Income Tax (Earnings and Pensions) Bill

House of Commons

Session 2002 - 03
Internet Publications
Other Bills before Parliament

Income Tax (Earnings and Pensions) Bill

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 2 — Conditional interests in shares
    216

432   Duty to notify provision of conditional interests in shares
     (1)    Subsection (2) applies if—
           (a)           a person provides an individual with an interest in shares which is only
conditional, and
           (b)           the circumstances are such that subsequent events may result in an
5
amount counting as employment income of that individual under
section 427 (charge on interest in shares ceasing to be only conditional
or on disposal).
     (2)    Each of the following persons—
           (a)           the person providing the interest in shares, and
10
           (b)           the employer company,
            must provide the Inland Revenue with particulars in writing of the interest and
its provision.
     (3)    The particulars must be provided before 7th July in the tax year following that
in which the interest is provided.
15
433   Duty to notify events resulting in charges under section 427
     (1)    Subsection (2) applies if—
           (a)           a person has an interest in shares which is only conditional,
           (b)           either—
                  (i)                 the shares cease to be shares in which that person’s interest is
20
only conditional,
                  (ii)                the shares are disposed of, or
                  (iii)               that person dies, and
           (c)           by virtue of that event an amount counts as employment income under
section 427 (charge on interest in shares ceasing to be only conditional
25
or on disposal).
     (2)    Each of the following persons—
           (a)           the person who provided the interest in shares, and
           (b)           the employer company,
            must provide the Inland Revenue with particulars in writing of the interest and
30
the event.
     (3)    The particulars must be provided before 7th July in the tax year following that
in which the event occurs.
434   Minor definitions
     (1)    In this Chapter—
35
                    “director”—
                  (a)                                     in the case of a company whose affairs are managed by a board
of directors or similar body, means a member of that board or
similar body,
                  (b)                                     in the case of a company whose affairs are managed by a single
40
director or similar person, means that director or person,
                  (c)                                     in the case of a company whose affairs are managed by its
members, means a member,
                         and includes any person who is to be or has been a director;

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 3 — Convertible shares
    217

                    “employee” includes—
                  (a)                 in relation to a company, a person taking part in the
management of the affairs of the company who is not a director,
and
                  (b)                 a person who is to be or has been an employee;
5
                    “market value”, in relation to an interest in shares, means the amount that
might reasonably be expected to be obtained from a sale of the interest
in the open market;
                    “shares” (except in section 423 in the expression “convertible shares”)
includes—
10
                  (a)                 stock,
                  (b)                 securities issued by a company, and
                  (c)                 any other interest of a member of a company;
                    “terms” on which a person is entitled to an interest in shares means terms
imposed by contract or arrangement or in any other way.
15
     (2)    In this Chapter—
                    “the employee”,
                    “the employee’s interest”,
                    “the employer company”, and
                    “the shares”,
20
            have the meanings indicated in section 422(1) and (2).
Chapter 3
Convertible shares
Introduction
435   Application of this Chapter
25
     (1)    This Chapter applies where a person (“the employee”)—
           (a)           has acquired convertible shares or an interest in such shares in a
company, and
           (b)           did so as a director or employee of that or another company.
     (2)    For the purposes of this Chapter shares are “convertible” if—
30
           (a)           they confer on the holder an immediate or conditional entitlement to
convert them into shares of a different class, or
           (b)           they are held on terms that authorise or require the grant of such an
entitlement to the holder if certain circumstances arise, or do not arise.
     (3)    The references, in relation to the terms of a person’s entitlement, to
35
circumstances arising include references to—
           (a)           the expiry of a period specified in or determined under those terms,
           (b)           the death of that or any other person, and
           (c)           the exercise by any person of a power conferred on that person by or
under those terms.
40
     (4)    In this Chapter—

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 3 — Convertible shares
    218

