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

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Paragraph 25: Exercise of options: death

3431.     This derives from the other part of paragraph 27(2) of Schedule 9 to ICTA (part is reflected in paragraph 23 of this Schedule). It allows a scheme to provide for the exercise of an option after the option holder dies.

Part 6:Exchange of share options

Paragraph 26: Exchange of options on company reorganisation

3432.     This paragraph is the first of two that rewrite paragraph 15 of Schedule 9 to ICTA. The remainder of that paragraph is rewritten in paragraph 27 of this Schedule.

3433.     This paragraph explains the circumstances in which there may be a "rollover" of share options. The layout is similar to that in paragraph 39 of Schedule 5 to this Bill (EMI).

3434.     Sub-paragraphs (5) to (8) of paragraph 15 of Schedule 9 to ICTA have not been rewritten as they are spent.

Paragraph 27: Requirements about share options granted in exchange

3435.     This completes the picture introduced in paragraph 26 of this Schedule and reproduces the part of paragraph 15 of Schedule 9 to ICTA which sets out the rules on the new options that can be received on exchange.

3436.     Paragraph 15(4) of Schedule 9 to ICTA has been divided, and has been rewritten as sub-paragraphs (5) and (6) of this paragraph.

3437.     The cross-reference to paragraph 10(b) and (c) of Schedule 9 to ICTA at the end of paragraph 15(1) of that Schedule has been replaced by a cross-reference to paragraph 16 in sub-paragraph (2)(b) and the meaning of this has been clarified. The new options can relate to shares in the acquiring company or in a company which controls the acquiring company.

Part 7: Approval of schemes

Paragraph 28: Application for approval

3438.     This paragraph deals with the mechanics of the application for approval of a CSOP option scheme. The paragraph derives from part of paragraph 1(1) and paragraph 1(2) of Schedule 9 to ICTA.

3439.     Sub-paragraph (3) states that, after the Inland Revenue have reached their decision, they must give notice of their decision to the scheme organiser. See Change 170 in Annex 1.

Paragraph 29: Appeal against refusal of approval

3440.     This paragraph derives from most of paragraph 5 of Schedule 9 to ICTA. (Sub-paragraph (c) of paragraph 5 relates to approved profit sharing schemes.) The procedure, in paragraph 5 of Schedule 9 to ICTA, is that a "matter" is referred to the Special Commissioners for them to "hear and determine the matter in like manner as an appeal" if the Inland Revenue refuse to approve the scheme. Sub-paragraph (1) provides that the scheme organiser may appeal to the Special Commissioners.

3441.     The change to a straightforward appeal procedure is intended to simplify matters. Section 48(2) of TMA 1970 provides that various provisions of that Act, as regards proceedings before the Commissioners, apply to "appeals other than appeals against assessments" and to "proceedings..to be heard and determined in the same way as an appeal". For the purposes of this paragraph, there is therefore no real difference in law or practice between provisions that refer to an appeal and those that refer to proceedings where the Special Commissioners shall "hear and determine the matter in like manner as an appeal". See Change 171 in Annex 1.

3442.     Sub-paragraphs (3) and (4) now provide that the Special Commissioners may specify the date from which the Scheme is to be treated as approved. See Change 171 in Annex 1.

Paragraph 30: Withdrawal of approval

3443.     This paragraph derives from paragraph 3(1) of Schedule 9 to ICTA. The rewritten legislation includes the use of a new label, a "disqualifying event". This expression does not occur in Schedule 9 to ICTA, but it does occur in the SIP code and in the EMI code.

3444.     Sub-paragraph (1) has been expanded to include a requirement that the Inland Revenue give notice of their withdrawal of approval. See Change 170 in Annex 1.

3445.     Paragraphs 3(2) and (3) of Schedule 9 to ICTA relate to approved profit sharing schemes.

Paragraph 31: Approval ineffective after unapproved alteration

3446.     This paragraph derives from paragraph 4 of Schedule 9 to ICTA. An unapproved alteration to an approved CSOP option scheme is ineffective after the date of the alteration. The rule is clarified by the addition of the words "of the scheme" in the final line of sub-paragraph (1).

