 to this Bill includes provisions designed to avoid any transitional problems arising from the replacement of Schedule 8 by the provisions contained in this Bill.

Overview

2009.     In this Chapter, after an introductory clause (clause 488), the first major topic dealt with is the tax advantages that an approved SIP possesses (in clauses 489 to 499). The second major topic dealt with is the tax charges that may arise (in clauses 500 to 508). The provisions relating to each major topic have been arranged to deal with the award of shares, then with the holding of shares, and then, finally, with shares ceasing to be subject to the plan. This Chapter concludes with provisions dealing with the making of PAYE deductions in connection with the tax charges that may arise (in clauses 509 to 514), and with a clause referring to the other provisions in the Tax Acts that deal with SIPs (in clause 515).

Clause 488: Approved share incentive plans (SIPs)

2010.     This clause is introductory. It indicates the main components of the SIP code, and defines some terms of general application.

2011.     Subsection (1) is new, and indicates the main topics dealt with in the SIP code. Subsection (2), which is also new, then indicates which of those topics are dealt with in Schedule 2.

2012.     Subsection (3) contains the definition of "the SIP code". This definition is also new.

2013.     Subsection (4) defines terms used generally in the SIP code. Of these terms:

  • the definition of an "approved" plan may be deduced from the definition of "approved employee share ownership plan" in paragraph 129(1) of Schedule 8 to FA 2000; but, in this Bill, the definition is now followed by a new provision, stating that the word "approval" has a corresponding meaning;

  • the definition of a "PAYE deduction" generalises the partial definitions in paragraphs 95(10) and 96(5) of Schedule 8 to FA 2000; and

  • the definition of a "share incentive plan" derives from the definition of an "employee share ownership plan" in paragraph 1(1) of Schedule 8 to FA 2000.

2014.     Subsection (5) draws attention to the fact that there is an index relating to the SIP code at the end of Schedule 2. Expressions contained in that index have the meanings that are indicated there.

The tax advantages

2015.     Clauses 489 to 499 relate to the first major topic dealt with in this Chapter: the tax advantages possessed by an approved SIP.

Clause 489: Operation of tax advantages in connection with approved SIP

2016.     This clause is introductory, being concerned with the general scope of the tax advantages applying to an approved SIP. Those advantages do not apply to an individual who is not chargeable to tax under Part 2 in respect of the eligible employment (as defined) (see subsection (2)).

2017.     This clause is the first of two that derive from paragraph 77 of Schedule 8 to FA 2000 (the other being clause 500).

2018.     Subsections (2) and (3) are derived from paragraph 77(2) of Schedule 8 to FA 2000. The material in that sub-paragraph has been divided to make it easier to understand; and the definition of "the eligible employment" is new.

Clause 490: No charge on award or acquisition of shares: general

2019.     This clause is the first of four that deal with the tax advantages connected with the award of shares. It contains the basic proposition that the employee is not liable to income tax on the value of the beneficial interest in the plan shares that passes to the employee at the time those shares are acquired.

2020.     This clause derives from paragraph 78(1) of Schedule 8 to FA 2000, a sub-paragraph that has now been divided into two subsections.

Clause 491: No charge on award of shares as taxable benefit

2021.     This clause is the second of four that deal with the tax advantages connected with the award of shares. It provides that an employee is not liable to income tax under Chapter 8 of Part 3. That Chapter forms part of the benefits code, and provides for income tax liabilities to arise on acquisitions of shares.

2022.     This clause derives from paragraph 78(2) of Schedule 8 to FA 2000. That sub-paragraph contains a second sentence stating that any charge to tax under section 162(6) of ICTA remained unaffected. As the provision is expressed in this clause in a form that does not impinge in any way on the provisions rewriting section 162(6) of ICTA (in Chapter 9 of Part 3), this second sentence has been omitted on the basis that it is unnecessary.

Clause 492: No charge on partnership share money deducted from salary

2023.     This clause is the third of four that deal with the tax advantages connected with the award of shares. It provides that an employee is not liable to income tax under Part 2 where partnership share money is deducted from the employee's salary under a partnership share agreement. The expressions "partnership share agreement" and "partnership share money" are defined in Schedule 2 (in paragraphs 44 and 45 respectively); and these expressions may also be found in the index of defined expressions in paragraph 100 at the end of that Schedule.

