Finance (No. 2) Bill

Session 2012 - 13
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Other Bills before Parliament

Finance (No. 2) Bill

Finance (No. 2) Bill
Schedule 22 — Employee shareholder shares
Part 1 — Income tax treatment of employee shareholder shares
328

(2)
“Qualifying shares” means employee shareholder shares in—
(a)
the employer company in relation to the relevant agreement,
or
(b)
an associated company of that company,

which are acquired by the employee in consideration of an
5
agreement within subsection (3).
(3)
An agreement is within this subsection if it is—
(a)
another employee shareholder agreement with the same
employer company, or
(b)
an employee shareholder agreement with an associated
10
company of that company.
(4)
For the purposes of this section—
(a)
a company is an “associated company” of another if—
(i)
one of the two has control of the other, or
(ii)
both are under the control of the same person or
15
persons, and
(b)
if a company controls another when an employee
shareholder agreement is entered into with the employee,
paragraph (a) applies as if that continued to be the case (in
addition to any other circumstances) when any subsequent
20
employee shareholder agreement is entered into with that
employee.
(5)
But subsection (4)(b) does not apply as between two companies if—
(a)
one of the companies has been dissolved,
(b)
the period of two years beginning with the date of the
25
dissolution has passed, and
(c)
the employee has not, at any time in that period, been
engaged in any office or employment (including engagement
under a contract for services) with any company which is an
associated company of the dissolved company.
30
(6)
In this section “control” is to be read in accordance with sections 450
and 451 of CTA 2010.
226D
Shareholder or connected person having material interest in company
(1)
No payment is treated as made under section 226B in respect of any
shares if, on the date on which the shares are acquired—
35
(a)
the employee has a material interest in the employer
company or a relevant parent undertaking, or
(b)
the employee is connected with an individual who has a
material interest in the employer company or a relevant
parent undertaking.
40
(2)
No payment is treated as made under section 226B in respect of any
shares if—
(a)
at any time in the period of one year ending with the date on
which the shares are acquired, the employee had a material
interest in the employer company or a relevant parent
45
undertaking, or
(b)
on the date on which the shares are acquired, the employee is
connected with an individual who, at any time in the period

Finance (No. 2) Bill
Schedule 22 — Employee shareholder shares
Part 1 — Income tax treatment of employee shareholder shares
329

of one year ending with that date, had a material interest in
the employer company or a relevant parent undertaking.
(3)
Subsections (4) and (5) define “material interest” for the purposes of
this section.

Those subsections must be read together with subsections (6) to (8).
5
(4)
An individual (“A”) has a material interest in a company if at least
25% of the voting rights in the company are exercisable—
(a)
by A,
(b)
by persons connected with A, or
(c)
by A and persons connected with A together.
10
(5)
If a company is a close company, an individual (“A”) has a material
interest in it if—
(a)
A,
(b)
persons connected with A, or
(c)
A and persons connected with A together,
15

possess such rights as would, in the event of the winding up of the
company or in any other circumstances, give an entitlement to
receive at least 25% of the assets that would then be available for
distribution among the participators.
(6)
For the purposes of subsection (1), A is to be treated as having a
20
material interest in a company at any time if either of the following
conditions is met.
(7)
The first condition is that—
(a)
A,
(b)
persons connected with A, or
25
(c)
A and persons connected with A together,

have an entitlement to acquire such rights as would (together with
any existing rights) give A a material interest in the company.
(8)
The second condition is that there are arrangements in place
between—
30
(a)
the employer company or a relevant parent undertaking, and
(b)
A, or persons connected with A, or A and persons connected
with A together,

which enable A or those persons to acquire such rights as would
(together with any existing rights) give A a material interest in the
35
company.
(9)
In this section—
“arrangements” includes any agreement, understanding,
scheme, transaction or series of transactions (whether or not
legally enforceable);
40
“close company” includes a company that would be a close
company but for—
(a)
section 442(a) of CTA 2010 (exclusion of companies
not resident in the United Kingdom), or
(b)
sections 446 and 447 of CTA 2010 (exclusion of certain
45
quoted companies);

Finance (No. 2) Bill
Schedule 22 — Employee shareholder shares
Part 1 — Income tax treatment of employee shareholder shares
330

