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

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Clause 710: Notional payments: accounting for tax

2883.     This clause sets out how an employer must account for tax on a "notional payment". It derives from section 203J of ICTA.

2884.     Subsection (1) (with the definition of relevant time in subsection (7)) requires the employer to deduct any tax due on a notional payment from actual payments made at the same time or later in the income tax period.

2885.     Subsection (2) defines notional payment and extends references to employer in this section.

2886.     Subsections (3) and (4) require the employer to account for tax which cannot be deducted from actual payments.

2887.     Subsection (5) provides power for PAYE regulations to determine the time when any notional payment is made, to apply any provisions of the regulations to notional payments (with or without modifications), and to deal with matters about the collection and recovery of amounts accounted for in respect of notional payments.

2888.     Subsection (6) provides for the employee to be treated as having paid the tax accounted for on a notional payment. It also provides when the employee is treated as having paid the tax: see Change 153 in Annex 1.

2889.     Subsection (7) derives from regulations 7 and 8 of the Income Tax (Employments) (Notional Payments) Regulations, SI 1994 No 1212. It defines the relevant time for subsections (1) and (4).

2890.     Subsection (8) derives from regulation 2 of the Income Tax (Employments) Regulations 1993, SI 1993 No 744. It provides that "income tax period" takes the same meaning as in the PAYE regulations. It is the tax month or (for some small employers) quarter.

Clause 711: Right to make a return

2891.     This clause gives a person a right to a notice under section 8 of TMA 1970 if that person has had PAYE deductions or repayments. A notice under section 8 of TMA 1970 in turn obliges that person to make a tax return. The clause derives from section 205(4) of ICTA.

2892.     Subsection (1) sets out the conditions that must be satisfied for a person to give notice to the Inland Revenue.

2893.     Subsection (2) provides a time limit within which notice can be given to the Inland Revenue.

2894.     Note 62 in Annex 2 explains why section 205(1) to (3) and (5) of ICTA are not needed and are not rewritten in this Bill. Section 205(4) ICTA is however rewritten in response to requests made during consultation leading up to this Bill. The requests were to preserve, as a matter of principle, any rights to make a tax return that it gives to some taxpayers until such time as there is an explicit general right for all taxpayers to submit a tax return.

Clause 712: Interpretation of this Part

2895.     This clause provides definitions and interpretation. It derives from section 203L(1) of ICTA.

2896.     Subsection (1) provides various definitions for the purposes of this Part. The definitions of "employee" and "employer" are different from those used elsewhere in the Bill in order to relate a notional payment to a particular employment with a particular employer or former employer.

2897.     Subsection (2) applies clauses 4 and 5 of the Bill to this Part so that "employment" has the same meaning as in the employment income Parts of the Bill (see Note 1 in Annex 2); and that references to employees include office-holders and so on.

Part 12: Payroll giving


2898.     The next three clauses describe the circumstances in which a deduction may be available for charitable giving via the payroll. They derive from the provisions in section 202 of ICTA.

Clause 713: Donations to charity: payroll deduction scheme

2899.     This clause describes the arrangements between the person it characterises as "the payer" and the individual from whose PAYE income that payer withholds the donations. The clause derives from section 202(1) and (2) and part of (5) of ICTA.

2900.     Subsection (1) sets out the basic circumstances for payroll giving to be possible. An individual asks the person making payments of PAYE income to him or her to deduct authorised charitable donations from those payments. Tax relief is available on the donations made.

2901.     Subsection (2) removes the possibility of circularity in the operation of this clause.

2902.     Section 202(2) provides that the donations " .. shall .. be allowed to be deducted as expenses incurred in the year of assessment in which they are withheld". Under the structure of this Bill, the amounts that are withheld do not need to be characterised as "expenses". Subsections (3) and (4) simply refer to a deduction being allowed in calculating the amount of the individual's income that is charged to tax. The particular manner of that deduction depends on the type of income from which the amount is withheld and is described in subsection (4). Those provisions refer to deductions being allowed in calculating "net taxable" earnings/income of the specified type for "the relevant tax year". That fixes the tax year in which the deduction is due to that in which the income (from which the amount is withheld) is charged to tax. See Change 154 in Annex 1.

