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

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Paragraph 11: No further conditions

2979.     This paragraph provides that a SIP must not impose additional conditions on an employee's participation in an award of shares under the plan. It derives from paragraph 11 of Schedule 8.

2980.     A reference to conditions "required or authorised by this Schedule" replaces a reference to conditions "required or permitted by this Schedule". This change brings the wording used into alignment with that used elsewhere (for example, in paragraph 8(4) of this Schedule).

Paragraph 12: No loan arrangements

2981.     This paragraph provides that the arrangements for the plan must not be associated in any way with any provision made for loans to employees. It derives from paragraph 12 of Schedule 8.

2982.     Sub-paragraphs (1) and (2) both derive from paragraph 12(1) of Schedule 8. The material has been divided to make it easier to follow and to understand.

2983.     In sub-paragraph (3), the words "For the purposes of sub-paragraph (1)" have been replaced by the words "In sub-paragraph (1)".

Part 3: Eligibility of individuals

2984.     This Part is the second of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 13 to 24, deals with requirements relating to the eligibility of individuals.

2985.     Four such requirements are listed in paragraph 13; but those four differ widely in the amount of statutory material devoted to them. The requirements in paragraphs 14 and 18 need one paragraph each; but paragraph 15 is supplemented by paragraphs 16 and 17; and paragraph 19 is supplemented by paragraphs 20 to 24.

Paragraph 13: Eligibility of individuals: introduction

2986.     This paragraph lists the plan requirements relating to the eligibility of individuals. The paragraph is the counterpart of paragraph 6, and is new.

Paragraph 14: Time of eligibility to participate

2987.     This paragraph states (in sub-paragraph (1)) that the SIP must provide that an individual may only participate in an award of plan shares if the individual is eligible to participate in the award at the appropriate time. The expression "the appropriate time" is new, and has been devised to help to make the rest of this paragraph easier to understand.

2988.     Sub-paragraphs (2) to (6) specify "the appropriate time" in the case of the various different classes of plan shares. Each class of plan shares has been made the subject of a separate sub-paragraph; and in cases involving matching shares (see sub-paragraphs (5) and (6)) the provisions in paragraph 13(1)(b) of Schedule 8 have been supplemented by those in paragraph 13(2).

2989.     Sub-paragraphs (7) and (8) deal with the meaning of the expression "eligible to participate".

2990.     This paragraph derives from paragraph 13 of Schedule 8. The material in that paragraph has been substantially recast.

Paragraph 15: The employment requirement

2991.     This is the first of three paragraphs setting out the employment requirement in paragraph 14 of Schedule 8. Following the amendments made by paragraph 2 of Schedule 13 to FA 2001, this paragraph is now long, and may usefully be subdivided. This paragraph derives from paragraph 14(1) of Schedule 8.

2992.     After the introductory sub-paragraph (1), sub-paragraph (2) deals with the core of the employment requirement. The SIP must provide that an individual may not participate in an award of shares unless employed by the company (or, in the case of a group plan, by a constituent company) (sub-paragraph (2)(a)). And if the plan provides for a qualifying period, the individual must have been employed throughout that period (sub-paragraph (2)(b)) by a qualifying company.

2993.     Sub-paragraph (3) then provides that, in the SIP code, "the employment requirement" means the requirement specified in sub-paragraph (2).

2994.     Sub-paragraph (4) is a drafting addition, indicating that the terms "qualifying period" and "qualifying company" receive further attention in paragraphs 16 and 17 respectively. The wording of this sub-paragraph is in alignment with wording used elsewhere (for example in paragraph 19(3) of this Schedule).

Paragraph 16: Qualifying periods

2995.     This paragraph supplements paragraph 15, and specifies various qualifying periods that may apply. The paragraph derives from paragraph 14(2) to (5) of Schedule 8.

2996.     The material in sub-paragraphs (2) and (3) has been substantially recast to produce a result similar to that achieved in paragraph 14.

Paragraph 17: Meaning of "qualifying company"

2997.     This paragraph also supplements paragraph 15, and deals with the meaning of the expression "qualifying company". The paragraph derives from paragraph 14(1A) and (1B) of Schedule 8, inserted by paragraph 2 of Schedule 13 to FA 2001.

