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

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Clause 429: Amount or value of consideration given for employee's interest

1857.     This clause derives from section 140B(1) to (6) of ICTA. Section 140B(7) has been taken to a separate clause. This clause determines, for the purposes of clause 428, the amount allowable as the cost of the shares.

Clause 430: Amount or value of consideration given for right to acquire shares

1858.     This clause derives from section 140B(7) of ICTA which is concerned with calculating the allowable cost where an original option has been exchanged for a replacement option. Section 140B(7) simply refers to the workings of section 136 of ICTA which are not easy to follow. This clause spells out what the allowable cost is and the wording follows clause 485 which derives from section 136. See Change 125 in Annex 1.

Clause 431: Application of this Chapter where employee dies

1859.     This clause derives from section 140A(8) of ICTA which gives rules which apply when the employee dies holding the conditional shares. There is a deemed disposal immediately before death and a special market value rule applies.

Clause 432: Duty to notify provision of conditional interests in shares

1860.     This clause derives from those parts of section 140G of ICTA concerning information requirements on the initial award of the conditional shares. Section 140G(1)(b)(i) has been omitted as unnecessary because the original award of the shares cannot itself result in any charge under section 140A of ICTA. Accordingly this clause simply focuses on the possibility of there being subsequent events that may result in a charge.

1861.     The time limits for providing information throughout Chapters 2 to 5 of Part 7 have been standardised at 92 days after the end of the year in which the matter arose or after the event concerned. In the source legislation for this clause the time limit was 30 days after the end of the tax year in which the interest is provided. In addition where a time limit runs from the end of the tax year it is now expressed as "before 7th July" to give greater clarity. See Change 111 in Annex 1.

Clause 433: Duty to notify events resulting in charges under section 427

1862.     This clause derives from those parts of section 140G of ICTA concerning information requirements on the occurrence of any of the three events (death, disposal of shares, lifting of restrictions) which may result in a charge under section 140A of ICTA. The time limit for providing information has been extended from 30 to 92 days after the end of the tax year in which the event occurred and expressed differently. See Change 111 in Annex 1.

Clause 434: Minor definitions

1863.     This clause brings together the definitions in section 140H of ICTA and elsewhere in the provisions and adds some new labels for terms used in clause 422. In the definition of "terms" the word "include" in section 140H(6) of ICTA has been replaced by "means" to make better sense of the additional words "or in any other way".

1864.     The definition of shares (which comes from section 136(5)(d) of ICTA, as applied with modifications by section 140H(8) 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 3: Convertible shares

Background

1865.     Sections 140D to 140F of ICTA (together with supplementary provisions in sections 140G and 140H) were introduced by FA 1998 and apply to shares acquired on or after 17th March 1998. The provisions are concerned with countering possible avoidance in the award of convertible shares by reason of employment. Such shares could be issued having a low value but be later converted to shares of a different class with a higher value. The emoluments charge on award of the shares would be measured by reference to the initial low value and without these provisions the uplift in value on conversion would escape taxation.

1866.     The legislation imposes a charge to tax on the market value of the shares immediately after conversion as reduced by sums paid on acquisition or conversion and by any amounts already charged to tax in respect of those shares. No charge arises if all the shares of one class are converted to shares of a new single class and immediately before conversion the company was either controlled by outside shareholders or was employee-controlled.

1867.     Sections 140G and 140H of ICTA contain supplementary provisions some of which apply solely to the provisions concerning convertible shares (sections 140D to 140F of ICTA), some of which apply solely to the provisions concerning conditional shares (sections 140A to 140C of ICTA) which were introduced at the same time and some which apply to both. In this Bill the provisions on conditional shares appear in Chapter 2. This does mean that those supplementary provisions which apply to both types of share have been duplicated, but the overall result should be much easier to follow.

Clause 435: Application of this Chapter

1868.     Subsection (1) derives from section 140D(1) of ICTA and gives the basic condition that the shares must be acquired "as a director or employee" and that term is defined in clause 436. The reference to interests in shares as well as shares themselves throughout the Chapter derives from section 140F(6) of ICTA. The fact that these provisions only apply to shares acquired on or after 17th March 1998 is made clear in Part 7 of Schedule 7, to which there is also a signpost in clause 418(1).

