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

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Clause 510: Payments by trustees to employer company on shares ceasing to be subject to plan

2075.     This clause applies where any plan shares cease to be subject to the plan; where there is an amount that counts as employment income of the participant; and where there is an obligation to deduct PAYE in respect of that amount. In these circumstances the principal obligation to account for any PAYE due is that of the employer company (an expression defined in subsection (7)). The plan may require the participant to pay sufficient money to the employer company in order to meet the PAYE liability; but, to the extent that it does not do so, this clause provides for the trustees to pay sums to the employer company.

2076.     This clause is the first of three that derive from paragraph 95 of Schedule 8 to FA 2000. That paragraph is long; and it has been thought advantageous to divide it. This clause derives from sub-paragraphs (1) to (6) of paragraph 95.

2077.     Subsection (7) takes account of the amendment made to paragraph 95(6) of Schedule 8 to FA 2000 by section 39(3) of FA 2002.

Clause 511: PAYE deductions to be made by trustees on shares ceasing to be subject to plan

2078.     This clause is relevant where any plan shares cease to be subject to the plan and as a result there is an amount that counts as employment income of the participant. In such a case if either there is no employer company or the Inland Revenue are of the opinion that a PAYE deduction is impracticable, and direct that this clause is to apply, the trustees have to account for the PAYE as if the participant were a former employee of the trustees. The practical effect of this is that the trustees have to deduct income tax at the basic rate.

2079.     This clause is the second of three that derive from paragraph 95 of Schedule 8 to FA 2000. This clause derives from sub-paragraphs (7) and (8) of paragraph 95.

Clause 512: Disposal of beneficial interest by participant

2080.     This clause provides for clauses 510 and 511 to apply in a modified form where a participant disposes of his beneficial interest in any of his plan shares.

2081.     This clause is the last of three that derive from paragraph 95 of Schedule 8 to FA 2000. This clause derives from sub-paragraph (9) of paragraph 95.

Clause 513: Capital receipts: payments by trustees to employer company

2082.     This clause and clause 514 apply where the trustees receive money which gives rise to a capital receipt that counts as employment income in the hands of the participant (see clause 501). This clause then applies to deal with the "basic" case that arises in these circumstances. The trustees are to pay over an amount equal to the amount of employment income to the employer company (an expression defined in subsection (5)), and the employer company is then to account for the PAYE and to pay the balance to the employee.

2083.     This clause is the first of two that rewrite paragraph 96 of Schedule 8 to FA 2000. This clause derives from sub-paragraphs (1) and (2) of paragraph 96. Subsection (5) takes account of the amendment made to paragraph 96(2) of Schedule 8 to FA 2000 by section 39(4) of FA 2002.

Clause 514: Capital receipts: PAYE deductions to be made by trustees

2084.     Clause 513 and this clause apply where the trustees receive money which gives rise to a capital receipt that counts as employment income in the hands of the participant (see clause 501). This clause applies in circumstances where either there is no employer company or the Inland Revenue are of the opinion that a PAYE deduction is impracticable, and direct that this clause is to apply. In these circumstances, and when making the capital payment to the participant, the trustees are to make a PAYE deduction as if the participant were a former employee of the trustees. The practical effect of this is that the trustees have to deduct income tax at the basic rate.

2085.     This clause is the second of two that rewrite paragraph 96 of Schedule 8 to FA 2000. This clause derives from sub-paragraphs (3) and (4) of paragraph 96.

Clause 515: Tax advantages and charges under other Acts

2086.     This is a new clause, explaining where the remaining provisions in the SIPs code are to be found. The majority are to be found in ICTA (subsection (1)); but others are to be found in TCGA 1992 (subsection (2)(a)), or in FA 2001 (subsection (2)(b)).

Chapter 7: Approved SAYE option schemes

Overview

2087.     This Chapter contains the information that an employee needs, to be able to establish the tax consequences of receiving or exercising a share option that is within the Save-as-You-Earn ("SAYE") rules. A SAYE option scheme is defined in clause 516. This label has not been used in the statute up to now. The name in the source legislation is "savings-related share option scheme" and these schemes are commonly referred to as SAYE share option schemes or simply SAYE schemes in practice.