                    “the employer company” means the company as a director or employee of
which the employee acquired the convertible shares or the interest in
them, and
                    “the shares” means the shares mentioned in subsection (1)(a),
            and “director” and “employee” have the extended meaning given by section
5
446(1).
436   Shares acquired “as a director or employee”
     (1)    For the purposes of this Chapter a person (“E”) acquires shares or an interest in
shares “as a director or employee” of a company if E acquires the shares or
interest in pursuance of—
10
           (a)           a right conferred on, or opportunity offered to, E by reason of E’s office
or employment as a director or employee of the company;
           (b)           a right or opportunity assigned to E, having been conferred on or
offered to some other person by reason of E’s office or employment as
a director or employee of the company; or
15
           (c)           an assignment, the shares or interest having been acquired by some
other person by reason of E’s office or employment as a director or
employee of the company.
     (2)    The references in subsection (1) to a right or opportunity conferred or offered
by reason of E’s office or employment include—
20
           (a)           one so conferred or offered after E has ceased to hold the office or
employment, and
           (b)           one that arises from the fact that shares—
                  (i)                 which E acquired as a director or employee (or is treated as so
acquiring by virtue of this paragraph), or
25
                  (ii)                 in which E so acquired an interest,
                         were convertible shares.
     (3)    A person who—
           (a)           has acquired an interest in shares which is only conditional, convertible
shares or an interest in convertible shares,
30
           (b)           acquired that interest or those shares as a director or employee of a
company, or is treated by virtue of this subsection as having done so,
and
           (c)           as a result of any two or more transactions—
                  (i)                 ceases to be entitled to that interest or those shares, and
35
                  (ii)                becomes entitled to another interest in shares which is only
conditional or to any convertible shares or to an interest in
convertible shares,
            is to be treated for the purposes of this Chapter as if the interest or shares
mentioned in paragraph (c)(ii) were also acquired as a director or employee of
40
the company.
     (4)    Subsection (3) also applies where the interest or shares mentioned in
subsection (3)(c)(ii) were acquired by a person connected with the first-
mentioned person.
     (5)    Nothing in subsections (3) or (4) affects the rights or opportunities included by
45
virtue of subsection (2)(b).

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 3 — Convertible shares
    219

     (6)    In this section “an interest in shares which is only conditional” has the same
meaning as in Chapter 2 of this Part (conditional interests in shares) (see
section 424 and the definition of shares in section 434(1)).
437   Cases where this Chapter does not apply
     (1)    This Chapter does not apply where a person has acquired convertible shares or
5
an interest in such shares as a director or employee of a company if the earnings
from the office or employment in question were not (or would not have been if
there had been any) general earnings to which section 15 or 21 applies
(earnings for year when employee resident and ordinarily resident in the UK).
     (2)    This Chapter does not apply by virtue of section 436(2)(a) (right or opportunity
10
conferred or offered after person has ceased to hold office or employment) if it
would not apply if the right or opportunity had been conferred or offered in
the last tax year in which the office or employment was held.
Tax charge
438   Charge on conversion of shares
15
     (1)    This section applies if, at a time when the employee has a beneficial interest in
them, the shares are converted into shares of a different class in pursuance of
an entitlement to convert them which has been conferred on the holder.
     (2)    The taxable amount determined under section 439 counts as employment
income of the employee for the relevant tax year.
20
     (3)    The “relevant tax year” is the tax year in which the conversion occurs.
     (4)    This section is subject to—
                    section 440 (case outside charge under this section: conversion of entire
class), and
                    section 441 (case outside charge under this section: acquisition of
25
conditional interest).
439   Amount of charge
     (1)    The taxable amount for the purposes of section 438 (charge on conversion of
shares) is—
            where—
30
                    MV is the market value of the shares into which the convertible shares are
converted at the time of the conversion, and
                    DA is the total of any deductible amounts.
     (2)    For the purposes of subsection (1) each of the following is a “deductible
amount”—
35
           (a)           the amount or value of any consideration given for the convertible
shares or for the interest in them;
           (b)           the amount or value of any consideration given for the conversion;
           (c)           any amount that constitutes earnings from the employee’s
employment under Chapter 1 of Part 3 (earnings) in respect of the
40
acquisition of the convertible shares or the interest in them;

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 3 — Convertible shares
    220