1869.     Subsection (2) is mainly derived from section 140D(2) of ICTA (but also parts of section 140G(6) and section 140H(5) of ICTA) and defines the meaning of "convertible".

1870.     Subsection (3) derives from section 140F(2) of ICTA.

1871.     Subsection (4) is new and sets out a number of useful labels which make for less cumbersome drafting. The fact that this Chapter applies to prospective and former directors and employees is made clear by the reference to the extended definition in clause 446(1).

Clause 436: Shares acquired "as a director or employee"

1872.     This clause derives from subsections (1), (2) and (4) of section 140H of ICTA. It expands on what is meant by shares (or an interest in shares) acquired by a person "as a director or employee".

Clause 437: Cases where this Chapter does not apply

1873.     This derives from section 140H(3) of ICTA. It limits the application of this Chapter to cases where the earnings from the employment are within clause 15 or 21 and reproduces the restriction in the source legislation to Case I employments.

Clause 438: Charge on conversion of shares

1874.     This is the charging provision for this Chapter. It derives from section 140D(3) and (4) of ICTA and imposes a charge when the shares are converted to shares of a different class.

Clause 439: Amount of charge

1875.     This clause concerns the calculation of the taxable charge under clause 438. It derives from section 140D(5) and (60 of ICTA. A formula has been introduced to make the provisions more user-friendly. As with clause 428 the approach now adopted is to specify precisely what deductions are allowable in respect of amounts chargeable in respect of the acquisition of the interest. The three charges that are relevant are detailed in paragraphs (c), (d) and (e) of subsection (2). See Note 45 in Annex 2.

1876.     Subsection (3) provides that charges under the provisions derived from sections 78 and 79 of FA 1988 are deductible. It derives from section 140D(6)(d) of ICTA. In contrast to clause 428, there is no need to refer to "a different event" here since the conversion itself does not give rise to a charge under the FA 1988 provisions.

1877.     Subsection (5) gives the meaning of "market value", the definition of which is not found in ICTA until section 140F(3).

1878.     Subsection (6) derives from the definition of "taxable conversion" in section 140D(7) of ICTA.

1879.     Subsection (7) is new. It meets the point that there should be no reason why a charge arising at the end of the seven-year period in section 79 of FA 1988 should not be a deductible amount. This is a minor change to the law. See Change 112 in Annex 1.

Clause 440: Case outside charge under section 438: conversion of entire class

1880.     In ICTA the main exemption from the charge on conversion is tucked away in subsections (8) and (9) of section 140D with related definitions in section 140F. The exemption is now in a separate clause and the definitions are in subsections (4) and (5).

Clause 441: Case outside charge under section 438: acquisition of conditional interest

1881.     This clause provides that no charge arises under this Chapter if the new shares are within the scope of Chapter 2. This ensures that where a conditional interest in shares is acquired on the conversion of other shares and under clause 426 of the Bill there is no charge in respect of the acquisition of the interest, there will not be a charge under this Chapter in respect of the conversion of the other shares. The clause derives from section 140D(10) of ICTA.

Clause 442: Amount or value of consideration given for shares or conversion

1882.     This clause derives from section 140E(1) to (6) of ICTA. Section 140E(7) has been taken to a separate clause. It determines, for the purposes of clause 439, the amount allowable as the cost of the shares or the cost of conversion.

Clause 443: Amount or value of consideration given for right to acquire shares

1883.     This clause derives from section 140E(7) of ICTA which is concerned with calculating the allowable cost where an original option has been exchanged for a replacement option. That section simply refers to the workings of section 136 of ICTA which are not easy to follow. In order to assist readers, this clause sets out what the allowable cost is and the wording follows clause 485 which derives from section 136 of ICTA. See Change 125 in Annex 1.