2088.     The label SAYE denotes a SAYE option scheme in these notes.

2089.     Unlike in sections 185 and 187 of and Schedule 9 to ICTA, in this Bill SAYE has been separated from the CSOP schemes in an attempt to make these rules easier to read and understand.

2090.     The rules for APS schemes (profit sharing schemes approved under Schedule 9 to ICTA) are not rewritten in this Bill. These rules will therefore still be found in sections 186 and 187 of and Schedules 9 and 10 to ICTA. There is reference to this in clause 418(2) and in Part 8 of Schedule 7 to this Bill.

2091.     The redrafting of the SAYE and CSOP schemes has been influenced by the way the newer schemes, Enterprise Management Incentives ("EMI") and Share Incentive Plans ("SIP"), were drafted in FA 2000. This is a matter of style and also part of an attempt to achieve consistency across the share schemes where possible. Codes have been introduced for each scheme or plan as explained in the notes on the introduction to this Part.

2092.     The clauses will tell an employee receiving a share option whether or not the option is within SAYE and what the tax consequences are.

2093.     Each clause of this Chapter and each paragraph of Schedule 3 has a heading to help explain its contents and there are several examples of both clauses and paragraphs containing introductory material.

2094.     The requirements for the initial and continuing approval of the scheme are now contained in paragraphs 40 to 44 of Schedule 3. There are transitional provisions in Schedule 7 to ensure that a scheme approved under Schedule 9 to ICTA is treated as a SAYE option scheme approved under this Bill.

Clause 516: Approved SAYE option schemes

2095.     This clause sets out what is contained in this Chapter and in Schedule 3. It sets the scene: SAYE is a scheme which requires prior approval by the Inland Revenue and which enables the option-holder to benefit from income tax relief.

2096.     There are references in the SAYE code in several places to the Inland Revenue, where in ICTA these refer to the Board. This reflects practice and is in line with the approach in FA 2000 to the EMI and SIP codes. The Inland Revenue is defined in clause 720 as "any officer of the Board of Inland Revenue". See Change 158 in Annex 1.

2097.     In subsection (3)(c) there is a cross-reference to Part 2 of Schedule 7D to TCGA 1992 which covers the capital gains tax angle (see Schedule 6 to this Bill).

2098.     Share options are described as being granted rather than obtained in most contexts and especially where the timing of the grant is significant. This ties in with the terminology in EMI and perhaps gives a clearer indication of the exact date of the occasion.

2099.     The definitions derive from section 187 of ICTA. There are minor definitions and a new index of defined expressions, at the end of Schedule 3 to this Bill. This is based on the approach in the tax-relieved share schemes, introduced by FA 2000. The definition of "share option" matches the one used for EMI in FA 2000 (and in the EMI code). In clause 516 there is also a fuller definition of the SAYE option scheme itself than in ICTA.

Clause 517: Share options to which this Chapter applies

2100.     This is an introductory clause, which derives from section 185(1) of ICTA. This Chapter applies to an individual who obtains an option in accordance with the provisions of an approved scheme by reason of his or her employment. This phrase in section 185(1) matches the expression in the benefits code. The rules in paragraph 10 of Schedule 3 to this Bill govern the particular employment.

2101.     The reference to a commencement date in section 185(1) of ICTA is spent and is not rewritten.

Clause 518: No charge in respect of receipt of option

2102.     This derives from section 185(2) of ICTA. Here, as elsewhere, the phrase "no liability to income tax arises" expresses this type of exemption.

Clause 519: No charge in respect of exercise of option

2103.     This and the following clause derive from section 185(3) and (4) of ICTA and explain the conditions for relief from income tax on the exercise of an option and on post-acquisition benefits.

2104.     The relief and the exceptions are set out in a more straightforward way and in a positive framework. No liability to income tax arises in the circumstances set out in this clause (subject to the two conditions in subsections (2) and (3)) on the exercise of an option in accordance with the approved provisions of the scheme. Under condition A, the option is exercised after three years from the date on which it is granted. This period between grant and exercise is the norm for a SAYE scheme.

