Clause 184: Interest treated as paid

713.     This clause treats the cash equivalent of an employment-related loan as if it were interest paid so that tax relief can be given where the loan is for a qualifying purpose. It derives from parts of section 160(1) and section 160(1A) of ICTA.

714.     Subsection (1) sets out the circumstances in which the clause applies.

715.     Subsection (2) treats the employee as having paid interest equal to the cash equivalent of the benefit.

716.     Subsection (3) prevents a claim that the interest should be treated as paid and so qualify as a deduction from the amounts treated as earnings by another Chapter of the benefits code.

717.     Subsection (4) provides the mechanism for allocating to a tax year the cash equivalent to be treated as interest.

718.     Subsection (5) makes it clear that, although the cash equivalent is treated as if it were interest paid by the employee, it is not treated as interest received by the lender.

Clause 185: Apportionment of cash equivalent in case of joint loan etc.

719.     This clause allows the apportionment of the cash equivalent of a loan between two or more employees who are chargeable under this Chapter in respect of the same loan. It derives from paragraph 5A(1) of Schedule 7 to ICTA.

Clause 186: Replacement loans

720.     This clause prevents manipulation of the averaging method in clause 182 where a loan which is later replaced is repaid part way through the month. So that complete months are included in the calculation the clause treats the replacement loan as the original loan. It derives from paragraph 4(2) to (4) of Schedule 7 to ICTA.

721.     Subsection (1) sets out the circumstances in which the provisions apply and deals with both the replacement by a further employment-related loan and the insertion of a loan which is not employment-related between two that are.

722.     Subsection (2) treats all loans falling within subsection (1) as if they were one continuous loan.

723.     Subsection (3) follows the practice of applying the treatment of one continuous loan not just to the calculation of the official rate of interest which would be paid for the year but also to any interest paid on the loans for the purpose of calculating the cash equivalent. This is a minor change to the law. See Change 33 in Annex 1.

724.     Subsection (4) defines "further employment-related loan".

Clause 187: Aggregation of loans by close company to director

725.     This clause provides for the aggregation of certain loans on an election where the borrower is a director of a close company which is the lender. It derives from section 160(1B) and (1BA) of ICTA.

726.     Subsection (1) sets out the circumstances when the clause applies.

727.     Subsection (2) allows the lender to elect for aggregation for a tax year to apply to the borrower.

728.     Subsection (3) explains the effect of the election.

729.     Subsection (4) places a restriction on which loans may be aggregated.

730.     Subsection (5) says by whom and how and within what time limit the election may be made. See Change 158 in Annex 1 regarding the Inland Revenue.

Clause 188: Loan released or written off: amount treated as earnings

731.     This clause treats employment-related loans which are released or written off as earnings. It derives from section 160 of ICTA.

732.     Subsection (1) applies in the case of a continuing employment and treats the amounts written off as earnings for the year in which the loan is released or written off. It derives from section 160(2), but that section does not specify the tax year. See Note 7 in Annex 2.

733.     Subsection (2) applies subsection (1) where an employment-related loan is released or written off after the employment has ceased or at a time when the employee is lower-paid in accordance with Chapter 11 of Part 3 of this Bill. If the employment has ceased there is no taxable employment and the clause would not apply. The deeming that the employment has not ceased allows the clause to apply in the case of a release or writing off for the year in which the event occurs. It is also necessary for the employment to be one which is not lower-paid; otherwise the clause would not apply. Where the employment has become lower paid this subsection deems it not to be lower-paid. This derives from section 160(3) of ICTA.

734.     Subsection (3) preserves chargeability where subsection (2) applies and a loan replaces the employment-related loan. It derives from section 160(3A) of ICTA.

Clause 189: Exception where double charge

735.     This clause ensures that where the writing off of a loan might be chargeable to tax under other provisions only one applies. It derives from section 161(5) of ICTA.

736.     Subsection (1) provides the general rule that if another provision in the Taxes Acts applies this clause does not.

737.     This clarifies that there will be no double charge if a loan made to a participator in a close company is written off and section 421 of ICTA applies. It is a minor change to the law. See Change 34 in Annex 1.

738.     Subsections (2) and (3) provide exceptions to subsection (1). In both cases it is made explicit which provision takes precedence when there is a double charge. This change in approach is described more fully in Note 19 in Annex 2.

Clause 190: Exclusion of charge after death of employee

739.     This clause provides a general exemption from the provisions of the Chapter if the employee dies. It derives from section 161 of ICTA.

740.     Subsection (1) removes the charge on a taxable cheap loan for the period from the date of death where the employee has died but the loan is not repaid and provides that the loan is treated as no longer outstanding as from the date of death for the purposes of calculating the cash equivalent. This change in approach is described more fully in Note 20 in Annex 2.

