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

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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clear that SAYE option holders are protected in relation to their existing approved options if approval of a scheme is withdrawn.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 Bill, 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 clause 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 clause 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 Bill (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 clause 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 Bill. 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.

 
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Prepared: 17 February 2003