2105.     There are a number of circumstances however for an early (pre-three year) exercise which are catered for in SAYE schemes. Rules about these appear in Schedule 3 to this Bill. Following on from section 185(4) of ICTA, this clause identifies those circumstances for which tax relief is provided. But under condition B the position is expressed positively, although the formulation makes reference to the circumstances where tax relief is not available on the early exercise of an option.

2106.     There is a clarification of the time limit in section 185(4) of ICTA, which refers to the exercise of an option within three years of its being obtained in subsections (2) and (3)(a). This clause confirms that the period is inclusive of the date of the grant. So, if granted an option on 1st January 2002, an employee can be confident that it can be exercised on the same date three years later and the exercise will qualify for income tax relief. See Change 129 in Annex 1.

2107.     There are similar clarifications in the CSOP code and there are references to time limits elsewhere in the notes on the approved schemes. These are instances where, to a greater or lesser extent, doubt may exist as to whether or not the "trigger date", from which a period is measured, is to be included in the period. As the law ignores fractions of a day when computing periods of this nature, the start date for the various periods has been identified.

2108.     The Inland Revenue practice under which the charge on the exercise, assignment and release of unapproved share options is lifted after the death of an option holder has now been given statutory effect in clause 477(4). There is a cross-reference to this clause in subsection (4). Also, to make it clear that the operation of clause 477 acts in conjunction with the approved share scheme rules, which concern the time when a share option lapses after death, there is also a signpost to paragraph 32 of Schedule 3 to this Bill in subsection (5)(a).

2109.     In subsection (5)(b) there is a direct signpost to paragraph 42(3) of Schedule 3 to this Bill, under which, for SAYE, the option holder is protected against the possibility of approval being withdrawn from an approved scheme.

Clause 520: No charge in respect of post-acquisition benefits

2110.     This clause mirrors the previous clause and gives relief in the same circumstances from income tax on specified charges on an increase in the value of shares acquired by way of a tax-relieved exercise.

2111.     There is a signpost in subsection (3) to paragraph 42(3) of Schedule 3 to this Bill under which, for SAYE, the option holder is protected against the possibility of approval being withdrawn from an approved scheme.

Chapter 8: Approved CSOP schemes

Overview

2112.     This Chapter contains the information that an employee needs, to be able to establish the tax consequences of receiving or exercising a share option that is within the CSOP rules. A CSOP scheme is defined in clause 521. The acronym CSOP stands for a company share option plan. This label has not been used in the statute up to now but it is commonly used in practice.

2113.     Unlike in sections 185 and 187 of and Schedule 9 to ICTA, in this Bill CSOP has been separated from the SAYE schemes in an attempt to make these rules easier to read and understand.

2114.     The rules for APS scheme (profit sharing schemes approved under Schedule 9 to ICTA) are not being rewritten in this Bill. These rules will therefore still be found in sections 186 and 187 of and Schedules 9 and 10 to ICTA. There is reference to this in clause 418(2) and in Part 8 of Schedule 7 to this Bill.

2115.     The redrafting of the CSOP and SAYE schemes has been influenced by the way the newer schemes, Enterprise Management Incentives ("EMI") and Share Incentive Plans ("SIP"), were written in FA 2000. This is a matter of style and also part of an attempt to achieve consistency across the share schemes where possible. Codes have been introduced for each scheme or plan as explained in the notes to the introduction to this Part.

2116.     The clauses will tell an employee receiving a share option whether or not the option is within CSOP and what the tax consequences are.

2117.     Each clause of this Chapter and each paragraph of Schedule 4 has a heading to help explain its contents and there are several examples of both clauses and paragraphs containing introductory material.

2118.     The requirements for the initial and continuing approval of the scheme are now contained in paragraphs 28 to 32 of Schedule 4. There are transitional provisions in Schedule 7 to ensure that a scheme approved under Schedule 9 to ICTA is treated as a CSOP scheme approved under this Bill.

Clause 521: Approved CSOP Schemes

2119.     This clause sets out what is contained in this Chapter and in Schedule 4 to this Bill. It sets the scene: CSOP is a scheme which requires prior approval by the Inland Revenue and which enables the option-holder to benefit from income tax relief. There is also provision here for amounts to count as employment income in certain circumstances.

