Income Tax (Earnings and Pensions) Bill

House of Commons

Session 2002 - 03
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Income Tax (Earnings and Pensions) Bill

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 9 — Enterprise management incentives
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     (2)    But those sections only apply in cases where the option is exercised on or
before the tenth anniversary of—
           (a)           the date of the grant of the option, or
           (b)           if it is a replacement option, the date of the grant of the original option.
     (3)    In the EMI code “the original option” means—
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           (a)           where there has been one replacement option, the option that that
option replaced, or
           (b)           where there have been two or more replacement options, the option
that the first of them replaced.
530   No charge on exercise of option to acquire shares at market value
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     (1)    This section applies if the option is to acquire shares at not less than their
market value—
           (a)           at the time when the option is granted, or
           (b)           if it is a replacement option, at the time when the original option was
granted.
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     (2)    If this section applies, no liability to income tax arises by virtue of section 476
(charge on exercise etc. of option by employee) in respect of the exercise of the
option.
     (3)    This section has effect subject to section 532 (modified tax consequences
following disqualifying events).
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531   Limitation of charge on exercise of option to acquire shares below market
value
     (1)    This section applies if the option is to acquire shares at less than their market
value—
           (a)           at the time when the option is granted, or
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           (b)           if it is a replacement option, at the time when the original option was
granted,
            or at nil cost.
     (2)    If this section applies, the section 476 gain is—
            where—
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                    CMV is the chargeable market value,
                    ACO is the amount or value of the consideration given for the grant of the
option, and
                    ACS is the amount, if any, for which the shares are acquired.
     (3)    “The chargeable market value” means—
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           (a)           the market value of the shares—
                  (i)                 at the time when the option was granted, or
                  (ii)                if it is a replacement option, at the time when the original option
was granted, or
           (b)           the market value of the shares at the time when the option is exercised,
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            whichever is lower.

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 9 — Enterprise management incentives
    261

     (4)    In this section “the section 476 gain” means the amount which is to be regarded
for the purposes of section 476 (charge on exercise etc. of option by employee)
as the amount of the gain realised by exercising the option.
     (5)    This section has effect subject to section 532 (modified tax consequences
following disqualifying events).
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Tax advantages where disqualifying events
532   Modified tax consequences following disqualifying events
     (1)    This section applies where—
           (a)           a disqualifying event (see section 533) occurs in relation to a qualifying
option before the option is exercised, and
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           (b)           the option is exercised later than 40 days after the day on which the
event occurred.
     (2)    If the option is within section 530(1) (option to acquire shares at market value),
the section 476 gain is—
            (see subsection (4)).
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     (3)    If the option is within section 531(1) (option to acquire shares at less than
market value), the section 476 gain is—
            (see subsection (4)).
     (4)    For the purposes of subsections (2) and (3)—
                    ACO is the amount or value of the consideration given for the grant of the
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option,
                    ACS is the amount, if any, for which the shares are acquired,
                    CMV is the chargeable market value (as defined by section 531(3)), and
                    PEG is the post-event gain, that is the amount (if any) by which the market
value of the shares at the time when the option is exercised exceeds
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their market value immediately before the disqualifying event.
     (5)    In those subsections “the section 476 gain” means the amount which is to be
regarded for the purposes of section 476 (charge on exercise etc. of option by
employee) as the amount of the gain realised by exercising the option.
     (6)    Nothing in the following provisions—
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           (a)           subsections (2) and (3) above, or
           (b)           sections 530 and 531,
            applies if the amount that counts as employment income by virtue of section
476 in respect of the exercise of the option would, in the absence of those
provisions, be less than the amount that counts as such income as a result of
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those provisions.
533   Disqualifying events
     (1)    The following provisions deal with the events that are (or are to be treated as)
disqualifying events in relation to a qualifying option—
           (a)           section 534 (events relating to the relevant company),
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           (b)           section 535 (events relating to the employee), and