3447.     Sub-paragraph (2) is new. It introduces an express requirement for the Inland Revenue to notify the scheme organiser of their decision to approve or not to approve an alteration. See Change 170 in Annex 1.

Paragraph 32: Appeal against withdrawal of approval etc.

3448.     This paragraph derives from paragraph 5 of Schedule 9 to ICTA.

3449.     As in the case of paragraph 29 of this Schedule, sub-paragraph (2) provides that the scheme organiser may appeal to the Special Commissioners, as opposed to requiring the Special Commissioners to "hear and determine the matter in like manner as an appeal". See Change 171 in Annex 1.

3450.     The change to a straightforward appeal procedure is intended to simplify matters. Section 48(2) of TMA 1970 provides that various provisions of that Act, as regards proceedings before the Commissioners, apply to "appeals other than appeals against assessments" and to "proceedings..to be heard and determined in the same way as an appeal". For the purposes of this paragraph, there is therefore no real difference in law or practice between provisions that refer to an appeal and those that refer to proceedings where the Special Commissioners shall "hear and determine the matter in like manner as an appeal".

Part 8: Supplementary provisions

Paragraph 33: Power to require information

3451.     This paragraph derives from paragraph 6 of Schedule 9 to ICTA and gives the Inland Revenue power to obtain information. The words "think necessary" have been replaced with "reasonably require". See Change 172 in Annex 1.

3452.     This provision, as set out in sub-paragraph (2)(a)(ii), also covers liability to capital gains tax.

3453.     Sub-paragraph (3) clarifies the operation of the time limit for providing information by making the period run from the date of the notice. Also the period has been extended from 30 days to 3 months. See Change 172 in Annex 1.

Paragraph 34: Jointly owned companies

3454.     This paragraph gives statutory effect to ESC B27, so far as it relates to CSOP schemes. It corresponds to paragraph 46 of Schedule 3 to this Bill, for SAYE option schemes. See Change 173 in Annex 1.

Paragraph 35: Meaning of "associated company"

3455.     This paragraph derives from the definition of associated company in section 187(2) of ICTA.

Paragraph 36: Minor definitions

3456.     This paragraph takes definitions from section 187(2) and (7) of ICTA.

Paragraph 37: Index of defined expressions

3457.     This paragraph consists of an index of expressions defined or explained for the purposes of the CSOP code.

SCHEDULE 5: ENTERPRISE MANAGEMENT INCENTIVES

Overview

3458.     This Schedule, which is introduced in Chapter 9 of Part 7, deals with the rules relating to qualifying options for the purposes of "the EMI code". The legislation relating to EMI, which is contained in Chapter 9 of Part 7 and in this Schedule, is called "the EMI code". This term was introduced in clause 527. Chapter 9 of Part 7 deals with the tax exemptions available in connection with a qualifying EMI option.

3459.     The legislation relating to these schemes derives from Schedule 14 to FA 2000 (introduced by section 62 of FA 2000). This Schedule was amended by Schedule 14 to FA 2001 and by SI 2001 No 3799.

3460.     This Schedule contains further provisions relating to EMI. After the introductory Part (Part 1) it deals with the following matters:

  • it specifies the requirements that must be met in relation to a qualifying EMI option (in Parts 2 to 6);

  • it deals with the notification processes (in Part 7); and

  • it deals with supplementary matters (in Part 8).

3461.     EMI is different from SAYE, CSOP and SIPs in that it is not a "scheme" or a "plan", with an approval procedure and the administrative structure that goes with it. Nevertheless this Schedule follows the pattern in Schedules 8 and 14 to FA 2000 which has been developed in the Schedules in this Bill for SAYE, CSOP and SIPs. So where it seems helpful the opportunity has been taken to list the requirements relevant for a Part in an introductory paragraph.

Part 1: Introduction

Paragraph 1: Enterprise management incentives: qualifying options

3462.     This paragraph is a scene-setting paragraph explaining how the Schedule applies to determine what share options qualify under EMI and where within the Schedule the various requirements may be found. It derives from paragraph 1(1) and (2) of Schedule 14 to FA 2000.