2024.     This clause derives from paragraph 83 of Schedule 8 to FA 2000.

Clause 493: No charge on acquisition of dividend shares

2025.     This clause is the last of four that deal with the tax advantages connected with the award of shares. It provides that a scheme participant is not liable to income tax on the amount applied by the trustees in acquiring dividend shares on the participant's behalf.

2026.     This clause derives from paragraph 89 of Schedule 8 to FA 2000. Subsection (1) reorganises the material in paragraph 89(1); in subsection (2) the word "amount" replaces the words "amounts of dividends"; and subsections (3) to (5) vary the order of material drawn from paragraph 89(3) and (4) of Schedule 8 to FA 2000.

Clause 494: No charge on removal of restrictions applying to shares

2027.     This clause is the first of three that deal with the tax advantages connected with the holding of shares. Subsections (1) and (2) apply where a participant's plan shares are subject to provision for forfeiture, and that provision is varied or removed. In these circumstances a participant is not liable to income tax by virtue of clauses 427 or 449. Those clauses may be found, respectively, in Chapters 2 and 4 of this Part. Subsection (3) provides that a participant is not liable to income tax by virtue of clause 449 when the holding period comes to an end. The expressions "provision for forfeiture" and "holding period" are defined in Schedule 2, in paragraphs 99(1) and 36 respectively.

2028.     This clause derives from paragraph 80(1) and (2) of Schedule 8 to FA 2000. There is a new subsection (1), setting out the circumstances in which subsection (2) applies.

Clause 495: No charge on increase in value of shares in dependent subsidiary

2029.     This clause is the second of three that deal with tax advantages connected with the holding of shares. It provides that a participant is not liable to income tax by virtue of clause 453 (charge on increase in value of shares of dependent subsidiary) in respect of any of the participant's shares that are subject to the plan when the chargeable increase is determined for the purposes of that clause.

2030.     This clause derives from paragraph 80(3) of Schedule 8 to FA 2000. In order to make that provision easier to understand, the rewritten legislation now consists of two subsections.

2031.     Subsection (1) makes a minor change to the law. If plan shares are sold while they are still in the plan it is not the practice of the Inland Revenue to attempt to charge income tax under the dependent subsidiary charge in section 79 of FA 1988. However, there is a problem with the wording in paragraph 80 in that if the "appropriate time" for the purposes of that section is the time of sale it is debatable whether at that point the shares are still subject to the plan. In order to make it clear that no charge to income tax arises under clause 453 in such circumstances, the words "or immediately before" have been added before the words "the appropriate time" at the end of this subsection. See Change 126 in Annex 1.

Clause 496: No charge on cash dividend retained for reinvestment

2032.     This clause is the last of three that deal with the tax advantages connected with the holding of shares. It provides that a participant is not liable to income tax in respect of the amount of a cash dividend that is not reinvested but is carried forward and held by the trust with a view to reinvestment at a later date. It derives from paragraph 91 of Schedule 8 to FA 2000.

Clause 497: Limitations on charges on shares ceasing to be subject to plan

2033.     This clause is the first of two that deal with the tax advantages connected with shares ceasing to be subject to approved SIPs. It provides that liability to income tax only arises in specified limited circumstances when shares cease to be subject to the plan.

2034.     This clause brings together three general propositions contained in paragraphs 81(7), 86(6) and 93(6) of Schedule 8 to FA 2000 respectively. The opportunity has been taken to bring these three sub-paragraphs into better alignment. All three subsections now refer to "income tax" (as opposed to "tax"); and in subsection (2) the reference to "the employee" has been omitted. Paragraph 77(1) of Schedule 8 to FA 2000 may be relied on for the change to the use of the term "income tax".

Clause 498: No charge on shares ceasing to be subject to plan in certain circumstances

2035.     This clause is the second of two that deal with the tax advantages connected with shares ceasing to be subject to approved SIPs. It provides that a participant is not liable to income tax on shares ceasing to be subject to the plan if the shares so cease because the participant ceases to be in relevant employment in the circumstances specified in subsection (2). The meaning of a participant ceasing to be in relevant employment is explained in paragraph 95 of Schedule 2 to this Bill.

2036.     This clause derives from sub-paragraphs (1) and (2) of paragraph 87 of Schedule 8 to FA 2000. Subsection (2)(d) reorganises the material to be found in paragraph 87(3)(d) of Schedule 8.