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 9 — Enterprise management incentives
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           (c)           section 536 (other disqualifying events), read with sections 537 to 539
(which contain supplementary provisions).
     (2)    In the provisions mentioned in subsection (1) “the employee” means the person
holding the qualifying option and “the relevant company” means the company
whose shares are the subject of the option (see paragraph 1(3) of Schedule 5).
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534   Disqualifying events relating to relevant company
     (1)    The following events relating to the relevant company are disqualifying events
in relation to a qualifying option—
           (a)           when the relevant company becomes a 51% subsidiary of another
company;
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           (b)           when the relevant company comes under the control of—
                  (i)                 another company, or
                  (ii)                another company and any other person connected with that
other company,
                         without becoming a 51% subsidiary of that other company;
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           (c)           when the relevant company ceases to meet the trading activities
requirement (see paragraphs 13 to 23 of Schedule 5).
     (2)    But where a replacement option has been granted, an event within subsection
(1)(a) or (b) is not a disqualifying event in relation to the old option (see
paragraph 41(2) of Schedule 5) if the event occurs at any time during the
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period—
           (a)           beginning at the same time as the period within which the replacement
option had to be granted (see paragraph 42 of Schedule 5), and
           (b)           ending with the release of the rights under the old option.
     (3)    A disqualifying event is to be treated as occurring in relation to a qualifying
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option if the circumstances mentioned in subsection (4) arise.
     (4)    The circumstances are that—
           (a)           the relevant company was a qualifying company at the time when the
option was granted as a result only of preparations to carry on a
qualifying trade; and
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           (b)           either—
                  (i)                 the preparations cease to be carried on, or
                  (ii)                the initial period comes to an end,
                         without the relevant company (or, if it is a parent company, any
member of the group) beginning to carry on that qualifying trade.
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     (5)    “The initial period” means the period of two years after the date when the
option was granted.
     (6)    Paragraph 41(5)(b) of Schedule 5 has the effect that a replacement option is to
be treated as granted on the date when the original option was granted.
535   Disqualifying events relating to employee
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     (1)    The following events relating to the employee are disqualifying events in
relation to a qualifying option—

Income Tax (Earnings and Pensions) Bill
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           (a)           when the employee ceases to be an eligible employee in relation to the
relevant company as a result of ceasing to meet the requirement in
paragraph 25 of Schedule 5 (the employment requirement);
           (b)           when the employee ceases to be such an employee as a result of ceasing
to meet the requirement in paragraph 26 of that Schedule (the
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requirement as to commitment of working time).
     (2)    In addition, a disqualifying event is to be treated as occurring in relation to a
qualifying option at the end of any tax year if, during that year, the average
amount per week of the employee’s reckonable time in relevant employment
was less than the statutory threshold.
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     (3)    An employee’s “reckonable time in relevant employment” means the time
which the employee in fact spent, as an employee in relevant employment—
           (a)           on the business of the relevant company, or
           (b)           if that company is a parent company, on the business of the group,
            together with any time which the employee would, as such an employee, have
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spent on that business but for any of the reasons set out in paragraph 26(3)(a)
to (d) of Schedule 5 (requirement as to commitment of working time).
     (4)    The “statutory threshold” means—
           (a)           25 hours, or
           (b)           if less, 75% of the employee’s working time.
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     (5)    For the purpose of applying subsection (2) to the tax year in which the option
was granted, any part of that year which preceded the date on which it was
granted is to be disregarded in calculating the average amount mentioned in
that subsection.
     (6)    In this section—
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           (a)           “relevant employment” means employment—
                  (i)                 by the relevant company, or
                  (ii)                if that company is a parent company, by any member of the
group;
           (b)           “working time” has the meaning given by paragraph 27 of Schedule 5
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(meaning of “working time”).
536   Other disqualifying events
     (1)    The following are also disqualifying events in relation to a qualifying option—
           (a)           any variation of the terms of the option whose effect is either—
                  (i)                 to increase the market value of the shares that are the subject of
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the option, or
                  (ii)                that the requirements of Schedule 5 would no longer be met in
relation to the option;
           (b)           any alteration to the share capital of the relevant company—
                  (i)                 to which subsection (2) (share values affected by alteration of
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rights or restrictions) of section 537 applies, and
                  (ii)                whose effect is that the requirements of Schedule 5 would no
longer be met in relation to the option;
           (c)           any alteration to the share capital of the relevant company to which—
                  (i)                 subsection (2) (share values affected by alteration of rights or
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restrictions), and