Clause 444: Conversion in consequence of employee's death

1884.     This clause derives from section 140F(1) of ICTA which deems certain conversions within 12 months of death to have occurred immediately before death.

Clause 445: Duty to notify conversions of shares

1885.     This clause derives from those parts of section 140G of ICTA concerning the information requirements when shares are converted and may result in a charge under this Chapter. The time limit for providing information has been extended from 30 to 92 days after the tax year in which the conversion takes place and expressed differently. See Change 111 in Annex 1.

Clause 446: Minor definitions

1886.     This clause brings together the definitions in section 140H of ICTA and elsewhere in the source legislation and adds some new labels for expressions used in clause 435. In the definition of "terms" the word "include" in section 140H(6) of ICTA has been replaced by "means" to make better sense of the additional words "or in any other way".

1887.     The definition of shares (which comes from section 136(5)(d) of ICTA, as applied with modifications by section 140H(8) 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 4 - Post-acquisition benefits from shares

Overview

1888.     This Chapter is concerned with the income tax charges which may arise in respect of shares (or an interest in shares) which have been awarded by reason of an individual's office or employment.

1889.     The initial award of the shares may have given rise to a Schedule E charge as an emolument or benefit. This Chapter is not concerned with that initial charge. Instead it provides for a charge to tax in certain circumstances on the increase in value of those shares and in respect of any special benefits which are received by virtue of ownership of those shares. The increase in value charges do not apply where the shares have been issued under one of the share schemes approved by the Inland Revenue, but the special benefits charge may still apply.

1890.     The provisions in this Chapter derive from sections 77 to 88 of FA 1988. They apply to shares acquired on or after 26th October 1987 and replace legislation in sections 138 and 139 of ICTA which had a similar, though rather more wide-ranging, effect. Sections 138 and 139 of ICTA, together with the interpretation provisions in section 140 of ICTA still apply to shares acquired before 26th October 1987 and that legislation remains on the statute book although it has not been rewritten. Paragraphs 55 to 57 in Part 7 of Schedule 7 to this Bill contain the appropriate savings and also rewrite the transitional provisions in section 88 of FA 1988 that are still relevant.

1891.     Section 84 of FA 1988 is a capital gains tax provision and is duplicated in section 120(1) of TCGA 1992. As it is not intended to include the provision in this Bill, the section has not been rewritten. Amendments to section 120 of TCGA 1992 are made by paragraph 210 of Schedule 6 to this Bill.

1892.     The 1988 anti-avoidance legislation contains three distinct charges in sections 78, 79 and 80 of FA 1988. That ordering of the charges has been followed in this Bill with the corresponding charges now in clauses 449, 453 and 457. Other than that, however, much of the material has been moved to present it in a logical and more helpful order. One broad intention is that in respect of each charge the legislation sets out in the following order

  • The scope of the charge

  • The calculation of the charge

  • The exceptions from the charge

Clause 447: Application of this Chapter

1893.     This clause sets out the scope of the Chapter. Subsection (1) derives from the rule at the end of section 77 of FA 1988 that the provisions are concerned with acquisitions of shares in a company by a director or employee of that or any other company. The fact that these provisions only apply to shares issued on or after 26th October 1987 is made clear in Part 7 of Schedule 7 to which there is also a signpost in clause 418(1).

1894.     Subsections (2) and (3) are new. They spell out what subsequent references to "the acquisition" and "the shares" are references to. The fact that this Chapter applies to prospective and former employees is made clear by the reference to the extended definition in clause 470. The definition of "the employer company" is designed to avoid some rather tortuous references to it elsewhere in this Chapter.

1895.     Subsection (4) derives from the rules in section 77(1) and in section 87(4) of FA 1988 which explain that the Chapter is concerned both with shares acquired by the employee directly and with shares first issued to another person and then assigned to the employee.