2903.     Subsection (5) defines "relevant tax year" for the purposes of parts of the preceding subsection.

Clause 714: Meaning of "donations"

2904.     This clause defines what is meant by "donations". It also records the meanings of supporting terms that are used in that definition. The clause derives from section 202(3), (4), (5), (6) and (11) of ICTA.

2905.     Subsection (1) contains the definition of "donations", where two (or possibly three) requirements that need to be fulfilled are identified.

2906.     Subsection (2) contains definitions of three terms used in the preceding subsection.

2907.     Section 202(4)(a) of ICTA refers to "a person ("the agent")", although that term is not further defined there. The Bill recognises the reality that the agent will be a "body". See Change 155 in Annex 1.

2908.     The Bill provides for the Inland Revenue, as opposed to the Board in the source legislation, to approve a scheme for payroll giving. See Change 158 in Annex 1.

2909.     Subsection (3) provides for the Inland Revenue, as opposed to the Board in the source legislation, to approve an agent for payroll giving. That reflects the Inland Revenue's practice on the application of section 202(3) whereby the power of the Board is delegated to the technical specialist. See Change 158 in Annex 1.

Clause 715: Approval of schemes: regulation by Treasury

2910.     This clause describes the powers reserved for the Treasury to regulate certain matters relating to payroll giving. It derives from section 202(8), (9) and (10) of ICTA.

2911.     Subsection (1) provides for the Treasury to make regulations governing how the Inland Revenue, as opposed to the Board in the source legislation, grant or withdraw approval of a scheme or agent. See Change 158 in Annex 1.

2912.     Section 202(9)(a) refers to a notice "served on" a participating employer or agent by the Board. Subsection (3)(a)(i) instead refers to a notice the Inland Revenue "give to" such an employer or agent. See Changes 156 and 158 in Annex 1.

Part 13: Supplementary provisions

2913.     This Part includes various supplementary provisions grouped under the following general headings:

  • Alteration of amounts;

  • Orders and regulations;

  • Interpretation; and

  • Amendments, repeals, citation etc.

Clause 716: Alteration of amounts by Treasury order

2914.     This clause provides that sums of money in certain specified clauses may be increased or further increased by an order from the Treasury.

2915.     Subsection (1) introduces the right to increase or further increase the sums of money mentioned in the clauses in subsection (2) by Treasury order. It derives from sections 191A, 200A(6), 828(1) and paragraph 24(10) of Schedule 11A to ICTA.

2916.     Subsection (2) sets out the clauses that are subject to such an order. It derives from sections 191A, 200A(6), 828(1) and paragraph 24(10) of Schedule 11A to ICTA and ESCs A22, A57, A70A and A70B. There is also some new material. See Changes 29, 56, 59, 78, 79 and 96 in Annex 1.

2917.     Subsection (3) sets out further implications where an order is made in respect of clause 241(3)(a) or (b). It derives from section 200A(6) of ICTA.

2918.     Subsection (4) sets out further implications where an order is made in respect of clause 287(1). It derives from paragraphs 24(1) and (10) of Schedule 11A to ICTA.

Clause 717: Orders and regulations made by Treasury or Board

2919.     This clause sets out how any Treasury order or regulations under this Bill are to be made.

2920.     Subsection (1) provides that orders or regulations made by the Treasury or the Board of Inland Revenue under this Bill must be exercised by statutory instrument. It derives from section 828(1) of ICTA.

2921.     Subsection (2) sets out the one exception to subsection (1) of the clause and relates to overseas Crown employment. See Change 4 in Annex 1.

2922.     Subsection (3) explains that a statutory instrument issued in accordance with subsection (1) is subject to annulment in pursuance of a resolution of the House of Commons. It derives from section 828(3) of ICTA.

2923.     Subsection (4) sets out the one exception to subsection (3) of the clause and relates to deductions for professional membership fees. See Change 85 in Annex 1.