2998.     It may not be obvious what is achieved by sub-paragraph (3)(c)(ii), but this provision has a role to play. A qualifying company may fall within paragraph (a) or paragraph (b); or within paragraph (c)(i) as an associated company of a company within paragraph (a) or (b); or within paragraph (c)(ii) as an associated company of an associated company within paragraph (c)(i) (and so on indefinitely).

Paragraph 18: Requirement not to participate in other SIPs

2999.     This paragraph restricts the ability of an individual to participate in an award of shares under more than one SIP in a tax year.

3000.     The paragraph derives from paragraph 16 of Schedule 8. In that Schedule, paragraphs 17 to 22 supplement paragraph 15; so, to improve the narrative "flow", this paragraph now appears before the paragraphs rewriting paragraphs 15 and 17 to 22, which now constitute one single uninterrupted "block".

3001.     The title to this paragraph has been changed to make it simpler.

3002.     In sub-paragraph (1) the word "eligible" has been added to bring this provision into alignment with paragraphs 15(1) and 19(1).

3003.     Sub-paragraph (1) combines and abbreviates paragraph 16(1) and (2) of Schedule 8. References to approved profit sharing schemes in paragraph 16(1) of Schedule 8 have been removed. See Change 160 in Annex 1.

Paragraph 19: The "no material interest" requirement

3004.     This paragraph states that the SIP must provide that an individual is not eligible to participate in an award of shares if the individual has (or has recently had) a "material interest" in a company with specified characteristics. In determining whether the individual has such a "material interest", it is necessary to consider the interests of the individual's "associates". This paragraph is accordingly then supplemented by paragraphs 20 and 21 (which deal with the meaning of "material interest") and by paragraphs 22 to 24 (which deal with the meaning of "associate"). This paragraph derives from paragraph 15 of Schedule 8.

3005.     As the paragraphs in this Part of Schedule 8 have now been placed in a different order (see the explanatory notes relating to paragraph 18), this paragraph is now followed immediately by the paragraphs that supplement it.

3006.     In sub-paragraph (3), the wording of the two paragraphs has been brought into alignment.

Paragraph 20: Meaning of "material interest"

3007.     This paragraph supplements paragraph 19. It contains the definition of "material interest" and is in its turn supplemented by paragraph 21. This paragraph derives from paragraph 17 of Schedule 8.

3008.     Sub-paragraphs (2) and (3) separate out the two alternatives which, at present, are combined in the lengthy paragraph 17(1) of Schedule 8. In this Bill, the two alternatives are called a material interest in the share capital of the company, and a material interest in the assets of a close company.

Paragraph 21: Material interest: options and interests in SIPs

3009.     This paragraph supplements paragraph 20, and contains further provisions dealing with the meaning of the expression "material interest". The paragraph derives from paragraph 18 of Schedule 8 (in sub-paragraphs (1) to (5)) and from paragraph 19 of Schedule 8 (in sub-paragraph (6)).

3010.     Sub-paragraphs (3) and (4) both derive from paragraph 18(2) of Schedule 8. This sub-paragraph has been divided to make the text easier to understand.

3011.     In sub-paragraph (6), the reference to "any approved profit sharing scheme" (in paragraph 19 of Schedule 8) has been omitted. The legislation relating to approved profit sharing schemes has not been rewritten; but, in this Bill, paragraph 87 of Schedule 7 (transitionals and savings) preserves the effect of this reference.

Paragraph 22: Meaning of "associate"

3012.     This paragraph also supplements paragraph 19. It contains the definition of "associate" and is in its turn supplemented by paragraphs 23 and 24. This paragraph derives from paragraph 20 of Schedule 8.

3013.     In sub-paragraph (1) references to an "individual" replace references to a "person"; and in sub-paragraph (1)(c) different words are used to describe the relevant company.

3014.     Sub-paragraph (2) is new. This provision links sub-paragraph (1)(c) with paragraphs 23 and 24 of this Schedule.

