|Income Tax (Earnings And Pensions) Bill - continued||House of Lords|
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Paragraph 28: The "no material interest" requirement
3515. This paragraph sets out that to be "eligible" under EMI, employees cannot have a material interest in the relevant company (or any group company if the relevant company is a parent company). Nor may any associate of the employee have such a material interest if the employee is to be an "eligible employee". This paragraph derives from paragraph 30(1), (2) and (4) of Schedule 14 to FA 2000.
Paragraph 29: Meaning of "material interest"
3516. This paragraph derives from paragraph 31 of Schedule 14 to FA 2000. It sets out what is meant by "material interest" for the purposes of paragraph 28 of this Schedule.
Paragraph 30: Material interest: options and interests in SIPs
3517. This paragraph explains what rights to acquire shares should be taken into consideration in deciding whether an employee has a material interest, and how and when such rights should be counted. It derives from paragraphs 30(3), 32 and 33 of Schedule 14 to FA 2000.
3518. This paragraph includes the part of paragraph 33 of Schedule 14 to FA 2000, which relates to SIPs. The rest of that paragraph that refers to APS (the profit sharing schemes approved under Schedule 9 to ICTA) has not been reproduced in this Schedule. It is contained in Part 8 of Schedule 7 to this Bill (Transitionals and savings).
Paragraph 31: Meaning of "associate"
3519. This paragraph derives from paragraph 34 of Schedule 14 to FA 2000. It sets out what is meant by "associate" for the purposes of paragraph 28. The same definition is used for the different share schemes, and has been rewritten in the same way in each of Schedules 2, 3, 4 and 5 to this Bill.
3520. The company in sub-paragraph (1)(c) is identified as the company mentioned in paragraph 28(2) of this Schedule. This is also copied in later paragraphs to which it is relevant. This makes explicit both interpretation and practice, thereby limiting the scope of the definition of "associate" in the case of a trust or estate.
3521. Sub-paragraph (2) is new. It links this paragraph with the two that follow.
3522. The definition of "relative" in sub-paragraph (3) reflects the meaning given to this term in paragraph 26(7) of Schedule 14 to FA 2000.
Paragraph 32: Meaning of "associate": trustees of employee benefit trust
3523. The material interest test in paragraph 28 of this Schedule applies to a wide range of associates. Where an employee has an interest in shares subject to a trust, this includes the trustees of that settlement. If that settlement is an employment benefit trust, paragraph 32 ensures the trustees of that employment benefit trust do not count as associates (unless they do so because of some other link). This paragraph derives from paragraph 35 of Schedule 14 to FA 2000.
3524. Chapter 11 of Part 7 defines the expression "employee benefit trust", and deals with further matters arising when payments from employee benefit trusts are made.
Paragraph 33: Meaning of "associate": trustees of discretionary trust
3525. The material interest test in paragraph 28 of this Schedule is applied to a wide range of associates including, potentially, the trustees of a settlement. This paragraph applies where the company shares are held in a discretionary trust (ordinary meaning) of which the employee is a beneficiary but with only a very remote expectation of receiving anything from the trust. In such a case the trustees of that discretionary trust do not count as associates (unless they do so because of some other link). This paragraph derives from paragraph 36 of Schedule 14 to FA 2000.
Part 5: Requirements relating to options
Paragraph 34: Requirements relating to options: introduction
3526. This paragraph is introductory and derives from paragraph 37 of Schedule 14 to FA 2000.
Paragraph 35: Type of shares that may be acquired
3527. This paragraph sets out the requirement that, to qualify, an option may only be capable of being exercised to acquire shares that are:
3528. This paragraph derives from paragraph 38 of Schedule 14 to FA 2000.
Paragraph 36: Option to be capable of exercise within 10 years
3529. This paragraph sets out the requirement that, in order to qualify under EMI, the option must be capable of being exercised within ten years. There is no minimum exercise period. This paragraph derives from paragraph 39 of Schedule 14 to FA 2000.