1896.     Subsection (5) derives from section 83(1) of FA 1988. That provision ensures that where the shares are issued to a connected person because the opportunity was offered to that person rather than the employee himself, the acquisition is treated as having been made by the employee. The charges in the Chapter generally operate by reference to beneficial interests and it is not expressly provided in section 83(1) of FA 1988 that the deeming provision applies to beneficial ownership although that is the way the subsection has always been interpreted. This clause clarifies the general understanding that the opening words "For the purposes of this Chapter" imply that the shares are deemed to have been acquired by the employee as a director or employee. This clarification is explained in detail in Note 46 in Annex 2.

Clause 448: Cases where this Chapter does not apply

1897.     Subsection (1) derives from section 77(2) of FA 1988. It limits the scope of the Chapter to cases where the earnings from the employment are within clause 15 or 21 reproducing the restriction in the source legislation to Case I employments. See Note 47 in Annex 2.

1898.     Subsection (2) derives from section 77(3) of FA 1988 and is an exemption for public offers.

1899.     Subsections (3) and (4) derive from section 77(4) of FA 1988 and extend the public offer exemption to certain other offers which are made to employees separate from a public offer.

Clause 449: Charge on occurrence of chargeable event

1900.     This is the first of the charging provisions and derives from parts of section 78(1) and (3) of FA 1988. The meaning of chargeable event, the calculation of the charge and the exceptions appear in separate clauses. Subsection (5) acts as a signpost to the provisions which remove the charge under various approved schemes.

Clause 450: Chargeable events

1901.     This clause defines what is and is not a chargeable event and derives from section 78(2), (5), (6) and (7) of FA 1988. It will be noted that a new label "outside shareholders" is used as shorthand for the persons within section 78(6)(a) of FA 1988 and the term is defined in clause 469.

1902.     The words in section 78(6)(c) of FA 1988 "which is not a dependent subsidiary" have been omitted in new subsection (4)(c) on the grounds that they are unnecessary. It is already clear from section 78(1)(b) of FA 1988 that no charge arises if the company is a dependent subsidiary.

1903.     Subsection (6) derives from section 78(7) of FA 1988. The term "are references to such" has been used instead of "include" to make better sense of the additional words "or in any other way".

Clause 451: Amount of charge

1904.     This clause, which derives from section 78(3) of FA 1988, specifies the amount of the charge under clause 449. The present subsection is rather complex and so this clause separates out the various ideas to make the provision easier to grasp.

Clause 452: Cases outside charge under section 449

1905.     This clause brings together the various exceptions in sections 77 and 78 of FA 1988.

1906.     Subsection (2) ensures that if a charge is taken under clause 427 in respect of an event then no charge is taken under this clause. It derives from the opening words of section 77(1) of FA 1988 which give priority to the charge on conditional shares in section 140A of ICTA (rewritten in Chapter 2 of this Part).

1907.     Subsection (3) derives from section 78(4) of FA 1988 which contains the let-out if the employee has not been a director or employee of the company or an associated company within the seven years ending with the chargeable event. The source legislation uses the term "the person who acquired the shares" rather than the "employee". However, since shares acquired by connected persons are treated as acquired by the employee, the effect is the same.

1908.     Subsection (4) derives from section 78(1)(b) of FA 1988. Shares in dependent subsidiaries are excluded from the charge under clause 449 because they are instead subject to a charge under clause 453. For the sake of clarity this clause replaces the word "at" in the phrase "at the time of the chargeable event" with "immediately before". See Note 48 in Annex 2.

Clause 453: Charge on increase in value of shares of dependent subsidiary

1909.     This is the second of the charging provisions and derives from section 79(1) and (4) of FA 1988. Again, matters concerning what is chargeable, the calculation of the amount and the exceptions have been taken to separate clauses.

1910.     Subsection (3) derives from section 79(4) of FA 1988 and specifies the year of charge.

1911.     Subsections (4) and (5) are new. Subsection (5) acts as a signpost to the provisions which remove the charge under various approved schemes.

Clause 454: Chargeable increases

1912.     This clause derives from section 79(2) and (3) of FA 1988 and determines the period over which any rise in the value of the shares is measured in order to be an increase subject to charge.

Clause 455: Amount of charge

1913.     This clause brings together all those parts of section 79 of FA 1988 which concern the calculation of the charge and in particular it makes clear what deductions should be made from the rise in value of the shareholding.