3015.     In sub-paragraph (3) the definition of "relative" has been slightly amended.

Paragraph 23: Meaning of "associate": trustees of employee benefit trust

3016.     This paragraph supplements paragraph 22 and contains provisions that apply where an individual is interested as a beneficiary of an employee benefit trust. The paragraph derives from paragraph 21 of Schedule 8.

3017.     This paragraph has counterparts in Schedules 3, 4 and 5. 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. In the later sub-paragraphs of this paragraph there are references to provisions in Chapter 11 of Part 7 and to the contents of that Chapter.

3018.     The defined term "relevant company" in paragraph 21 of Schedule 8 has been omitted. This definition is not in fact used.

Paragraph 24: Meaning of "associate": trustees of discretionary trust

3019.     This paragraph also supplements paragraph 22 and contains provisions that apply where an individual is interested as an object of a discretionary trust. The paragraph derives from paragraph 22 of Schedule 8.

3020.     The defined term "relevant company" in paragraph 22 of Schedule 8 has been omitted. It is possible to rewrite this paragraph without making use of this definition.

3021.     Sub-paragraphs (1) and (2) recast the material in paragraph 22(1) and (2). Sub-paragraph (1) deals with all the conditions (which, at present, are distributed between sub-paragraphs (1) and (2)); and sub-paragraph (2) states the main rule (which, at present, is contained in the full-out words at the end of sub-paragraph (2)).

Part 4: Types of shares that may be awarded

3022.     This Part is the third of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 25 to 33, deals with requirements relating to the types of shares that may be awarded.

3023.     This Part of the Schedule imposes requirements that all SIPs must meet. It has therefore been placed at an earlier point in this Schedule than in Schedule 8 (where it is Part 8 of that Schedule). This change has the consequence that the order of Parts in Schedules 2 to 5 is in closer alignment.

3024.     Within this Part, five requirements are listed in paragraph 25(1). Of these, the requirement imposed by paragraph 29 (prohibited shares) is now dealt with at an earlier point, thus enabling the requirement in paragraph 30 (only certain kinds of restriction allowed), which has further supplementary paragraphs, to be dealt with last.

3025.     This Part is now entitled "Types of shares that may be awarded" as opposed to "Types of shares that may be used" (the title to Part 8 of Schedule 8).

Paragraph 25: Types of shares that may be awarded: introduction

3026.     This paragraph is introductory, and derives from paragraph 59 of Schedule 8.

3027.     Sub-paragraph (1) lists the requirements relating to types of shares that must be met before a SIP may be approved. The paragraph follows the source legislation and, unlike paragraphs 6 and 13 (for example), contains no reference to "plan requirements". This divergence may be explained by the fact that the requirements imposed in this Part of this Schedule are not matters that must be dealt with in the plan documentation.

3028.     Sub-paragraph (2) then defines shares that may be awarded under the plan as "eligible shares". This definition is in a new sub-paragraph.

Paragraph 26: Shares must be part of ordinary share capital of certain companies

3029.     This paragraph provides that the shares that may be awarded must be part of the ordinary share capital of a company with characteristics specified in this paragraph. The paragraph derives from paragraph 60 of Schedule 8.

Paragraph 27: Requirement as to listing etc.

3030.     This paragraph provides that the shares that may be awarded must fall within one of the three categories specified in sub-paragraph (1).

3031.     The paragraph derives from paragraph 61 of Schedule 8, dividing that paragraph into two sub-paragraphs with the object of making its contents easier to follow. The definition of "listed company" in sub-paragraph (2) is new, and this sub-paragraph contains most of the material from paragraph 61(c).

Paragraph 28: Shares must be fully paid up and not redeemable

3032.     This paragraph provides that eligible shares must be fully paid up and not redeemable. It derives from paragraph 62 of Schedule 8.

3033.     In sub-paragraph (2), the words "for the purposes of sub-paragraph (1)(a)" have been moved to the beginning of the sentence. This change brings this sub-paragraph into better alignment with sub-paragraph (3), and makes it easier to grasp the relationship with sub-paragraph (1). Sub-paragraph (2) also contains new additional wording to make it clear that the payment of cash is to be made to the company whose shares are being issued.