Clause 718: Connected persons

2924.     This clause applies the same meaning of connected person as set out in section 839 of ICTA for the purposes of this Bill. It derives from sections 140(2), 140H(9), 146(11), 161(3), 162(10), 187(6), 200B(7), 200C(8), 203B(5), 596A(16) and paragraph 4(4) of Schedule 7 to ICTA, paragraph 129(2) of Schedule 8 to FA 2000 and paragraph 71(2) of Schedule 14 to FA 2000. See also Change 59 in Annex 1.

Clause 719: Control in relation to a body corporate

2925.     This clause applies the same meaning of control in relation to a body corporate as set out in section 840 of ICTA for the purposes of this Bill. It derives from sections 140F(7), 187(2), paragraph 8(2) of Schedule 11 and paragraph 4(2) of Schedule 12AA to ICTA; section 87(3) of FA 1988; paragraph 129(1) of Schedule 8 to FA 2000; and paragraphs 13(3), 15(2) and 59(3) of Schedule 14 to FA 2000. See also Changes 133 and 157 in Annex 1.

Clause 720: Meaning of "the Inland Revenue" etc.

2926.     This clause provides definitions of "Inland Revenue" and "the Board of Inland Revenue" for the purposes of this Bill.

2927.     Subsection (1) defines "the Inland Revenue" as any officer of the Board of Inland Revenue. It derives from paragraph 124 of Schedule 8, paragraph 20 of Schedule 12 and paragraph 68 of Schedule 14 to FA 2000. See also Change 158 in Annex 1.

2928.     Subsection (2) defines "the Board of Inland Revenue" as the Commissioners of Inland Revenue. The term "Commissioners of Inland Revenue" is defined in the Inland Revenue Regulation Act 1890.

2929.     Subsection (3) sets out how section 4A of the Inland Revenue Regulation Act 1890 provides for some devolution of the Board's powers.

Clause 721: Other definitions

2930.     This clause provides a list of definitions for the purposes of this Bill.

2931.     Subsection (1) contains new drafting material and sets out each definition. In connection with the definition of "personal representatives", see Change 159 in Annex 1.

2932.     Subsection (2) deals with the meaning of "assignment" in the application of this Bill to Scotland. It is new.

2933.     Subsection (3) defines the meaning of "domiciled in the United Kingdom" for the purposes of this Bill. It is new.

2934.     Subsection (4) defines the members of a person's family for the purposes of this Bill. It derives from sections 148(5), 149(3), 157(3), 159AA(3) and 159AC(3) of ICTA and also contains new material.

2935.     Subsection (5) defines the members of a person's family or household for the purpose of this Bill. It derives from sections 148(5), 168(4), 191B(16), 197G(6), 200AA(4), 203F(6) and paragraph 26 of Schedule 11A to ICTA and paragraph 21(3) of Schedule 12 to FA 2000 and also contains new material.

2936.     In connection with the application of a "person's family or household" to costs and expenses of personal security assets and services, see Note 39 in Annex 2.

2937.     Subsection (6) excludes certain statutory provisions in interpreting "child" or "children" for the purposes of this Bill. It derives from section 831(4) of ICTA and corrects a small mistake in that section. See Note 63 in Annex 2.

Clause 722: Consequential amendments

2938.     This clause advises that Schedule 6 contains consequential amendments.

Clause 723: Commencement and transitional provisions and savings

2939.     This clause sets out when the Bill has effect. This is subject to the transitional provisions and savings that are listed in Schedule 7.

Clause 724: Repeals and revocations

2940.     This clause makes repeals (subsection (1)) and revocations (subsection (2)). The affected enactments and instruments are listed in Parts 1 and 2 of Schedule 8.

Clause 725: Citation

2941.     This clause provides the name under which the Bill may be cited.


Part 1: Abbreviations of Acts and instruments

2942.     Part 1 provides a list of abbreviations referring to other Acts.

Part 2: Index of defined expressions

2943.     Part 2 lists expressions defined in the Bill.



2944.     This Schedule, which is introduced in Chapter 6 of Part 7, deals with some of the topics involved in rewriting the legislation relating to share incentive plans (or "SIPs" for short). SIPs were earlier known as employee share ownership plans (or "ESOPs" for short).