741.     Subsection (2) removes the charge if the loan is released or written off on or after the death of the employee.

Clause 191: Claim for relief to take account of event after assessment

742.     This clause allows adjustments to the figures in cases where subsequent events affect the amount chargeable. It derives in part from section 160(4A) of ICTA.

743.     Subsection (1) introduces the claim.

744.     Subsection (2) allows for the fact that interest may be after the tax liability for the year has been determined.

745.     Subsection (3) allows for repayment of a loan that has been released or written off. Allowing a claim for a loan that has been released or written off is a minor change to the law. See Change 35 in Annex 1.

746.     Subsection (4) provides for the situation where tax payable had been decided on the basis that the condition in respect of bridging loans will not be met and that condition is subsequently met. It derives from section 191B(13).

747.     Subsection (5) allows the adjustment to be made.

Chapter 8: Taxable benefits: notional loan in respect of acquisitions of shares

Overview

748.     This Chapter deals with a benefit which may arise on certain acquisitions of shares by employees. It derives from those parts of section 162 of ICTA which deal with acquisition of shares at undervalue. The legislation is included in the benefits code because the benefit is treated as a notional loan and, as such, some of the provisions in Chapter 7 of this Part apply to it.

Clause 192: Application of this Chapter

749.     This clause sets out the subject of the legislation. It derives from section 162(1) and (9) and section 168(3)(b) of ICTA and also contains new material.

750.     Subsection (1) describes the circumstances relating to an acquisition of shares which will bring it within the provisions of this Chapter.

751.     Subsection (2) makes it clear that the employment-related shares can be in a company other than the employer.

752.     Subsection (3) deems - with certain exceptions - a right or opportunity to acquire shares, or an interest in shares, made available by an employer, as being made available by reason of the employee's employment. It derives from section 168(3)(b) of ICTA.

753.     It has been made explicit that a right or opportunity to acquire shares, or an interest in shares, which is made available by an employer, is to be regarded - with certain exceptions - as being made available by reason of the employee's employment. This change in approach is described more fully in Note 21 in Annex 2.

754.     Subsection (4) defines the term "acquisition" and gives shares acquired the label "employment-related shares".

Clause 193: Notional loan where acquisition for less than market value

755.     This clause is derived from parts of section 162(1), (2) and (9) of ICTA and contains new drafting material.

756.     Subsection (1) outlines the circumstances in which a benefit arises.

757.     It has been made clear that payments made before the share issue or transfer will be allowable. This is a minor change to the law. See Change 36 in Annex 1.

758.     Subsection (1)(a) applies the clause to employment-related shares for which no payment is made.

759.     Subsection (1)(b) covers the situation in which some payment is made. The subsection prevents shares which are not fully paid at the time of issue (but which later become fully paid) as being valued as part-paid shares.

760.     Subsection (3) provides that the benefit is chargeable to tax and is treated as an employment-related loan under Chapter 7 of this Part on which no interest is paid.

761.     Subsection (4) lists the provisions in Chapter 7 of this Part which apply to the notional loan. This is a minor change to the law. See Change 37 in Annex 1.

762.     Clause 175 in Chapter 7 specifies the tax year for which the cash equivalent is treated as earnings, so also applies to this Chapter. See Note 7 in Annex 2.

763.     Subsection (5) makes it clear that acquisitions of shares under the various provisions which encourage share ownership take precedence over this Chapter. Where the acquisition would be chargeable within the terms of the schemes, but is exempt from that charge by the provisions listed, it does not then fall through to this Chapter.

Clause 194: The amount of the notional loan

764.     This clause shows how the initial amount of the loan is calculated, and how the amount is reduced or subsequently varied in certain circumstances. In addition to determining the amount of the notional loan, these provisions also clarify the priority of the charges, and leave this Chapter to sweep up anything which is not within the other provisions dealing with chargeability on acquisition of shares.

765.     The clause is derived from section 162(2), (3), (9) and (11) and section 185(8) of ICTA and includes new drafting material.

766.     The amount of the notional loan is used in the calculation of the cash equivalent of the benefit in accordance with clause 182 or clause 183.

767.     Subsection (1) sets out how to arrive at the initial amount of the loan. The value taken is that of fully paid up shares. The value is reduced by "deductible amounts".

768.     Subsection (2)(a) allows the payment made for the acquisition as a "deductible amount". A payment may be made before the shares are issued or transferred and it has always been the practice to allow any advance payment of this sort as well as any payment made at the actual time of the transfer. The words "or before" have been added to make this clear. This is a minor change to the law. See Change 36 in Annex 1.

769.     Subsection (2) sets out what are the deductible amounts. Subsection (2)(c)(iii) takes out any amount charged under clauses 476 and 477. See Note 22 in Annex 2. The other deductible amounts in subsection (2)(c) ensure that there is no element of double charge. This is a minor change to the law. See Change 38 in Annex 1.