Paragraph 37: Terms of option to be agreed in writing
3530. This paragraph sets out the requirement that the option must take the form of a written agreement between the grantor of the option and the employee. It goes on to elaborate on the specific types of terms that have to be covered in that agreement. It derives from paragraph 40 of Schedule 14 to FA 2000.
Paragraph 38: Non-assignability of rights
3531. This paragraph explains that in order to qualify under EMI an option must not include any transferable rights. If the option includes a right for it to be exercised after the employee's death, the right may not extend for more than one year after the employee's death. It is not clear from the source legislation whether the one-year period includes any part or indeed the whole of the day on which the employee died. Sub-paragraph (b) clarifies this by referring to "one year after the date of the death" so if, for example, the employee dies at 2 pm on 1 May 2003, the option must be exercised before 2 May 2004.
3532. This paragraph derives from paragraph 41 of Schedule 14 to FA 2000.
Part 6: Company reorganisations
Paragraph 39: Company reorganisations: introduction
3533. This paragraph introduces the provisions in the rest of this Part of this Schedule and explains the term "company reorganisation". In this context a "company reorganisation" is broadly where a company acquires control of another company whose shares are subject to an unexercised qualifying share option. This paragraph derives from paragraph 59 of Schedule 14 to FA 2000.
Paragraph 40: Meaning of "qualifying exchange of shares"
3534. Among the ways listed in paragraph 39 of this Schedule for a company to acquire control of another company is by a "qualifying exchange of shares". Paragraph 40 sets out that a "qualifying exchange of shares" is an arrangement under which the new company issues shares in itself in exchange for acquiring all the shares in the old company, subject to certain conditions laid down in this paragraph. This paragraph derives from paragraph 60 of Schedule 14 to FA 2000.
Paragraph 41: Grant of replacement option
3535. Paragraph 41 derives from paragraph 61 of Schedule 14 to FA 2000. It sets out how, if a company reorganisation meets the required criteria set out in the preceding paragraph, a qualifying share option in the old company ("the old option") is exchanged for an equivalent share option in the new company, "the new option", to form a "replacement option". The replacement option must meet certain conditions and must be granted within the time limit outlined in paragraph 42 of this Schedule.
3536. The new sub-paragraph (6) makes it clear that when valuing the shares that are subject to the replacement option, for the purpose of the tests in paragraphs 5 to 7 of this Schedule, the value of the shares in the acquired company, at the time when the old option was granted, is the measure of the valuation of the shares subject to the new option. See Change 177 in Annex 1.
Paragraph 42: Period within which replacement option must be granted
3537. This paragraph outlines the time limit on granting the replacement option mentioned in the preceding paragraph. That time limit depends on the circumstances under which the new company acquires control of the old company. The various possibilities are covered in sub-paragraphs (2) to (4).
3538. In sub-paragraphs (2) and (3) there is a six-month period time limit. The wording in the source legislation does not make it clear whether or not the six months start running on the day that the change in control occurs, or on the day after. Sub-paragraphs (2) and (3) clarify this by referring to "6 months after the date on which..". So if, for example, the new company acquires control of the old company at 2pm on 1st January 2004, the replacement option must be granted before 2nd July 2004.
3539. This paragraph derives from paragraph 62 of Schedule 14 to FA 2000.
Paragraph 43: Further requirements to be met as to replacement option
3540. This paragraph sets out various other conditions that must be met if the new option is to qualify as a replacement option for the purposes of EMI. This paragraph derives from paragraph 63 of Schedule 14 to FA 2000.
3541. As noted above, in relation to paragraphs 5 and 41 of this Schedule, the test in sub-paragraph (3)(b) (the maximum value of options under paragraph 7) should be applied to the new option and the acquiring company but the shares to be valued are those in the acquired company at the date of the grant of the old option. This is made clear in sub-paragraph (4). See Change 177 in Annex 1.
Part 7: Notification of option to Inland Revenue
Paragraph 44: Notice of option to be given to Inland Revenue
3542. A further requirement for an option to be a qualifying option is that its grant must be notified to the Inland Revenue within 92 days. This paragraph sets out this requirement, along with particulars of what information has to be included in that notification and who must make it. The wording in the source legislation does not make it clear whether the day upon which the option is granted is counted in the period of 92 days. Sub-paragraph (1) clarifies that the 92-day period only starts running the day after the date upon which the option is granted.
