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 2 — Conditional interests in shares
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419   Duties to provide information
     (1)    The following contain duties to supply information about the acquisition of
shares or interests in shares by directors or employees—
                      section 432 (provision of conditional interest in shares),
                      section 465 (general duty to notify acquisition of shares or interests in
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shares by employees or directors).
     (2)    The following contain duties to supply information about other matters that
may result in amounts counting as employment income of directors or
employees—
                      section 433 (events resulting in charge under section 427),
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                      section 445 (conversion of shares),
                      section 466 (chargeable events and receipt of chargeable benefits).
     (3)    Section 486 contains a duty to provide information about the grant of share
options and other matters relating to them.
     (4)    Paragraph 52 of Schedule 5 (enterprise management incentives) contains a
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duty to deliver annual returns where a company’s shares are subject to a
qualifying option within the meaning of that Schedule.
420   Negative amounts treated as nil
     (1)    This section applies if the result given by any formula under any provision of
this Part would otherwise be a negative amount.
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     (2)    The result is to be taken to be nil instead.
421   Application of Part 7 to office-holders
     (1)    As indicated in section 417, this Part contains provisions relating to directors as
well as employees.
     (2)    But section 5(1) (application of employment income Parts to office-holders
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generally) does not apply to any of the provisions of this Part.
     (3)    This is subject to section 549(5) (application of Chapter 11 of this Part).
Chapter 2
Conditional interests in shares
Introduction
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422   Application of this Chapter
     (1)    This Chapter applies where—
           (a)           a person (“the employee”) acquires a beneficial interest in shares in a
company as a director or employee of that or another company, and
           (b)           the interest is acquired on terms that make it only conditional.
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     (2)    In this Chapter —
                    “the employee’s interest” means the beneficial interest in shares
acquired by the employee as mentioned in subsection (1);

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 2 — Conditional interests in shares
    211

                    “the employer company” means the company as a director or employee of
which the employee’s interest is acquired;
                    “the shares” means the shares mentioned in subsection (1)(a);
            and “director” and “employee” have the extended meaning given by section
434(1).
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423   Interests in shares acquired “as a director or employee”
     (1)    For the purposes of this Chapter a person (“E”) acquires an interest in shares
“as a director or employee” of a company if E acquires the interest in pursuance
of—
           (a)           a right conferred on, or opportunity offered to, E by reason of E’s office
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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
           (c)           an assignment, the interest having been acquired by some other person
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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—
           (a)           one so conferred or offered after E has ceased to hold the office or
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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
                  (ii)                in which E so acquired an interest,
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                         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,
           (b)           acquired that interest or those shares as a director or employee of a
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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
                  (ii)                becomes entitled to another interest in shares which is only
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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
the company.
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     (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 subsection (3) or (4) affects the rights or opportunities included by
virtue of subsection (2)(b).
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Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 2 — Conditional interests in shares
    212

     (6)    In this section “convertible shares” has the same meaning as in Chapter 3 of this
Part (convertible shares) (see section 435(2) and the definition of shares in
section 446(1)).
424   Meaning of interest being “only conditional”
     (1)    For the purposes of this Chapter an interest in shares is “only conditional” for
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so long as the terms on which the person is entitled to it—
           (a)           provide that if certain circumstances arise, or do not arise, there will be
a transfer, reversion or forfeiture as a result of which that person will
cease to be entitled to any beneficial interest in the shares, and
           (b)           are not such that, on the transfer, reversion or forfeiture, that person
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will be entitled to receive in respect of the interest an amount that is
equal to or more than its market value at that time.
     (2)    But a person is not to be regarded as having an interest in shares which is only
conditional by reason only that one or more of the following is the case—
           (a)           the shares are unpaid or partly paid and may be forfeited for non-
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payment of calls, in a case where there is no restriction on the meeting
of calls by that person;
           (b)           the articles of association of the company require the shares to be
offered for sale or transferred, if that person ceases to hold a relevant
office or employment;
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           (c)           that person may be required to offer the shares for sale or transfer them
on ceasing, as a result of misconduct, to hold a relevant office or
employment;
           (d)           in the case of an interest in a security, the security may be redeemed on
payment of any amount.
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     (3)    In subsection (1)(a) the references, in relation to the terms of a person’s
entitlement, to 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
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under those terms.
     (4)    For the purposes of subsection (1)(b) the market value of the interest is to be
determined as if there were no provision for transfer, reversion or forfeiture.
     (5)    In subsection (2)(b) “articles of association” includes, in the case of a company
incorporated under the law of a country outside the United Kingdom, any
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equivalent document relating to the company.
     (6)    The references in subsection (2)(b) and (c) to a person ceasing to hold a relevant
office or employment are to that person ceasing to be an officer or employee of
the company in question, or of one or more group companies or of any group
company.
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     (7)    For the purposes of subsection (6)—
           (a)           a company is a “group company” in relation to another company if they
are members of the same group, and
           (b)           companies are taken to be members of the same group if, and only if,
one is a 51% subsidiary of the other or both are 51% subsidiaries of a
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third company.