“relevant parent undertaking” means any parent undertaking
of the employer company and for this purpose “parent
undertaking” is to be read in accordance with section 1162 of
the Companies Act 2006.”
4
In consequence of the amendment made by paragraph 3—
5
(a)
in the heading to Chapter 12 of Part 3, for “Payments” substitute
“Other amounts”, and
(b)
before section 221 insert the heading “Payments”.
5
In section 428 (restricted securities: amount of charge on occurrence of
chargeable event), in subsection (7), after paragraph (b) insert—
10
“(ba)
any amount treated as earnings from the employee’s
employment under section 226A (employee shareholder
shares: amount treated as earnings) in respect of the
acquisition of the employment-related securities (other than
an amount of exempt income),”.
15
6
In section 431 (election for full or partial disapplication of Chapter 2
(restricted securities)), in subsection (3), after paragraph (a) insert—
“(aa)
determining any amount that is to be treated as earnings
from the employment where section 226A applies (employee
shareholder shares: amount treated as earnings),”.
20
7
In section 437 (convertible securities: adjustment of charge), in subsection
(1)(a), after “charge)” insert “, section 226A (employee shareholder shares:
amount treated as earnings)”.
8
In section 446B (charge on acquisition of securities with artificially
depressed market value), in subsection (4), after paragraph (b) insert—
25
“(ba)
section 226A (employee shareholder shares: amount treated
as earnings),”.
9
In section 446T (securities acquired for less than market value: amount of
notional loan), in subsection (3), after paragraph (b) insert—
“(ba)
any amount treated as earnings from the employee’s
30
employment under section 226A (employee shareholder
shares: amount treated as earnings) in respect of the
acquisition of the employment-related securities (other than
an amount of exempt income),”.
10
In section 446V (Chapter 3C to be additional to other income tax charges),
35
after paragraph (b) insert—
“(ba)
section 226A (employee shareholder shares: amount treated
as earnings),”.
11
In section 452 (shares in research institution spin-out companies: market
value on acquisition), in subsection (2), after paragraph (a) insert—
40
“(aa)
determining any amount that is to be treated as earnings
from the employment under section 226A (employee
shareholder shares: amount treated as earnings),”.
12
In section 479 (securities options: amount of gain realised on chargeable
event), after subsection (3) insert—
45
“(3A)
Sections 226B to 226D (deemed payment for acquisition of employee
shareholder shares) provide for the determination of the amount of

Finance (No. 2) Bill
Schedule 22 — Employee shareholder shares
Part 1 — Income tax treatment of employee shareholder shares
331

consideration, if any, which is given for employee shareholder
shares (within the meaning of section 226A(6)).”
13
In section 531 (enterprise management incentives: limitation of charge
where shares acquired below market value), after subsection (3) insert—
“(3A)
Sections 226B to 226D (deemed payment for acquisition of employee
5
shareholder shares) provide for the determination of the amount, if
any, for which employee shareholder shares (within the meaning of
section 226A(6)) are acquired.”
14    (1)
Section 532 (enterprise management incentives: consequences after
disqualifying events) is amended as follows.
10
      (2)
After subsection (4) insert—
“(4A)
Sections 226B to 226D (deemed payment for acquisition of employee
shareholder shares) provide for the determination of the amount, if
any, for which employee shareholder shares (within the meaning of
section 226A(6)) are acquired.”
15
      (3)
In subsection (5), for “those subsections” substitute “subsections (2) and (3)”.
15
In section 554N (exclusions: other cases involving employment-related
securities etc), in subsection (7)(b), after “Part 3” insert “, or an amount
treated under section 226A as earnings of A,”.
16
In Chapter 3 of Part 4 of ITTOIA 2005 (tax on dividends etc from UK
20
companies), after section 385 insert—
“Purchase by company of exempt employee shareholder shares
385A
No charge to tax on purchase by company of exempt employee
shareholder shares
(1)
No tax is charged under this Chapter on the amount or value of a
25
payment made by a company on the purchase of shares from an
individual if—
(a)
the payment is made in respect of shares in the company,
(b)
the shares are exempt employee shareholder shares, and
(c)
at the time of the disposal, the individual is not an employee
30
of, or an office-holder in, the employer company or an
associated company of that company.
(2)
In this section—
“exempt employee shareholder share”, “employer company”
and “associated company” have the same meaning as in
35
sections 236B to 236D of TCGA 1992 (capital gains tax
treatment of employee shareholder shares);
“in respect of shares in the company” has the same meaning as
in Part 23 of CTA 2010 (company distributions) (see section
1113 of that Act).”
40

Finance (No. 2) Bill
Schedule 22 — Employee shareholder shares
Part 2 — Capital gains tax exemption for employee shareholder shares
332

Part 2
Capital gains tax exemption for employee shareholder shares
17
TCGA 1992 is amended as follows.
18
In section 58(2) (spouses and civil partners: disposals excepted from the
usual rule)—
5
(a)
omit “or” at the end of paragraph (a), and
(b)
after paragraph (b) insert “, or
(c)
if the disposal is of exempt employee shareholder
shares (see sections 236B to 236D),”.
19    (1)
Section 149AA (restricted and convertible employment-related securities) is
10
amended as follows.
      (2)
In subsection (1) for “Where” substitute “Subject to subsection (1A), where”.
      (3)
After that subsection insert—
“(1A)
Where an individual has acquired an asset consisting of shares
which, on acquisition, became employee shareholder shares—
15
(a)
the consideration for the acquisition is (subject to section
119A) to be taken to be equal to any amount that constituted
earnings under Chapter 1 of Part 3 of ITEPA 2003 (earnings)
or section 226A of that Act (employee shareholder shares),
and
20
(b)
no other consideration is to be treated as having been given
for the acquisition of the shares.”
      (4)
In subsection (2)—
(a)
for “Subsection (1) above applies” substitute “Subsections (1) and
(1A) apply”, and
25
(b)
for “is” substitute “are”.
      (5)
After subsection (6) insert—
“(6A)
For the purposes of subsection (1A)—
“employee shareholder share” has the meaning given in section
236B(3) (exemption for employee shareholder shares), and
30
shares are “acquired” by an individual if the individual
becomes beneficially entitled to them (and they are so
acquired at the time when the individual becomes so
entitled).”
      (6)
In subsection (7)—
35
(a)
for “In subsection (1) the” substitute “In subsections (1) and (1A) a”,
and
(b)
after “ITEPA 2003” insert “or was treated as earnings under section
226A of that Act”.
      (7)
Accordingly, in the heading for that section, after “securities” insert “and
40
employee shareholder shares”.