2037.     That paragraph concludes by providing two definitions. The first definition (that of "redundancy") has now been placed in paragraph 99(1) of Schedule 2 to this Bill; and the second (which appears in the rewritten legislation as a definition of "the specified retirement age") has now been placed in paragraph 98 of Schedule 2.

2038.     The material set out in subsection (2) of this clause is also set out in full in paragraph 32(2) of Schedule 2. This duplication should assist the reader.

Clause 499: No charge in respect of incidental expenditure

2039.     This clause is concerned with incidental expenditure incurred in operating the plan; and provides that an employee is not liable to income tax in respect of such expenditure of the trustees, the company that established the SIP or the employee's employer.

2040.     The clause derives from paragraph 78(3) of Schedule 8 to FA 2000, which was added by paragraph 4 of Schedule 13 to FA 2001.

2041.     This clause makes a minor change to the law in that it is now provided that there is also no liability to income tax for incidental expenditure incurred by the company which established the plan. See Change 127 in Annex 1.

The charges to tax

2042.     Clauses 500 to 508 relate to the second major topic dealt with in this Chapter: the consequential tax charges that may arise in certain circumstances.

Clause 500: Operation of tax charges in connection with approved SIP

2043.     As in the case of clause 489, this clause is introductory, being concerned with the general scope of the tax charges applying to an approved SIP. Those charges do not apply to an individual who is not chargeable to tax under Part 2 in respect of the eligible employment (as defined) (see subsection (2)).

2044.     This clause is the second of two that derive from paragraph 77 of Schedule 8 to FA 2000 (the other being clause 489).

2045.     As in the case of clause 489, subsections (2) and (3) are derived from paragraph 77(2) of Schedule 8 to FA 2000. Once again the material in that sub-paragraph has been divided to make it easier to understand; and the definition of "the eligible employment" is new.

Clause 501: Charge on capital receipts in respect of plan shares

2046.     This clause is the first of three that impose tax charges connected with the holding of shares. It imposes a charge to income tax if a capital receipt is received by a participant in respect of plan shares which have been held for less than five years (three years in the case of dividend shares). The meaning of the term "capital receipt" is dealt with in the following clause.

2047.     This clause is the first of two that derive from paragraph 79 of Schedule 8 to FA 2000. This clause derives from sub-paragraphs (1) and (5) of that paragraph, and deals with the matters directly relevant to the charge. Subsections (1) to (5) of this clause are all derived from paragraph 79(1) of Schedule 8 to FA 2000, which has been divided to make it easier to understand; and subsection (6) simplifies the wording of paragraph 79(5) of Schedule 8 to FA 2000.

Clause 502: Meaning of "capital receipt" in section 501

2048.     This clause follows on from clause 501, and deals with the definition of the term "capital receipt". The term is given a very wide definition.

2049.     This clause is the second of two that derive from paragraph 79 of Schedule 8 to FA 2000. This clause derives from the definitional provisions in sub-paragraphs (2) to (4) of that paragraph.

2050.     In order to emphasise the provision that will apply most often in practice, subsection (2) begins with the words "The general rule".

2051.     In subsection (5) the words "pursuant to a direction" have been changed to "as a result of a direction".

Clause 503: Charge on partnership share money paid over to employee

2052.     This clause is the second of three that impose tax charges connected with the holding of shares. The clause imposes a charge to income tax if an amount is paid over to an individual under any of the provisions in Schedule 2 that are listed in this clause.

2053.     This clause derives from paragraph 84 of Schedule 8 to FA 2000.

Clause 504: Charge on cancellation payments in respect of partnership share agreement

2054.     This clause is the last of three that impose tax charges connected with the holding of shares. The clause imposes a charge to income tax if an individual receives any money in respect of the cancellation of a partnership share agreement.

2055.     This clause derives from paragraph 85 of Schedule 8 to FA 2000; but the wording of this clause differs very substantially from the wording of that paragraph.

2056.     As in the case of other clauses in this Chapter, the year that is "the relevant tax year" is specified. The point at which the tax charge arises is not specified in Schedule 8 to FA 2000; but the point has been dealt with explicitly in subsection (3). See Note 3(B) in Annex 2.

Clause 505: Charge on free or matching shares ceasing to be subject to plan

2057.     This clause is the first of three that impose tax charges connected with shares ceasing to be subject to SIPs. This clause is the main charging provision for free and matching shares; and it provides for the charge to vary with the length of the period for which the shares have been held. If the shares have been held for more than five years, there is no income tax liability under this clause.