770.     Subsection (3) provides for the amount of the notional loan to be reduced where payments are made for the shares after the time they are issued or transferred. The reduced amount is used in the calculation of the benefit in clauses 182 or 183 which require ascertaining the maximum amount of the loan outstanding on a particular day.

Clause 195: Discharge of notional loan: amount treated as earnings

771.     This clause covers the circumstances in which a notional loan is treated as discharged, and the consequences of that treatment. It is derived from section 162(3), (4) and (5) of ICTA and contains new drafting material.

772.     Subsection (1) sets out circumstances in which the notional loan is treated as discharged. The words "is released, transferred or adjusted" in section 162(4)(b) of ICTA have been left out on the grounds that they are unnecessary. There is no other way that the obligation could cease to bind the employee. The words "by surrender or otherwise" in section 162(6)(a) of ICTA have not been used in subsection (1)(c) because they are unnecessary.

773.     Subsection (2) provides that the discharge of a notional loan in the circumstances in subsection (1)(b) and (c) is treated as earnings. The tax year is that in which the discharge occurs. See Note 7 in Annex 2.

774.     Subsection (3) ensures that the amount in subsection (2) can be chargeable in a tax year after the year in which the employment has ended or has become lower-paid employment in accordance with Chapter 11 of Part 3 of this Bill.

775.     If the employment has ceased there is no taxable employment and the clause would not apply. The deeming that the employment has not ceased allows the clause to apply in the case of a release or writing off for the year in which the event occurs. It is also necessary for the employment to be one which is not lower-paid; otherwise the clause would not apply. Where the employment has become lower-paid this subsection deems it not to be lower-paid. This subsection makes explicit what is implicit in section 162(5) of ICTA by applying section 160(3).

Clause 196: Effects on other income tax charges

776.     This clause derives from section 162(11) of ICTA which operates to give priority to any section by which an acquisition of shares results in an amount being chargeable to tax as earnings.

777.     The provision in section 162(11) has been rewritten to include section 135 of ICTA (now clauses 476 and 477). Section 135 is a free-standing charge and does not treat gains as emoluments. This is a minor change to the law. See Change 38 in Annex 1.

Clause 197: Minor definitions

778.     This clause defines terms which are used in the clauses and clarifies the way in which payment for shares can be made.

779.     The clause is derived from section 162(1), (9) and (10) of ICTA and contains new drafting material.

780.     Subsection (2) makes the meaning of "acquisition" very wide to discourage schemes intended to avoid chargeability under this Chapter. The meaning of "market value" is as in Part 8 of TCGA 1992. This includes both sections 272 and 273 of TCGA 1992. Section 273 sets out how market value is decided in the case of unquoted shares and securities. This clarification is a minor change to the law. See Note 23 in Annex 2.

781.     Subsection (3) ensures that payment for shares made in kind or by any other means is included, and that legal liability is not needed to make it a payment.

Chapter 9: Taxable benefits: disposals of shares for more than market value

Overview

782.     This Chapter deals with the benefits which may arise from certain disposals of shares. It derives from those parts of section 162 of ICTA which deal with the disposal of shares at a price greater than their market value.

Clause 198: Shares to which this Chapter applies

783.     This clause sets out the subject of the legislation. It derives from part of section 162(1)(a), (6) and (9), and section 168(3)(b) of ICTA.

784.     Subsection (1) describes the circumstances which bring an acquisition of shares within the provisions of this Chapter.

785.     Subsection (2) labels the shares acquired "employment-related shares".

786.     Subsection (3) derives from section 162(1)(a) which makes it clear that the employment-related shares can be in a company other than the employer.

787.     Subsection (4) derives from section 168(3)(b) and applies to the right or opportunity to acquire shares made available by the employer. This change in approach is explained more fully in Note 21 in Annex 2.

Clause 199: Disposal for more than market value: amount treated as earnings

788.     This clause sets out the circumstances in which a benefit arises and how it is to be chargeable to tax. It derives from parts of section 162(6), (7), (8), (9) and (11) of ICTA.

789.     Subsection (1) applies the provisions of the section in the case of a disposal of the employment-related shares. The words "by surrender or otherwise" have not been used as they are unnecessary.

790.     Subsection (2) derives from section 162(8). It prevents chargeability when the disposal takes place after the death of the employee. In rewriting this the words "whether by his personal representatives or otherwise" have been left out. These words do not add anything and are unnecessary.

791.     Subsection (3) provides a formula to arrive at the amount which is to be treated as earnings.

792.     Subsection (4) ensures that the amount in subsection (3) can be chargeable in a tax year after the year in which the employment has ended or has become lower-paid employment in accordance with Chapter 11 of Part 3 of this Bill.