3463.     The connection between "relevant company" and "qualifying company" has been clarified in sub-paragraph (3)(b).

3464.     Also there is a new definition of "appropriate time" in sub-paragraph (4). This term is used in the opening paragraphs in Parts 2 to 5 of this Schedule to demonstrate clearly that the requirements have to be met, when the option is granted. There is also a link back to this phrase in paragraph 44(7) of this Schedule, which provides the same clarification for Part 7. Part 6, which deals with company reorganisations, has its own timing rules in paragraph 43 of this Schedule.

Paragraph 2: Meaning of "the relevant company" and "the employer company"

3465.     This paragraph defines the EMI terms "the relevant company" and "the employer company". It derives from paragraph 1(3) of Schedule 14 to FA 2000.

Part 2: General requirements

Paragraph 3: General requirements: introduction

3466.     This paragraph is introductory and derives from paragraph 8 of Schedule 14 to FA 2000.

Paragraph 4: Purpose of granting the option

3467.     This clause derives from paragraph 9 of Schedule 14 to FA 2000.

Paragraph 5: Maximum entitlement of employee: financial limit on unexercised options

3468.     This paragraph derives from paragraph 10(1) to (3) and (6) to (8) of Schedule 14 to FA 2000 and sets out a limit of £100,000 on the value of shares in respect of which "unexercised qualifying options" are held by each individual employee. If the grant of an option causes this limit to be exceeded, then the option does not qualify under EMI so far as it relates to that excess. If the limit is already exceeded at the time that further options are granted, those further options do not qualify.

3469.     There is no guidance in the legislation on the tax treatment when an option, that includes a qualifying element and a non-qualifying element, is partially exercised. The option agreement itself may provide guidance on this. Otherwise, in practice, the person exercising the option will be able to decide which part of the option was exercised, enabling the relief to be taken in the way that suits the option holder.

3470.     This paragraph also contains information about how to arrive at the share values. Sub-paragraph (6)(a) makes it clear that the value of the shares for the £100,000 test is frozen at the time when the option is granted. This was the intention of the original clause and is the way the provision has been interpreted. As this is part of the definition of "unexercised qualifying options" it has an impact on the test in paragraph 7(1) of this Schedule and in turn on paragraphs 41 and 43 as well. See Change 177 in Annex 1.

Paragraph 6: Maximum entitlement of employee: further limit of 3 years

3471.     This paragraph derives from paragraph 10(4) to (8) of Schedule 14 to FA 2000. If the limit set out in paragraph 5 has been reached, no further qualifying option can be granted for three years from the date of the grant of the last qualifying option.

Paragraph 7: Maximum value of options in respect of relevant company's shares

3472.     This paragraph sets out the limit on the value of shares in the relevant company that can be the subject of unexercised qualifying options. That limit is £3 million. This paragraph derives from paragraph 11 of Schedule 14 to FA 2000.

3473.     There is a cross-reference in sub-paragraph (6) to the rules about the valuation of the shares subject to the option in paragraph 5(6) to (8) of this Schedule.

Part 3: Qualifying companies

3474.     There is a considerable overlap in this Part between EMI and the investment schemes EIS, VCT and CVS, (the Enterprise Investment Scheme, Venture Capital Trusts and the Corporate Venturing Scheme).

Paragraph 8: Qualifying companies: introduction

3475.     This paragraph is introductory and derives from paragraph 12 of Schedule 14 to FA 2000.

Paragraph 9: The independence requirement

3476.     In order to qualify under EMI, a company must not be under the control of another company. This paragraph sets out the criteria for this independence requirement and derives from paragraph 13 of Schedule 14 to FA 2000.

Paragraph 10: The qualifying subsidiaries requirement

3477.     This paragraph stipulates that if a company controls other companies, all the companies that it controls must be "qualifying subsidiaries", as defined in paragraph 11 of this Schedule. This requirement derives from paragraph 14 of Schedule 14 to FA 2000.

Paragraph 11: Meaning of "qualifying subsidiary"

3478.     This paragraph derives from paragraph 15 of Schedule 14 to FA 2000.

3479.     This paragraph sets out the conditions that must be met if a company is to be a qualifying subsidiary of the company that controls it. The parent company cannot have ownership of less than 75% of a subsidiary.

3480.     Sub-paragraph (3) extends the reference to "holding company" in sub-paragraph (2). See Change 174 in Annex 1.

3481.     The paragraph also sets out how this requirement applies to particular circumstances such as when a subsidiary company is being wound up.