2945.     Nearly all the source legislation relating to SIPs is contained in Schedule 8 to FA 2000 (referred to in the notes on this Schedule as "Schedule 8"). Schedule 8 was introduced by section 47 of FA 2000; and amended, to a certain extent, by Schedule 13 to FA 2001 (introduced by section 61 of that Act). Further amendments to Schedule 8 have been made by section 39 of FA 2002 and by the Employee Share Schemes Act 2002.

2946.     The new legislation relating to SIPs, the majority of which is contained in Chapter 6 of Part 7 and in this Schedule, is called "the SIP code" - a term introduced in clause 488. Chapter 6 of Part 7 deals with the tax advantages that an approved SIP provides, and with the tax charges that may arise in certain circumstances.

2947.     This Schedule contains further provisions relating to SIPs. After the Introductory Part (Part 1) it deals with the following matters:

  • it specifies the requirements that a SIP must meet before it may be "approved" for the purposes of the SIP code (in Parts 2 to 9);

  • it deals with the procedural aspects of the approval of plans and with the withdrawal of approval (in Part 10); and

  • it deals with supplementary matters (in Part 11).

2948.     The majority of the provisions in this Schedule are concerned with the various requirements that a SIP must meet before it may be "approved". The general policy adopted has been (first) to place the various Parts in an order consistent with that to be found in the rewritten legislation relating to other share schemes; but also (secondly) to deal with those requirements that all SIPs must meet before dealing with the requirements that are not essential. The various requirements have accordingly been placed in a different order from that found in Schedule 8. Part 2 of this Schedule accordingly 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 that may be awarded. The following Parts then deal with free shares (Part 5), partnership shares (Part 6), matching shares (Part 7) and cash dividends and dividend shares (Part 8). Part 9 is the final Part of this Schedule concerned with the requirements for approval, and deals with the trustees.

2949.     Each of Parts 2 to 9 lists, at an early point, the requirements relevant for that Part. Users may find it helpful to be able to refer to these lists. In some cases (for example, in paragraph 6) these lists simply reproduce the source legislation; but in other cases (for example, in paragraph 70) it has been necessary to devise new material.

Part 1: Introduction

2950.     This Part, which consists of paragraphs 1 to 5, is introductory. It indicates the contents of this Schedule (in paragraph 1) and introduces various terms of general application (in paragraphs 2 to 5).

Paragraph 1: Approval of share incentive plans (SIPs)

2951.     This paragraph indicates the contents of this Schedule (in sub-paragraph (1)), and the Parts into which it is divided (in sub-paragraphs (2) to (4)). The opening paragraphs of Schedules 3, 4 and 5 have been organised in the same manner.

2952.     This paragraph is new. It aims to help users to understand the subject matter of the Schedule and to locate relevant material.

Paragraph 2: SIPs: free shares and partnership shares

2953.     In this paragraph, sub-paragraph (1) sets out the central definition of "share incentive plan" (or "SIP" for short), a definition derived from that of "employee share ownership plan" in paragraph 1(1) of Schedule 8. In the source legislation, that sub-paragraph was followed by a provision relating to matching shares; but in this Bill the proposition set out here appears on its own, and the provision relating to matching shares has been postponed until the following paragraph.

2954.     Sub-paragraph (2) contains three definitions:

  • the definition of "the company" derives from paragraph 1(4) of Schedule 8;

  • the definition of "plan requirements" is new; and

  • the definition of "the trustees" is a new feature of these introductory provisions, introducing a term that will be used before the requirements relating to the trustees are dealt with in Part 9 of this Schedule.

Paragraph 3: Matching shares

2955.     This paragraph introduces the concept of "matching shares". It derives from paragraph 1(2) and (3) of Schedule 8.

2956.     Sub-paragraph (2) now refers to "free shares, partnership shares, and matching shares", as opposed to "the kinds of shares mentioned in sub-paragraphs (1) and (2)"; and states that "the plan may provide for the company to decide" as opposed to "it may leave it for the company to decide".

Paragraph 4: Group plans

2957.     This paragraph is concerned with group plans. It derives from paragraph 2 of Schedule 8.

2958.     In sub-paragraph (3) the term "constituent company" replaces the term "participating company". This change, which is in alignment with corresponding changes made in Schedules 3, 4 and 5, 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.