Income Tax (Earnings and Pensions) Bill
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Chapter 9 — Enterprise management incentives
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                  (ii)                subsection (3) (alteration designed to increase share values),
                         of section 537 apply;
           (d)           a conversion of any of the shares to which the option relates into shares
of a different class, except in a case within section 538(2); and
           (e)           the grant to the employee of a relevant CSOP option, if immediately
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after it is granted the employee holds unexercised employee options in
respect of shares with a total value of more than £100,000.
     (2)    In subsection (1)(e)—
                    “relevant CSOP option”, and
                    “employee option”,
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            have the meaning given by section 539 (CSOP and other options relevant for
purposes of this section); and sub-paragraphs (6) to (8) of paragraph 5 of
Schedule 5 (determination of value of shares) apply for the purposes of
subsection (1)(e) as they apply for the purposes of paragraph 5.
537   Alterations of share capital for purposes of section 536
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     (1)    This section has effect for the purposes of section 536(1)(b) and (c) (other
disqualifying events: alterations of share capital of relevant company).
     (2)    This subsection applies to an alteration of the share capital of the relevant
company if—
           (a)           the alteration affects (or but for the occurrence of some other event
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would affect) the value of the shares to which the option relates; and
           (b)           it consists of or includes—
                  (i)                 the creation, variation or removal of a right relating to any
shares in the relevant company,
                  (ii)                the imposition of a restriction relating to any such shares, or
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                  (iii)               the variation or removal of a restriction to which any such
shares are subject.
     (3)    This subsection applies to an alteration of the share capital of the relevant
company if the effect of the alteration is to increase the market value of the
shares to which the option relates and either—
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           (a)           it is not made by the relevant company for commercial reasons, or
           (b)           the main purpose (or one of the main purposes) for making it is to
increase the market value of those shares.
     (4)    In this section any reference to—
           (a)            a restriction relating to shares or to which shares are subject, or
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           (b)            a right relating to shares,
            is a reference to such a restriction imposed or right conferred by any contract
or arrangement or in any other way.
538   Share conversions excluded for purposes of section 536
     (1)    This section has effect for the purposes of section 536(1)(d) (other disqualifying
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events: share conversions).
     (2)    A conversion of shares is not a disqualifying event if—
           (a)           it is a conversion of shares of one class only (“the original class”) into
shares of one other class only (“the new class”);

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           (b)           all the shares of the original class are converted into shares of the new
class; and
           (c)           one of the conditions in subsection (3) is met.
     (3)    The conditions are—
           (a)           that immediately before the conversion the majority of the relevant
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company’s shares of the original class are held otherwise than by or for
the benefit of—
                  (i)                 directors or employees of the relevant company,
                  (ii)                an associated company of the relevant company, or
                  (iii)               directors or employees of such an associated company;
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           (b)           that immediately before the conversion the relevant company is
employee-controlled as a result of holdings of shares of the original
class.
     (4)    In this section “associated company”, “director”, “employee” and “employee-
controlled” have the same meaning as in section 440 (exception from tax charge
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where conversion of entire class of shares).
539   CSOP and other options relevant for purposes of section 536
     (1)    This section has effect for the purposes of section 536(1)(e) (other disqualifying
events: grant of CSOP option).
     (2)    A “relevant CSOP option” means a CSOP option granted to the employee by
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reason of the employee’s employment—
           (a)           with the employer company, or
           (b)           if it is a member of a group of companies, with any member of that
group.
     (3)    A share option is an “employee option” if it is—
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           (a)           the qualifying option mentioned in section 536(1), or
           (b)           another qualifying option granted to the employee by reason of the
employee’s employment as mentioned in subsection (2)(a) or (b)
above, or
           (c)           a relevant CSOP option.
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     (4)    In this section a “CSOP option” means an option to acquire shares under a
scheme approved under Schedule 4 (CSOP schemes).
Tax advantages: taxable benefits
540   No charge on acquisition of shares as taxable benefit
     (1)    In its application in relation to a UK resident employee, Chapter 8 of Part 3
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(taxable benefits: acquisitions of shares) does not apply in relation to the
acquisition of shares by the exercise of a qualifying option.
     (2)    An employee is a “UK resident employee” if—
           (a)           at the time when the option is granted, or
           (b)           at the time when it is exercised,
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            the earnings from the employment are (or would be if there were any) general
earnings to which section 15 or 21 applies (earnings for year when employee
resident and ordinarily resident in the United Kingdom).



© Parliamentary copyright 2002	Revised 4 December 2002