1914.     Subsection (1) introduces a formula and subsection (2) specifies the items that are allowable deductions. Subsection (3) derives from section 79(6) of FA 1988 and is concerned with certain cases where the employee receives less than market value for the shares. The aim is to ensure that the employee is only charged on the difference between base value and the actual proceeds. That provision produces the right result where the chargeable increase is calculated by reference to the value of the shares at acquisition, but not where it is calculated by reference to the value of the shares at the later time that the company becomes a dependent subsidiary. The clause produces the right result in both situations. It is a minor change to the law. See Change 113 in Annex 1.

1915.     Subsection (4) derives from the final two lines in section 79(4) of FA 1988.

Clause 456: Cases outside charge under section 453

1916.     Subsection (2) reflects the opening words of section 77(1) of FA 1988 "subject to section 140A of the Taxes Act 1988". It ensures that if a charge is taken under clause 427 (conditional interests in shares) then no charge is taken under clause 453. This is because if a disposal potentially gives rise to a charge under clause 453 (which is more general in its application) and under clause 427 then the latter charge has priority.

1917.     Subsection (3) derives from section 79(7) of FA 1988 and provides a let-out if the employee has not been a director or employee of the company or an associated company in the seven years before the time that the company becomes a dependent subsidiary. As with clause 452, the phrasing has been changed to produce a true exception and the reference is to "the employee" rather than "the person who acquired the shares".

Clause 457: Charge on other chargeable benefits from shares

1918.     This is the third of the charging provisions and derives from section 80 of FA 1988. The term "chargeable benefit" in subsection (1) has replaced "special benefit" in order to be consistent with "chargeable event" and "chargeable increase" in the other charging provisions in this Chapter.

1919.     An amount in respect of benefits attaching to shares may be charged on the employee, not only when the shares are owned by the employee (section 80(1) of FA 1988), but also when owned by other persons (section 83(1) and (4) of FA 1988). Subsection (2) brings together and clarifies how these rules are considered to operate and remedies the deficiencies in the wording of the source legislation. See Change 114 in Annex 1.

Clause 458: Chargeable benefits

1920.     This clause derives from the rather complex rules in section 80 of FA 1988 giving further conditions as to when a benefit is a chargeable benefit.

1921.     Subsection (2) introduces the following three subsections. The approach adopted is to define what are chargeable benefits, replacing the approach in FA 1988 of saying that all benefits are chargeable benefits unless paragraphs (a) and (b) of section 80 apply. This makes the rules easier to understand.

1922.     Subsection (3) derives from section 80(2)(a) of FA 1988.

1923.     Subsection (4) derives from section 80(1A) of FA 1988.

1924.     Subsection (5) introduces the conditions in subsection (6) which derive from section 80(3) of FA 1988. Subsection (6)(a) uses the new term "outside shareholders" which was first introduced in clause 450.

1925.     Subsection (7) contains two definitions which apply solely for the purposes of this section. The definition of "the company" is new and clarifies which company is being referred to in subsections (4) and (6). The other definition derives from section 87(1) of FA 1988.

Clause 459: Amount of charge

1926.     This clause specifies the amount of the chargeable benefit. It derives from section 80(4) of FA 1988 and the definition of "value" in section 87(1) of FA 1988.

Clause 460: Cases outside charge under section 457

1927.     This clause derives from section 80(5) of FA 1988 which contains the let-out where the employee has not been a director or employee of the company or an associated company in the seven years before the benefit is received. There are two points to note. Section 80(5)(a) of FA 1988 refers to the company in subsection (1) when that subsection contains no reference to a company. It clearly means the company whose shares are mentioned in subsection (1). See Change 115 in Annex 1. Also, in section 80(5) of FA 1988 the test is expressed to apply to the person receiving the benefit. But by virtue of the connected persons rules in section 83(4) of FA 1988 the test effectively applies to the employee himself. Accordingly, the test is applied directly to the employee in this clause.

 
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Prepared: 17 February 2003