           (d)           any amount that is treated as earnings from the employee’s
employment under Chapter 8 of Part 3 (taxable benefits: notional loans
in respect of acquisitions of shares) in respect of the acquisition;
           (e)           if the convertible shares were, or the interest in them was, acquired by
the exercise of a share option, any amount that counts as employment
5
income of the employee under section 476 or 477 (charge on employee
on exercise etc. of option) in respect of the exercise; and
           (f)           if the convertible shares were, or the interest in them was, acquired
through a series of conversions each of which was a taxable conversion,
the taxable amount for each conversion, so far as not falling within
10
paragraph (c), (d) or (e).
     (3)    If, not later than the conversion, an event occurred in respect of the shares by
virtue of which an amount counts as employment income of the employee
under—
           (a)           section 449 (charge on occurrence of chargeable event), or
15
           (b)           section 453 (charge on increase in value of shares of dependent
subsidiary),
            that amount is a “deductible amount” for the purposes of subsection (1).
     (4)    Section 541(2) (effects of the EMI code on other income tax charges) also
provides that an amount is to be regarded as a “deductible amount” for the
20
purposes of subsection (1).
     (5)    For the purposes of subsection (1) the “market value” of shares means the
amount that might reasonably be expected to be obtained from a sale of the
shares in the open market.
     (6)    In subsection (2) “taxable conversion” means a conversion which—
25
           (a)           resulted in an amount counting as employment income under section
438, or
           (b)           would have done so but for the fact that the market value of the shares
at the time of the conversion did not exceed the sum of the deductible
amounts.
30
     (7)    The reference in subsection (3) to an event includes the expiry of a period.
440   Case outside charge under section 438: conversion of entire class
     (1)    Section 438 (charge on conversion of shares) does not apply if—
           (a)           the conversion is a conversion of shares of one class only (“the original
class”) into shares of one other class only (“the new class”), and
35
           (b)           all shares of the original class are converted into shares of the new class,
and
           (c)           condition A or B is met.
     (2)    Condition A is that immediately before the conversion the majority of the
company’s shares of the original class are not held by or for the benefit of—
40
           (a)           directors or employees of the company,
           (b)           an associated company of the company, or
           (c)           directors or employees of such an associated company.
     (3)    Condition B is that immediately before the conversion the company is
employee-controlled by virtue of holdings of shares of the original class.
45

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 3 — Convertible shares
    221

     (4)    A company is “employee-controlled” by virtue of holdings of shares of a class
if—
           (a)           the majority of the company’s shares of that class (other than any held
by or for the benefit of an associated company) are held by or for the
benefit of employees or directors of the company or a company
5
controlled by the company, and
           (b)           those directors and employees are together able as holders of the shares
to control the company.
     (5)    In this section “associated company” has the meaning given by section 416 of
ICTA.
10
441   Case outside charge under section 438: acquisition of conditional interest
     (1)    Section 438 (charge on conversion of shares) does not apply if the interest
which the employee acquires in the shares into which the convertible shares
are converted is an interest which is only conditional.
     (2)    “Only conditional” has the same meaning as in Chapter 2 of this Part (see
15
section 424).
Supplementary provisions
442   Amount or value of consideration given for shares or conversion
     (1)    This section applies for the purposes of section 439 (amount of charge) in
determining the amount or value of the consideration given for the convertible
20
shares, or for the interest in them, or for the conversion.
     (2)    Subject to the following provisions of this section, the consideration given for
the convertible shares, or for the interest in them, is any consideration given in
respect of the acquisition by—
           (a)           the employee, or
25
           (b)           if section 436(1)(c) applies, the person by whom the shares were, or
interest was, acquired.
     (3)    The amount or value of the consideration given by a person for shares, or an
interest in shares, includes the amount or value of any consideration given for
a right to acquire the shares or interest.
30
     (4)    If any consideration is given partly in respect of one thing and partly in respect
of another, the amount given in respect of the different things is to be
determined on a just and reasonable apportionment.
     (5)    The consideration which for the purposes of this section is taken to be given
wholly or partly for anything does not include the performance of any duties
35
of, or in connection with, the office or employment by reference to which the
shares or interest in question have been acquired by a person as a director or
employee of a company.
     (6)    No amount is to be counted more than once in calculating the amount or value
of any consideration.
40



© Parliamentary copyright 2002	Revised 4 December 2002