2058.     This clause derives from sub-paragraphs (1) to (6) of paragraph 81 of Schedule 8 to FA 2000.

2059.     Subsection (1) introduces two new terms, "the award date" and "the exit date". These two terms are then deployed in subsections (2) to (5). Subsection (5), by providing that the "relevant tax year" is the tax year in which the exit date falls, has the effect that any charge to tax will arise in that year. See Note 3(B) in Annex 2.

2060.     Subsection (6) combines material at present contained in sub-paragraphs (5) and (6) of paragraph 81.

Clause 506: Charge on partnership shares ceasing to be subject to plan

2061.     This clause is the second of three that impose tax charges connected with shares ceasing to be subject to SIPs. This clause is the main charging provision for partnership shares; and, as in the case of clause 505, it provides for the charge to vary with the length of the period for which the shares have been held. If the shares have been held for more than five years, then once again there is no income tax liability under this clause.

2062.     This clause derives from sub-paragraphs (1) to (5) of paragraph 86 of Schedule 8 to FA 2000.

2063.     Subsection (1) introduces a new term, "the exit date". This term is then deployed in subsections (2) to (5).

2064.     As in the case of other clauses in this Chapter, the year that is "the relevant tax year" is specified. The point at which the tax charge arises is not specified in Schedule 8 to FA 2000; but as there can be little doubt about the answer, the point has been dealt with explicitly in subsection (5). See Note 3(B) in Annex 2.

Clause 507: Charge on disposal of beneficial interest during holding period

2065.     This clause is the last of three that impose tax charges connected with shares ceasing to be subject to SIPs. It applies if a participant disposes of the beneficial interest in free or matching shares during the holding period in breach of the obligations imposed by paragraph 36(1)(b) of Schedule 2 to this Bill.

2066.     This clause derives from paragraph 82(1) of Schedule 8 to FA 2000. (Paragraph 82(2) of Schedule 8 to FA 2000 was repealed by paragraph 5 of Schedule 13 to FA 2001.) Subsection (1)(a) contains additional wording to emphasise that this clause applies if free or matching shares cease to be subject to the plan during the holding period applying to those shares.

2067.     As in the case of other clauses in this Chapter, the year that is "the relevant tax year" is specified. As in the case of those other clauses, the point at which the tax charge arises is not specified in Schedule 8 to FA 2000; the point is dealt with explicitly in subsection (3). See Note 3(B) in Annex 2.

Clause 508: Identification of shares ceasing to be subject to plan

2068.     This clause contains provisions for identifying shares that cease to be subject to SIPs.

2069.     This clause derives from paragraph 122(6) of Schedule 8 to FA 2000, which is one of the supplementary provisions in Part 13 of that Schedule. It is more convenient to deal with this topic here, alongside the provisions dealing with the tax charges connected with shares ceasing to be subject to SIPs.

2070.     Paragraph 122(6) of Schedule 8 is drafted in terms of shares being "awarded" to a participant; but, while it is appropriate to speak of an award of free shares, partnership shares or matching shares, it is not clear that such terminology is appropriate for dividend shares. It is, however, the intention that all shares in the trust for a particular employee should be pooled, and that shares should come out of the trust on a first in first out basis. Subsection (2) has been added to this clause to deal with this point. See Change 128 in Annex 1.

PAYE implications

2071.     Clauses 500 to 508 deal with the various charges to income tax as employment income that may arise under the SIP code. Clauses 509 to 514, which derive from paragraphs 94 to 96 of Schedule 8 to FA 2000 (as amended), deal with the circumstances in which PAYE may be applied to those payments.

Clause 509: Modification of section 696 where charge on shares ceasing to be subject to plan

2072.     This clause, with its reference to section 696, has the effect of providing that where there is an amount that counts as employment income as the result of shares ceasing to be subject to an approved SIP, and where the shares in question are readily convertible assets, PAYE is to be applied on the amount likely to count as employment income under the SIP code.

2073.     This clause derives from paragraphs 94 and 128 of Schedule 8 to FA 2000, two paragraphs since amended by section 39(2) and (6) of FA 2002.

2074.     This clause has the consequence that the employer has to use his best estimate of the amount that will be chargeable: there is no requirement that PAYE has to be operated on the precise amount that will eventually count as employment income.

 
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Prepared: 17 February 2003