Paragraph 5: Meaning of "award of shares", "participant" etc.

2959.     This paragraph defines various expressions to be found in the SIP code. It derives from paragraph 3 of Schedule 8.

2960.     These definitions are set out in an order that differs somewhat from that found in the source legislation, because sub-paragraph (2) derives from the full-out words at the end of paragraph 3(2) of Schedule 8.

2961.     In paragraph 3(2) of Schedule 8, the source legislation provides for the definition of "the individual award". This term is not used in this Bill, as it appears in one place only: in paragraph 53(5) of this Schedule (derived from paragraph 43(4) of Schedule 8). The wording of paragraph 53(5) has been amended accordingly.

Part 2: General requirements

2962.     It was mentioned, in the overview to the explanatory notes for this Schedule, that the contents of this Schedule could be divided into three categories. This Part is the first of eight that deal with the first category: the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 6 to 12, deals with general requirements that all SIPs must meet.

Paragraph 6: General requirements for approval: introduction

2963.     This paragraph lists the general requirements that must be met before a SIP may be approved. It derives from paragraph 6 of Schedule 8.

Paragraph 7: The purpose of the plan

2964.     This paragraph deals with the purpose of a SIP. It derives from paragraph 7 of Schedule 8.

Paragraph 8: All-employee nature of plan

2965.     This paragraph contains provisions designed to ensure as many employees as possible are eligible to benefit in an award of shares under a SIP. It derives from paragraph 8 of Schedule 8.

2966.     Sub-paragraph (1), in its final full-out words, adds a second "is" to the material that deriving from the final full-out words of paragraph 8(1) of Schedule 8, so that the sub-paragraph now ends "is invited to do so". This addition brings this sub-paragraph into better alignment with sub-paragraph (5).

2967.     Sub-paragraph (2) introduces a definition of a "UK resident taxpayer", drawing on material in paragraph 8(1)(b) of Schedule 8. This definition is then used again in sub-paragraph (5)(b).

2968.     Sub-paragraphs (3) and (4) deal with the material in paragraph 8(2) of Schedule 8, which has two sentences.

2969.     Sub-paragraph (6) substantially recasts and shortens paragraph 8(4) of Schedule 8.

Paragraph 9: Participation on same terms

2970.     This paragraph states that a SIP must provide that all employees who participate in it must do so on the same terms. It derives from paragraph 9 of Schedule 8.

2971.     Sub-paragraph (3) recasts paragraph 9(3) of Schedule 8, replacing two sentences with a single sentence.

2972.     In sub-paragraph (5), the cross-references to the provisions dealing with performance allowances have been placed in paragraphs of their own.

2973.     Sub-paragraph (7) is new. This provision makes explicit that, in the case of partnership shares, the requirements of this paragraph are not infringed because a deduction of the same percentage of salary will result in employees with larger salaries having larger amounts deducted and receiving awards of more shares. This provision accords with Inland Revenue practice on this point.

Paragraph 10: No preferential treatment for directors and senior employees

2974.     This paragraph provides that the SIP must not have the effect of conferring benefits mainly on directors or more highly paid employees. It derives from paragraph 10 of Schedule 8.

2975.     Sub-paragraphs (2) and (3) contain the material that is presently in paragraph 10(2) of Schedule 8. The material has been divided in order to make it easier to follow and to understand.

2976.     In sub-paragraph (1) the words "no feature of the plan must have or be likely to have the effect" in paragraph 10(1) of Schedule 8 have been replaced by the words "no feature of the plan has or is likely to have the effect".

2977.     Sub-paragraph (4) sets out, in full, the proposition that is contained in paragraph 10(3) of Schedule 8, instead of providing a reference to paragraph 9(3) of that Schedule.

2978.     Sub-paragraphs (1)(b) and (3)(a) now refer to "the higher or highest levels of remuneration". These changes have been made to achieve greater alignment in the legislation: in this case an alignment with paragraph 8(1)(b) of Schedule 3.

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Prepared: 17 February 2003