3543. This paragraph derives from paragraph 2 of Schedule 14 to FA 2000.
3544. In sub-paragraph (7) there is a cross- reference to the term "appropriate time". This is a new definition in paragraph 1 of this Schedule and is helpful in this Part with, for example, the application of paragraph 46(3).
Paragraph 45: Correction of notice by Inland Revenue
3545. This paragraph gives the Inland Revenue authority to amend a notice given to it under the preceding paragraph. This paragraph also sets out how and when such a correction may be made. It derives from paragraph 3 of Schedule 14 to FA 2000.
3546. This paragraph sets out the time within which the Inland Revenue may amend a notice and the time within which the employer company may reject such a correction. The source legislation gives these time limits as "nine months after the day on which the notice..was given" and "three months from the date of issue of the notice of correction". The time limit in each case starts running from the day after the day mentioned. Sub-paragraph (4) make this clearer for the time limit for the employer company by referring to "3 months after the date of issue of the notice".
3547. The wording in sub-paragraph (4) of paragraph 3 of Schedule 14 to FA 2000 states that the employer company can give notice rejecting a correction without saying to whom the notice should be given. A reference to the Inland Revenue has been added in sub-paragraph (4). See Change 178 in Annex 1.
Paragraph 46: Notice of enquiry
3548. This paragraph gives the Inland Revenue authority to enquire whether an option is qualifying or not after a notice has been given under paragraph 44 of this Schedule. The paragraph describes the procedure that should be followed by the Inland Revenue in opening such an enquiry and the time limits for doing so. This paragraph derives from paragraph 4 of Schedule 14 to FA 2000.
3549. Sub-paragraph (5) of paragraph 46 of this Schedule makes it clear that a notice of enquiry can be given before the end of the 92-day notification period if the option is notified to the Inland Revenue before then. The closing date remains 12 months after the end of the 92-day period. See Change 178 in Annex 1.
Paragraph 47: Completion of enquiry: closure notices
3550. This paragraph sets out what happens when an enquiry as described in the preceding paragraph is completed. It provides for the issue of a closure notice, which must include details of the Inland Revenue's decision as to whether the option in question qualifies under EMI. It also sets out how, to whom and when such a closure notice should be issued. This paragraph derives from paragraph 5(1) to (5) of Schedule 14 to FA 2000.
Paragraph 48: Completion of enquiry: application for closure notice to be given
3551. This paragraph derives from paragraph 5(6) to (9) of Schedule 14 to FA 2000. It sets out that the employer company (or in certain circumstances the individual concerned) has a right to apply to the Commissioners for a direction requiring the Inland Revenue to issue a closure notice as described in paragraph 47 of this Schedule.
Paragraph 49: Effect of enquiry
3552. This paragraph sets out how an enquiry impacts on the qualification of an option under EMI. The Inland Revenue's decision given in the closure notice determines whether an option qualifies, although that decision may be subject to an appeal under paragraph 50 of this Schedule. The paragraph also explains the procedure if there is no enquiry. In this circumstance the option is taken as being a qualifying option under EMI. This paragraph derives from paragraph 6 of Schedule 14 to FA 2000.
Paragraph 50: Appeals
3553. This paragraph sets out that there is a right of appeal to the Commissioners against a decision by the Inland Revenue that either the grant of an option was not properly notified in accordance with paragraph 44 of this Schedule or that the option does not qualify under EMI. The right of appeal lies with the employer company, although if the decision concerns the "commitment of working time" test in paragraph 26 of this Schedule, it is also open to the individual concerned to appeal. This paragraph derives from paragraph 7 of Schedule 14 to FA 2000.
3554. The replacement of employer company or individual in sub-paragraph (3) with "appellant" makes it clear that only the appellant has the right to elect that the appeal is heard by the Special Commissioners.