3034.     Sub-paragraphs (4) and (5) abbreviate the material in paragraph 62(4) and (5) of Schedule 8. In that Schedule, it is provided that sub-paragraph (1)(b) does not apply in relation to shares in a co-operative. The term "co-operative" is then defined as "a registered industrial and provident society which is a co-operative society"; and the terms "registered industrial and provident society" and "co-operative society" then receive definitions of their own. (This legislation was amended while the Finance Bill 2000 was before Parliament.).

3035.     In this Bill the term "co-operative" has been omitted. It is provided instead (in sub-paragraph (4)) that sub-paragraph (1)(b) does not apply to shares in a registered industrial and provident society which is a co-operative society; and then, as before, the terms "registered industrial and provident society" and "co-operative society" are defined. This procedure enables the term "co-operative" to be omitted.

Paragraph 29: Prohibited shares

3036.     This paragraph specifies types of shares that may not be awarded under a SIP. The paragraph derives from paragraph 67 of Schedule 8.

3037.     The title of this paragraph is now "prohibited shares" as opposed to "prohibited companies". The new wording should provide a better indication of what is being prohibited.

3038.     This paragraph now refers to a "service company" as opposed to an "employer company". The new term is more descriptive and accords better with actual commercial usage. The expression "the employer company" is used elsewhere in this Bill to mean the employee's employer.

3039.     Amendments have been made to sub-paragraphs (1)(b) and (4)(b) with a view to making those provisions easier to understand.

3040.     Sub-paragraph (4) has wording differing from that in the source legislation. Schedule 1 to the Interpretation Act 1978 provides that "'person' includes a body of persons corporate or unincorporate"; and the view is taken that there can be no doubt that the word "person" includes a partnership.

Paragraph 30: Only certain kinds of restriction allowed

3041.     This paragraph limits the restrictions to which eligible shares may be subject. Certain restrictions, however, are permitted, and these are specified in paragraphs 31 to 33, which supplement this paragraph. This paragraph derives from paragraph 63 of Schedule 8.

3042.     In sub-paragraph (1) the order in which the three paragraphs appear has been changed to make the references to paragraphs 31 to 33 (which supplement this paragraph) more prominent, and to make the references to the paragraphs dealing with holding periods (which only appear later in this Schedule) less prominent.

3043.     Sub-paragraph (2), which rewrites paragraph 63(2) of Schedule 8, now divides that material into two sentences.

3044.     The opening words of sub-paragraph (3) differ from those of the corresponding provision in the source legislation, and now include a reference back to sub-paragraph (2). This has led to a further variation in the order of the sub-paragraphs in this paragraph; in paragraph 63 of Schedule 8, what is now sub-paragraph (4) preceded what is now sub-paragraph (3).

Paragraph 31: Permitted restrictions: voting rights

3045.     This paragraph supplements paragraph 30. It derives from paragraph 64 of Schedule 8.

Paragraph 32: Permitted restrictions: provision for forfeiture

3046.     This paragraph also supplements paragraph 30 and deals with the circumstances in which free or matching shares may be subject to provision for forfeiture.

3047.     This paragraph derives from sub-paragraphs (1) to (5) of paragraph 65 of Schedule 8. (Paragraph 65(6) of Schedule 8 is a definition of "provision for forfeiture" applying for the purposes of the SIP code generally. This definition has now been moved to paragraph 99(1) of this present Schedule.)

3048.     Sub-paragraph (1) combines sub-paragraph (1) and the first part of sub-paragraph (2) of paragraph 65 in Schedule 8. The words "in the following circumstances" have been removed.

3049.     Sub-paragraph (2) gives a complete list of the events within paragraph 87(2) of Schedule 8. Although the amount of text is increased and there is duplication, the view has been taken that it is more helpful to set the relevant material out again than to refer users to clause 498(2).

3050.     In sub-paragraph (2), the reference at the beginning of this provision has been confined to sub-paragraph (1)(a). The reference can only be to paragraph (a) of sub-paragraph (1); and in the interests of clarity this cross-reference is more precise. Sub-paragraph (2)(d) reorganises the material in paragraph 87(3)(d) of Schedule 8.