Finance (No. 2) Bill
Schedule 22 — Employee shareholder shares
Part 2 — Capital gains tax exemption for employee shareholder shares
333

20
After section 236A insert—
“Employee shareholders
236B
Exemption for employee shareholder shares
(1)
A gain which accrues on the first disposal of an exempt employee
shareholder share is not a chargeable gain.
5
(2)
A share is an exempt employee shareholder share if it is—
(a)
an employee shareholder share, and
(b)
exempt in accordance with sections 236C and 236D.
(3)
In this section and sections 236C to 236G—
shares are “acquired” by an employee if the employee becomes
10
beneficially entitled to them (and they are acquired at the
time when the employee becomes so entitled);
“employee shareholder share” means a share acquired in
consideration of an employee shareholder agreement and
held by the employee;
15
“employee shareholder agreement” means an agreement by
virtue of which an employee is an employee shareholder (see
section 205A(1)(a) to (c) of the Employment Rights Act 1996);
“employee” and “employer company”, in relation to an
employee shareholder agreement, mean the individual and
20
the company which enter into the agreement.
236C
Only first £50,000 of shares under associated agreements to be exempt
(1)
An employee shareholder share acquired in consideration of an
employee shareholder agreement (“the relevant agreement”) is
exempt for the purposes of section 236B only if, immediately after its
25
acquisition, the total value of qualifying shares which have been
acquired by the employee does not exceed £50,000.
(2)
“Qualifying share” means an employee shareholder share in—
(a)
the employer company in relation to the relevant agreement,
or
30
(b)
an associated company of that company,

which is acquired by the employee in consideration of an agreement
within subsection (3).
(3)
An agreement is within this subsection if it is—
(a)
the relevant agreement,
35
(b)
another employee shareholder agreement with the same
employer company, or
(c)
an employee shareholder agreement with an associated
company of that company.
(4)
For the purposes of this section—
40
(a)
a company is an “associated company” of another if—
(i)
one of the two has control of the other, or
(ii)
both are under the control of the same person or
persons, and

Finance (No. 2) Bill
Schedule 22 — Employee shareholder shares
Part 2 — Capital gains tax exemption for employee shareholder shares
334

(b)
if a company controls another when an employee
shareholder agreement is entered into with the employee,
paragraph (a) applies as if that continued to be the case (in
addition to any other circumstances) when any subsequent
employee shareholder agreement is entered into with that
5
employee.
(5)
But subsection (4)(b) does not apply as between two companies if—
(a)
one of the companies has been dissolved,
(b)
the period of two years beginning with the date of the
dissolution has passed, and
10
(c)
the employee has not, at any time in that period, been
engaged in any office or employment (including engagement
under a contract for services) with any company which is an
associated company of the dissolved company.
(6)
If a number of qualifying shares are acquired by an employee on a
15
day and—
(a)
before that day, the value of qualifying shares that have been
acquired by the employee does not exceed £50,000, and
(b)
at the end of that day, that value does exceed that sum,

the appropriate proportion of the shares (rounded down, if
20
necessary, to the nearest share) is to be treated for the purposes of
subsection (1) as having been acquired separately and before the
others.
(7)
The “appropriate proportion” is the following—

where—
25
B is the value of qualifying shares acquired before the day;
T is the total value of qualifying shares acquired on the day.
(8)
For the purposes of this section, the value of a share (at any time) is
its unrestricted market value at the time when it was acquired by the
employee.
30
(9)
The unrestricted market value of a share when it is acquired by an
employee is what the market value of the share would be
immediately after the acquisition, but for any restriction.

For this purpose “restriction” has the meaning given by section
432(8) of ITEPA 2003 (restricted securities for the purposes of
35
Chapter 2 of Part 7 of that Act).
236D
Shares not exempt if shareholder or connected person has material
interest in company
(1)
An employee shareholder share is not exempt for the purposes of
section 236B if, on the date on which the share is acquired—
40
(a)
the employee has a material interest in the employer
company or a relevant parent undertaking, or
(b)
the employee is connected with an individual who has a
material interest in the employer company or a relevant
parent undertaking.
45