3555. The appeal must be made within a 30 day time limit. The source legislation does not make it clear whether or not the 30 day period starts running on the day that the closure notice is given to the employer company or on the day after. Sub-paragraph (3) clarifies this by referring to "within 30 days after the date when the closure notice is given". So if, for example, the closure notice is given during the course of the day on 1st March 2004 any appeal must be made before 1st April 2004.
Part 8: Supplementary provisions
Paragraph 51: Power to require information
3556. In order to carry out an enquiry as described in paragraph 46 of this Schedule, the Inland Revenue may require further information. This paragraph provides the Inland Revenue with the authority to issue a notice to a person requiring that person to provide such information.
3557. In sub-paragraph (2)(b), the authority also extends to cover information required to determine the tax liability of a person who has been granted a qualifying option. This covers liability to capital gains tax.
3558. There is a penalty for non-compliance with a notice issued under this paragraph. The consequential amendment to section 98 of TMA 1970 is contained in Schedule 6 to this Bill.
3559. In sub-paragraph (1)(a) the words "reasonably require" replace the words "think necessary" in sub-paragraph (1)(a) of paragraph 64 of Schedule 14 to FA 2000. This change brings the terminology into line with SIPs (and with comparable provisions in Corporation Tax Self Assessment, known as CTSA). See Change 179 in Annex 1.
3560. Sub-paragraph (3) clarifies the operation of the time limit for providing information by making the minimum three month period start after the date of the notice.
3561. This paragraph derives from paragraph 64 of Schedule 14 to FA 2000.
Paragraph 52: Annual returns
3562. This paragraph sets out that a company must make a return to the Inland Revenue for any year during which its shares are subject to a qualifying option, prescribes when it should make the return and that the return should contain such information as the Inland Revenue may require. It derives from paragraph 65 of Schedule 14 to FA 2000.
3563. The time limit has been changed to "before 7 July" in line with the practice in this Bill where it helps to refer to an exact date following the end of the tax year.
3564. As with paragraph 64 of Schedule 14 to FA 2000, there is a penalty for non-compliance with a notice issued under this paragraph. The consequential amendment to section 98 of TMA 1970 is contained in Schedule 6 to this Bill.
Paragraph 53: Compliance with time limits
3565. This paragraph allows an extension to the various time limits mentioned throughout the EMI provisions if the person failing to meet a particular time limit has a reasonable excuse for doing so. It derives from paragraph 70 of Schedule 14 to FA 2000.
Paragraph 54: Power to amend by Treasury order
3566. This paragraph allows the Treasury to make an order amending the terms of the trading activities tests for a qualifying company or amending the monetary limits on share values and on a company's gross assets. This paragraph derives from paragraph 69 of Schedule 14 to FA 2000.
3567. The power to amend by Treasury order, as set out in paragraph 69 of Schedule 14 to FA 2000, did not include any power to amend the £100,000 limit on unexercised employee options. That limit appears in paragraph 47(1)(g) of that Schedule, rewritten as clause 536. The power to amend by Treasury order has been extended to include that £100,000 limit. See Change 180 in Annex 1.
3568. In practice this limit is only likely to be increased but the new sub-paragraph (2) further protects the taxpayer by explicitly matching changes in the paragraph 5 and 6 limits with that in clause 536(1)(e).
Paragraph 55: Meaning of "market value" of shares
3569. This paragraph sets out that the "market value" of shares should have the same meaning as in TCGA 1992, subject to the special rule on the valuation of shares subject to restriction or risk of forfeiture in paragraph 5(7) of this Schedule.
3570. Paragraph 55 derives from paragraph 66(1) of Schedule 14 to FA 2000.
Paragraph 56: Determination of market value of shares
3571. Under this paragraph, if a market value has to be determined for the purposes of the EMI provisions, the company and the Inland Revenue may agree upon that market value and the dates by reference to which it must be determined. Alternatively the Inland Revenue have to decide what that market value is, and issue a notice to the company detailing its decision. The employer company has a right to pre-empt that decision by the Inland Revenue and refer the question instead to the Commissioners for their decision. This paragraph derives from paragraphs 66(2) and 67(1), (4) and (5) of Schedule 14 to FA 2000.