Paragraph 12: The gross assets requirement

3482.     This paragraph sets out the gross assets test that a company must satisfy in order to qualify under EMI. It derives from paragraph 16 of Schedule 14 to FA 2000.

3483.     The wording of this gross assets test is very brief. Inland Revenue Statement of Practice 2/00 expands upon it, explaining that gross assets are all the assets shown in a company's balance sheet without any deductions for liabilities, and providing information about the application of United Kingdom accounting practice and which balance sheets should be used.

3484.     The test in sub-paragraph (3) makes it clear that the computation requires the addition of the value of the gross assets of each member of the group.

Paragraph 13: The trading activities requirement: single company

3485.     This paragraph specifies that a single company can only qualify under EMI if it is carrying on (or preparing to carry on) a qualifying trade, and that must be the only purpose for the company's existence, aside from any incidental purpose. The paragraph also makes it clear that the holding and managing of property for the purposes of a qualifying trade may be disregarded. Sub-paragraph (3) includes signposts to the definition of "qualifying trade" in paragraph 15 of this Schedule and to the provisions regarding excluded activities in paragraphs 16 to 23 of this Schedule.

3486.     The paragraph derives from paragraph 17(1), (4) and (7) of Schedule 14 to FA 2000.

Paragraph 14: The trading activities requirement: parent company

3487.     This paragraph derives from the remainder of paragraph 17 of Schedule 14 to FA 2000. It contains the detail of the trading activities requirement for a parent company, which looks at the business of the whole group.

3488.     The way "non-qualifying activities" is defined in paragraph 14(5)(c) has enabled the provisions in paragraphs 18 and 19 of this Schedule to be expressed in a positive way.

Paragraph 15: Meaning of "qualifying trade"

3489.     This paragraph provides the definition of a qualifying trade as:

  • being carried on wholly or mainly in the United Kingdom;

  • being carried on with a view to making profits; and

  • not including (to any substantial degree) any excluded activities.

3490.     The paragraph also explains to what extent research and development activities may be included.

3491.     The material derives from paragraph 18 of Schedule 14 to FA 2000.

Paragraph 16: Excluded activities

3492.     This paragraph lists the various activities that are excluded activities for the purposes of EMI. Some of these activities are described more fully in subsequent paragraphs of this Schedule, and this paragraph includes signposts to those subsequent explanatory provisions. It derives from paragraph 19 of Schedule 14 to FA 2000.

Paragraph 17: Excluded activities: wholesale and retail distribution

3493.     This is an interpretative paragraph which draws the boundary around what may be considered as a wholesale or retail distribution activity. It derives from paragraph 20 of Schedule 14 to FA 2000.

Paragraph 18: Excluded activities: leasing of certain ships

3494.     This derives from paragraph 21 of Schedule 14 to FA 2000.

3495.     One of the excluded activities listed in paragraph 16 of this Schedule is leasing (including letting ships on charter). This paragraph relaxes this exclusion in specified circumstances. This material derives from paragraph 21 of Schedule 14 to FA 2000. A qualifying trade can include certain kinds of short-term ship leasing, provided that the conditions set out in this paragraph are met. This relaxation does not apply to oil rigs or pleasure craft, the leasing of which remains an excluded activity.

3496.     The additional material in sub-paragraph (2) makes it clear that the requirements of sub-paragraph (4) do not have to be met in relation to oil rigs and pleasure craft.

3497.     An error in sub-paragraph (4) of paragraph 21 of Schedule 14 to FA 2000 has been corrected. This part of the rule in Schedule 14 is unworkable in that it is not possible for both the owner and the charterer to be subsidiaries of the company carrying on the trade, which has necessarily to be the owner of the ship.

3498.     Sub-paragraph (6) is modelled on the approach taken in section 297(7) of ICTA (the Enterprise Investment Scheme). See Change 175 in Annex 1.

Paragraph 19: Excluded activities: receipt of royalties or licence fees

3499.     Another excluded activity listed in paragraph 16 of this Schedule is the receipt of royalties or licence fees. Paragraph 19, which derives from paragraph 22 of Schedule 14 to FA 2000, relaxes this line somewhat and allows a qualifying trade to include the receipt of royalties or licence fees in respect of certain intangible assets as described in this paragraph.