Paragraph 33: Permitted restrictions: pre-emption conditions

3051.     This paragraph also supplements paragraph 30 and deals with the circumstances in which pre-emption conditions may be permitted. The paragraph derives from paragraph 66 of Schedule 8.

Part 5: Free shares

3052.     This Part is the fifth of eight that deal with the requirements that a SIP must meet before it may be approved. This Part, which consists of paragraphs 34 to 42, deals with requirements relating to free shares. A SIP does not have to provide for free shares to be appropriated to employees (it may provide for partnership shares to be acquired for employees - see paragraph 2(1)), so it may be expected that there will be SIPs to which the provisions of this Schedule do not apply.

Paragraph 34: Free shares: introduction

3053.     This paragraph is introductory. It derives from paragraphs 23 and 25 of Schedule 8.

3054.     Sub-paragraph (1) sets out the requirements that must be met by all SIPs that provide for free shares. This sub-paragraph expands paragraph 23 of Schedule 8 by specifying the relevant requirements, a procedure now adopted throughout this Schedule.

3055.     Sub-paragraph (2) sets out the additional requirements that must be met by SIPs that provide both for free shares and for performance allowances (a term defined in paragraph 34(4)).

3056.     Sub-paragraph (4) recasts the definition of "performance allowances" in paragraph 25(1) of Schedule 8.

3057.     This paragraph follows the other introductory paragraphs in the various Parts of this Schedule by providing that a SIP must "meet" plan requirements, as opposed to "complying" with them.

Paragraph 35: Maximum annual award

3058.     This paragraph specifies the maximum annual award for which the plan must provide. It derives from paragraph 24 of Schedule 8.

3059.     There is a sub-paragraph for each individual proposition; and in sub-paragraphs (2) and (4), the opening words "For this purpose", which occurred in the corresponding places in the earlier legislation, have been omitted.

Paragraph 36: The holding period

3060.     This paragraph states that the plan must require the company to specify a period ("the holding period") during which a participant is bound to permit the free shares to remain in the hands of the trustees, and is bound not to dispose of the beneficial interest in those shares.

3061.     This paragraph derives from paragraph 31 of Schedule 8. This paragraph has been placed somewhat earlier in this part of this Schedule, as the requirement set out in this paragraph applies whether or not the SIP makes provision for performance allowances (see paragraph 34(2)).

3062.     Sub-paragraph (3) joins the two separate sentences in paragraph 31(3) of Schedule 8.

3063.     Sub-paragraphs (4) and (5) divide the material presently contained in paragraph 31(4) of Schedule 8.

Paragraph 37: Holding period: power of participant to direct trustees to accept general offers etc.

3064.     This paragraph provides that a participant may give directions of various types to the trustees during the holding period.

3065.     This paragraph derives from paragraph 32 of Schedule 8. There has been a significant amount of reorganisation; and this paragraph is now divided into sub-paragraphs.

3066.     Sub-paragraph (1) derives from the opening words of paragraph 32.

3067.     Sub-paragraphs (2) and (3) derive from paragraphs (a) and (d) of paragraph 32 respectively. In sub-paragraph (3), the words "as a result of" replace the words "pursuant to".

3068.     Sub-paragraphs (4) to (6) rewrite paragraphs (b) and (c) of paragraph 32; but that material is now organised differently, with sub-paragraph (5) containing a definition of a "general offer".

Paragraph 38: Performance allowances: general application

3069.     This paragraph states that a SIP that provides for performance allowances must provide for such allowances for all qualifying employees. The paragraph derives from paragraph 26 of Schedule 8.

3070.     The expression "qualifying employee" is defined in paragraph 8(6) of this Schedule.

Paragraph 39: Performance allowances: targets and measures

3071.     This paragraph specifies the performance targets and performance measurements that must be set where the SIP provides for performance allowances. The paragraph derives from paragraph 27 of Schedule 8.

3072.     The material dealing with performance targets has now been placed before the material dealing with performance measures. This has resulted in some reorganisation of the contents of this paragraph, and an amendment to its title.

 
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Prepared: 17 February 2003