2120.     There are references in the CSOP code in several places to the Inland Revenue, where the relevant provisions in ICTA referred to the Board. This reflects practice and is in line with the approach in FA 2000 to EMI and SIP codes. The Inland Revenue is defined in clause 720 as "any officer of the Board of Inland Revenue". See Change 158 in Annex 1.

2121.     In subsection (3)(c) there is a cross-reference to Part 3 of Schedule 7D to TCGA 1992 which covers the capital gains tax angle (see Schedule 6 to this Bill).

2122.     Share options are described as being granted rather than obtained in most contexts and especially where the timing of the grant is significant. This ties in with the terminology in EMI and perhaps gives a clearer indication of the exact date of the occasion.

2123.     The definitions derive from section 187 of ICTA. There are minor definitions and a new index of defined expressions, at the end of Schedule 4 to this Bill. This is based on the approach in the tax-relieved share schemes, introduced by FA 2000. The definition of "share option" matches the one used for EMI in FA 2000 (and in the EMI code). There is for the first time a definition of the CSOP scheme in clause 521.

Clause 522: Share options to which this Chapter applies

2124.     This is an introductory clause, which derives from section 185(1) of ICTA. This Chapter applies to an individual who obtains an option in accordance with the provisions of an approved scheme by reason of his or her employment. This phrase in section 185(1) matches the expression in the benefits code. The rules in paragraph 8 of Schedule 4 to this Bill govern the particular employment.

2125.     The reference to a commencement date in section 185(1) of ICTA is spent and is not being rewritten. This is also the case with section 185(9) of ICTA, which is specific to CSOP.

Clause 523: No charge in respect of receipt of option

2126.     Subsection (1) derives from section 185(2) of ICTA. Here as elsewhere the phrase "no liability to income tax arises" expresses this type of exemption.

2127.     Subsection (2) also derives from section 185(2) of ICTA.

Clause 524: No charge in respect of exercise of option

2128.     This and the following clause bring together section 185(3) and (5) of ICTA and incorporate paragraph 27(3) of Schedule 9 to ICTA, which was formerly referred to in section 185(3).

2129.     These two clauses explain the conditions for relief from income tax on the exercise of an option and on post-acquisition benefits. As with the SAYE provisions, this clause makes the circumstances of relief and the exceptions more straightforward, expressing them in a positive form.

2130.     No liability to income tax arises in the circumstances set out in the condition in subsection (2). The option has to be exercised between three years and ten years after receipt and three years after a previous exempt exercise, as defined in subsection (3).

2131.     There are therefore three dates crucial to this relief. The three year period in subsection (2)(a)(i) begins with the day on which the option is granted. There is a minor change in relation to the exercise on the tenth anniversary of the grant in subsection (2)(a)(ii). See Change 129 in Annex 1.

2132.     In subsection (2)(b) the rule makes it clear that the period is inclusive of the exercise of the current option. (In section 185(5)(b) of ICTA the period looks back to the date of an earlier exercise.) The effect is that if there is an exempt exercise of an option on 1 January 2002, an employee can be confident that a further exercise on the same date three years later will qualify for income tax relief.

2133.     There are similar clarifications in the SAYE code and there are references to time limits elsewhere in the explanatory notes on the approved schemes. These are instances where it might be open to doubt whether or not the trigger date, from which a period is measured, is to be included in the period. As the law ignores fractions of a day when computing periods of this nature, this clause identifies the start date for the various periods.

2134.     The Inland Revenue practice under which the charge on the exercise, assignment and release of unapproved share options after the death of an option holder is lifted has now been given statutory effect in clause 477(4). There is a new cross-reference to this clause in subsection (4). Also, to make it clear that the operation of clause 477 acts in conjunction with the approved share scheme rules, which concern the time when a share option lapses after death, there is a signpost to paragraph 25 of Schedule 4 in subsection (5).

Clause 525: No charge in respect of post-acquisition benefits

2135.     This clause mirrors the previous clause and also derives from section 185(3) and (5) of ICTA. It gives relief in the same circumstances from income tax on specified charges (post-acquisition charges under clause 449 and clause 453) on an increase in the value of shares acquired by way of a tax-relieved exercise. The exercise has to meet the condition set out in clause 524. See Note 50 in Annex 2.