Paragraph 57: Appeal against determination of market value of shares
3572. Where the Inland Revenue have decided on a market value of shares under paragraph 56 of this Schedule, and issued a notice setting out that decision, the employer company may appeal against that decision. This paragraph sets out that right of appeal, saying to whom it must be made and when.
3573. The appeal must be made within a 30 day time limit. The wording in the source legislation does not make it clear whether or not the 30 day period starts running on the day that the notice of determination is given to the employer company or on the day after. Sub-paragraph (2) clarifies this by referring to "within 30 days after the date when notice of their determination is given". So if, for example, the notice of determination is given during the course of the day on 1st March 2004 any appeal must be made before 1st April 2004.
3574. This paragraph derives from paragraph 67(2), (3) and (5) of Schedule 14 to FA 2000.
Paragraph 58: Minor definitions
3575. This paragraph provides a number of definitions of terms used throughout the EMI provisions. It derives from paragraph 71(1) of Schedule 14 to FA 2000.
3576. There is one new term included in this list of definitions: "group of companies". This new term has been used in clause 539(2)(b) and in paragraphs 5(1)(b)(ii) and (4)(b), and 6(2)(b) and (3) of this Schedule. See Note 69 in Annex 2.
Paragraph 59: Index of defined expressions
3577. This paragraph shows where various terms used in the EMI code are defined. The equivalent list for Schedule 14 to FA 2000 is in paragraph 72 of that Schedule.
SCHEDULE 6: CONSEQUENTIAL AMENDMENTS
3578. This Schedule makes consequential amendments to other legislation. Many of those amendments are matters of detail, which do not require commentary; but there are also other amendments that are more substantial.
3579. A number of the more substantial amendments in this Schedule are connected with the provisions of Part 7 of this Bill (employment income: share related income and exemptions). The majority of the provisions in the SIP code (deriving from Schedule 8 to FA 2000) and in the EMI code (deriving from Schedule 14 to that Act) are concerned with employment income; and, accordingly, appear in this Bill - but not all of those provisions fall into this category. The view has been taken that it is more appropriate to move those remaining provisions to other destinations in the Tax Acts than to leave them where they are (see clauses 515 and 527(3)). This Schedule makes provision accordingly.
Part 1: Income and Corporation Taxes Act 1988
3580. This paragraph substitutes a new section 1(1) of ICTA (the charge to income tax). As a result of the passing of this legislation the charge to income tax will consist in part of Schedules A, D and F, as set out in ICTA, and in part of the new categories of employment income, pension income and social security income for which this Bill provides (together with other amounts which, under the Income Tax Acts, are charged to income tax).
3581. This paragraph amends section 9 of ICTA, which deals with the computation of income for corporation tax purposes, to reflect the repeal of Schedule E.
3582. This paragraph amends section 18 of ICTA so as to re-establish the boundary between income charged under this Bill and income charged under ICTA.
3583. In section 18(1)(b) of ICTA the reference to Schedule E is replaced by a reference to the three types of income charged under this Bill. This will include some pension and social security income that is charged under Schedule D by ICTA. The amendment ensures that the income is charged only under this Bill. A similar amendment is made to the definition of Case VI.
3584. In the definition of Case V the phrase "income consisting of emoluments of any office or employment" is replaced by a general reference to "employment income". Although the latter term covers both the charge on emoluments taxed by paragraph 1 of section 19(1) of ICTA and the free-standing Schedule E charges taxed by paragraph 5 of section 19(1), the amendment respects the principle that Schedule D is the residual Schedule. Despite using the broader term, Schedule D Case V still covers all of a person's income from abroad except income that is specifically chargeable under other provisions.
3585. This paragraph provides for the repeal of section 19 of ICTA, which delineates the charge to income tax under Schedule E.
3586. This paragraph inserts three new sections (68A, 68B and 68C) into ICTA. The new sections, which are part of the SIP code, provide for a charge to income tax under Case V of Schedule D where an individual receives benefits under a SIP consisting of foreign cash dividends or dividend shares acquired with such dividends cease to be subject to the plan within three years of acquisition. The new sections derive from material in paragraphs 92 and 93 of Schedule 8 to FA 2000.
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