3500.     Alterations to paragraph 14 of this Schedule have enabled this provision to be expressed positively.

3501.     The reference to "normal accounting practice" has been replaced by "generally accepted accounting practice" in sub-paragraph (7). This is in line with the definition in section 103(1) of FA 2002.

Paragraph 20: Excluded activities: property development

3502.     This is an interpretative paragraph, which draws the boundary around what may be considered as property development, one of the excluded activities listed in paragraph 16 of this Schedule. It derives from paragraph 23 of Schedule 14 to FA 2000.

Paragraph 21: Excluded activities: hotels and comparable establishments

3503.     One of the excluded activities listed in paragraph 16 of this Schedule is the operation or management of a hotel or comparable establishment (or the management of property used as such). Paragraph 21,which derives from paragraph 24 of Schedule 14 to FA 2000, supplements the rule in paragraph 16.

Paragraph 22: Excluded activities: nursing homes and residential care homes

3504.     Another excluded activity listed in paragraph 16 of this Schedule is the operation of a nursing home or a residential care home establishment (or the management of property used as such). Paragraph 22, which derives from paragraph 25 of Schedule 14 to FA 2000, supplements the rule in paragraph 16.

Paragraph 23: Excluded activities: provision of facilities for another business

3505.     This paragraph adds to the list of excluded activities given in paragraph 16 of this Schedule, the provision of services to a business carried on by someone else. The exclusion applies if the business receiving the services consists largely of excluded activities (from the paragraph 16 list) and the person with a controlling interest in that business also has a controlling interest in the company providing the services. This material derives from paragraph 26 of Schedule 14 to FA 2000.

3506.     To achieve the connection with excluded activities, in paragraph 26(1)(a) of Schedule 14 to FA 2000 there is a reference back to the term in paragraph 19(1) of Schedule 14. A problem with this is that in theory this could encompass activities, described as such in paragraph 19(1), but then "carved out" of this general exclusion (eg certain leasing of ships). It has been made clear that the excluded activities referred to in sub-paragraph (2)(a) are those activities after the "carve out" of those which can qualify (such as the leasing of ships in paragraph 18).

Part 4: Eligible employees

Paragraph 24: Eligible employees: introduction

3507.     This paragraph is introductory and derives from paragraph 27 of Schedule 14 to FA 2000.

Paragraph 25: The employment requirement

3508.     This paragraph derives from paragraph 28 of Schedule 14 to FA 2000 and explains that eligible employees must be employees of the relevant company or of a qualifying subsidiary company (if the relevant company is a parent company).

Paragraph 26: The requirement as to commitment of working time

3509.     This paragraph sets out that eligible employees must spend at least 25 hours a week (or at least 75% of their working time, if less) on the business of the relevant company (or of the group if the relevant company is a parent company). Time off for illness and other types of leave are disregarded for the purposes of this test. This paragraph derives from paragraph 29(1) to (4) of Schedule 14 to FA 2000.

3510.     One change from the material in paragraph 29 of Schedule 14 to FA 2000 is the reference to the employee as an "individual", in both this and paragraph 27 of this Schedule. It is not possible for anyone other than an individual to be a qualifying employee.

3511.     There is also no mention in this paragraph of the closing words of paragraph 29(4) of Schedule 14 to FA 2000, about an employee ceasing to be in relevant employment. These words have been rewritten in clause 535(1)(a), with a cross-reference to paragraph 25 of this Schedule.

3512.     There is a change to the wording of the "statutory threshold" in sub-paragraph (1), in the reference to the average amount per week of the employee's committed time. See Change 176 in Annex 1 and the parallel change to clause 535, Change 130.

3513.     Another minor change to the law concerns the 75% element of the "statutory threshold". The wording of paragraph 29(1) of Schedule 14 to FA 2000 did not make it clear that the reference to 75% is a minimum. See Change 176 in Annex 1.

Paragraph 27: Meaning of "working time"

3514.     This paragraph derives from paragraph 29(5) and (6) of Schedule 14 to FA 2000. It sets out what is meant by "working time" for the purposes of paragraph 26 of this Schedule.

 
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Prepared: 17 February 2003