Clause 526: Charge where option granted at a discount

2136.     This clause derives from section 185(6) and (8) of ICTA. Section 185(7) of ICTA which covers the capital gains tax consequences (relief against a double charge) is now in Part 3 of Schedule 7D to TCGA 1992 (see Schedule 7 to this Bill).

2137.     The clause imposes a charge in the rare case that the total of any consideration given for the grant of the option and the amount payable on exercising the option is less than the market value of the shares at the time the option is granted. The option has to be granted at a price which is not manifestly less than the market value at that date (which is the rule in paragraph 22 of Schedule 4, formerly paragraph 29 of Schedule 9 to ICTA). Therefore this charge can only occur where there has been an agreement to fix the value earlier than the date of the grant or a mistake is made on the valuation.

2138.     The language of subsections (2) and (4) reflects the new approach to expressing "charge".

2139.     In response to a suggestion made in the consultation process leading up to this Bill, "the price" in subsection (1)(b) has been changed to "the amount payable" since price implies an amount payable per share. A further clarification has also been introduced. This is the reference to "the maximum number of shares" that can be acquired under the option, which specifies the number of shares in the frame in order to make the comparison required.

2140.     The reference to the discount being earned income has been dropped, as this has no continuing effect.

2141.     Under subsection (4), "knock-on" relief is given against further income tax charges on the same shares. This is a signpost only now; the way the relief is given is included in clauses 194, 479 and 480.

Chapter 9: Enterprise management incentives

Overview

2142.     This Chapter contains the information that an employee needs in order to be able to establish the tax consequences of receiving or exercising a share option that is within the enterprise management incentives ("EMI") rules.

2143.     A code has been introduced for EMI options as for SAYE, CSOP and SIPs as explained in the notes on the introduction to this Part.

2144.     Those parts of the EMI code that determine which options are within the scope of the scheme are separated out and appear in Schedule 5. Schedule 5 refers to "share options", where appropriate, so as to align this phraseology with SAYE and CSOP. There is a definition of "share option" in the introductory clause 527.

2145.     The requirements for a qualifying option, deriving from Schedule 14 to FA 2000 are now contained in Schedule 5 to this Bill. There are transitional provisions in Schedule 7 to ensure that where a share option was a qualifying option under Schedule 14 to FA 2000, it is treated as a qualifying option for the purposes of the EMI code.

Clause 527: Enterprise management incentives: qualifying options

2146.     This clause sets out what is contained in this Chapter and in Schedule 5. As well as being a new scene-setting clause, it includes material drawn from paragraph 1(1) of Schedule 14 to FA 2000 about what is a qualifying option.

2147.     In subsection (3)(c) there is a cross-reference to Part 4 of Schedule 7D to TCGA 1992 which covers the capital gains tax angle, (see Schedule 7 to this Bill).

Clause 528: No charge on receipt of qualifying option

2148.     This clause prevents tax being chargeable on receipt of a qualifying option. It derives from paragraphs 42(1) and 43 of Schedule 14 to FA 2000.

Clause 529: Scope of tax advantages: option must be exercised within 10 years

2149.     This clause explains that the tax advantages described in the following clauses only apply if the option is exercised within ten years of it being granted. If the option being exercised is a replacement for a previous option, it must be exercised within ten years from when the original option was granted in order to qualify for the tax advantages. This derives from paragraph 42 of Schedule 14 to FA 2000.

2150.     The words "the date of the" have been added before "grant" in subsection (2)(b) to clarify the effect of the rule in paragraph 42 which provides for a ten year period exclusive of the date of the grant.

Clause 530: No charge on exercise of option to acquire shares at market value

2151.     This clause, which derives from paragraph 44 of Schedule 14 to FA 2000, deals with the situation where an employee is granted an option with an exercise price not less than the market value of the shares at the time the original option is granted. In this situation, there is no charge on the exercise of the option (or a replacement option) under clause 476. This provision is subject to clause 532 which outlines what happens if a disqualifying event takes place.

 
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Prepared: 17 February 2003