793.     If the employment has ceased there is no taxable employment and the clause cannot apply. The deeming that the employment has not ceased allows the clause to apply in the case of a release or writing off for the year in which the event occurs. It is also necessary for the employment to be one which is not lower-paid; otherwise the clause would not apply. Where the employment has become lower-paid this subsection deems it not to be lower-paid. This subsection makes explicit what is implicit in section 162(7) of ICTA. This change in approach is explained more fully in Note 24 in Annex 2.

794.     Subsection (5) explains how to arrive at the market value of an interest in shares.

Clause 200: Minor definitions

795.     This clause defines terms which are used in the clauses. It derives from parts of section 162 of ICTA.

796.     The meaning of "market value" is as in Part 8 of TCGA 1992. This includes both sections 272 and 273 of TCGA 1992. Section 273 sets out how market value is decided in the case of unquoted shares and securities. See Note 23 in Annex 2.

Chapter 10: Taxable benefits: residual liability to charge

Overview

797.     This Chapter derives from the provisions of sections 154 and 156 of ICTA, but in a very different structure. The structure of the benefits code is outlined in the overview of Chapter 2 Part 3 of this Bill.

798.     Clauses 201 and 202 together identify the benefits which are within this Chapter.

799.     Clause 203 provides that the cash equivalent of the benefit is treated as earnings and how to calculate the amount.

800.     Clauses 204, 205 and 206 indicate how to calculate the cash equivalent for each different way of providing an employment-related benefit.

801.     Clauses 207, 208, 209 and 210 are the supplementary provisions.

802.     Clauses 212, 213, 214 and 215 provide that certain scholarships are benefits which are within this Chapter.

Clause 201: Employment-related benefits

803.     This clause derives from parts of sections 154 and 168(3) of ICTA.

804.     Subsections (1) and (2) derive from section 154(1) of ICTA and introduce the labels "employment-related benefit" and "excluded benefit".

805.     Subsection (3) derives from section 168(3) of ICTA.

806.     Subsection (4) and (5) make it explicit that if the employment is held at some time in the tax year it is immaterial whether or not the employment is held at the time the benefit is provided. Subsection (4) further clarifies this proposition by stating that references to an employee may therefore include a former or a prospective employee. These provisions derive from and clarify the meaning of the words "where in any year a person is employed" in section 154(1) of ICTA. This change in approach is explained more fully in Note 14 in Annex 2.

Clause 202: Excluded benefits

807.     This clause derives from section 154(1)(b) of ICTA. It clarifies what is meant by "the cost of the benefit is not (apart from this section) chargeable to tax as his income." Benefits which are within other chapters of the benefits code are not within this Chapter. This applies if the benefits are excepted from charge by the other Chapter. The clause does not exclude benefits which are earnings within clause 62. This is not necessary because clause 64 applies to prevent any element of double charge. See Change 15 in Annex 1. This identification of excluded benefits is explained more fully in Note 25 in Annex 2. The benefit of certain transport vouchers in Clause 86 is not excluded from this Chapter because Chapter 4 of this Part provides an exemption only for the lower paid.

Clause 203: Cash equivalent of benefit treated as earnings

808.     This clause establishes the cash equivalent as the amount to be treated as earnings, and what the amount is.

809.     Subsection (1) derives from the closing words of section 154(1) of ICTA. It provides that the cash equivalent is the amount treated as earnings. The words "for the tax year in which it is provided" are not in section 154. This clarification of the timing rule is explained more fully in Note 7 in Annex 2.

810.     Subsection (2) derives from section 156(1) of ICTA. It provides the basic rule that the cash equivalent is the cost of provision less amounts made good.

811.     Subsection (3) derives from section 156(2) to (7) of ICTA and indicates which clauses provide the rules for finding the cost of the benefit.

Clause 204: Cost of the benefit: basic rule

812.     This clause derives from section 156(2) of ICTA. The benefits within this Chapter can be provided in different ways. The "cost of the benefit" is the basic amount, and this clause sets out what this is.

813.     The words "(including a proper proportion of any expense relating partly to provision of the benefit and partly to other matters)" provide for apportionment of the cost of the benefit in appropriate circumstances. This has been made clear in a recently reported case before the Special Commissioners.

Clause 205: Cost of the benefit: asset made available without transfer

814.     This clause, deriving from section 156(5) to (7) and (9)(b) of ICTA, explains how to quantify the cost of the benefit when the ownership of the asset is not transferred to the employee.

815.     Subsection (1) derives from the opening words of section 156(5) of ICTA. It establishes the circumstances in which the following provisions of the clause will apply.

816.     Subsections (2) to (5) derive from section 156(5)(a) and (b) to (7) of ICTA and provide the rules for determining the cost of the benefit.