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 2 — Conditional interests in shares
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425   Cases where this Chapter does not apply
     (1)    This Chapter does not apply where a person acquires a beneficial interest in
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
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employee resident and ordinarily resident in the UK).
     (2)    This Chapter does not apply by virtue of section 423(2)(a) (right or opportunity
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.
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Tax exemption
426   No charge in respect of acquisition of employee’s interest in certain
circumstances
     (1)    Subsection (2) applies if the terms on which the employee acquires the
employee’s interest are such that the interest will cease to be only conditional
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within 5 years after its acquisition.
     (2)    No liability to income tax arises in respect of the acquisition of the employee’s
interest, except as provided by—
           (a)           Chapter 8 of Part 3 (taxable benefits: notional loans in respect of
acquisitions of shares), or
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           (b)           section 476 (charge on exercise of share option by employee).
Tax charge
427   Charge on interest in shares ceasing to be only conditional or on disposal
     (1)    This section applies if—
           (a)           the shares cease, without the employee ceasing to have a beneficial
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interest in them, to be shares in which the employee’s interest is only
conditional, or
           (b)           in a case where the shares have not so ceased, the employee sells or
otherwise disposes of the employee’s interest or any other beneficial
interest in the shares.
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     (2)    The taxable amount determined under section 428 counts as employment
income of the employee for the relevant tax year.
     (3)    The “relevant tax year” is the tax year in which the shares cease to be shares in
which the employee’s interest is only conditional, or in which the sale or other
disposal takes place.
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     (4)    Subsection (2) is subject to section 494 (approved SIPs: no charge on removal of
restrictions).
428   Amount of charge
     (1)    The taxable amount for the purposes of section 427 (charge on interest in shares
ceasing to be only conditional or on disposal) is—
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Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 2 — Conditional interests in shares
    214

            where—
                    MV is the market value of the employee’s interest immediately after it
ceases to be only conditional or, as the case may be, at the time of the
sale or other disposal, and
                    DA is the total of any deductible amounts.
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     (2)    For the purposes of subsection (1) each of the following is a “deductible
amount”—
           (a)           the amount or value of any consideration given for the employee’s
interest;
           (b)           any amount that constitutes earnings from the employee’s
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employment under Chapter 1 of Part 3 (earnings) in respect of the
acquisition of the employee’s interest;
           (c)           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; and
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           (d)           if the employee’s interest was acquired by the exercise of a share
option, any amount that counts as employment income of the employee
under section 476 (charge on employee on exercise etc. of option) in
respect of the exercise.
     (3)    If, not later than the event referred to in section 427(1)(a) or (b) occurred in
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relation to the employee’s interest, a different 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
           (b)           section 453 (charge on increase in value of shares of dependent
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subsidiary),
            that amount is a “deductible amount” for the purposes of subsection (1).
     (4)    The references in subsection (3) to an event include the expiry of a period.
     (5)    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
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purposes of subsection (1).
Supplementary provisions
429   Amount or value of consideration given for employee’s interest
     (1)    This section applies for the purposes of section 428 (amount of charge) in
determining the amount or value of the consideration given for the employee’s
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interest.
     (2)    Subject to the following provisions of this section, that consideration is any
given in respect of the acquisition of an interest in the shares by—
           (a)           the employee, or
           (b)           if section 423(1)(c) applies, the person by whom the interest in the
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shares was acquired.
     (3)    The amount or value of the consideration given by a person for an interest in
the shares includes the amount or value of any consideration given—
           (a)           for a right to acquire the shares, and

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 2 — Conditional interests in shares
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           (b)           for anything by virtue of which the employee’s interest in the shares
ceases to be only conditional.
     (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.
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     (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
of, or in connection with, the office or employment by reference to which the
interest in the shares in question has been acquired by a person as a director or
employee of a company.
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     (6)    No amount is to be counted more than once in calculating the amount or value
of any consideration.
430   Amount or value of consideration given for right to acquire shares
     (1)    This section applies for the purposes of section 429(3)(a) in determining the
amount or value of any consideration given for a right to acquire shares.
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     (2)    Subsection (3) applies if the right to acquire shares (“the new option”) is the
whole or part of the consideration for the assignment or release of another right
to acquire shares (“the old option”).
     (3)    The amount or value of the consideration given for the new option is to be
treated as being the sum of—
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           (a)           the amount by which the amount or value of the consideration given
for the grant of the old option exceeds the amount or value of any
consideration for the assignment or release of the old option, apart from
the new option, and
           (b)           any valuable consideration given for the grant of the new option, apart
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from the old option.
     (4)    Two or more transactions are to be treated for the purposes of subsection (2) as
a single transaction by which a right to acquire shares is assigned for a
consideration which consists of or includes another right to acquire shares if—
           (a)           the transactions result in—
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                  (i)                 a person ceasing to hold a right to acquire shares, and
                  (ii)                that person or a connected person coming to hold another right
to acquire shares, and
           (b)           one or more of the transactions is effected under arrangements to which
two or more persons who hold rights to acquire shares, in respect of
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which there may be a liability to tax under Chapter 5 of this Part (share
options), are parties.
     (5)    Subsection (4) applies regardless of the order in which the assignment and the
acquisition occur.
     (6)    In this section “release” includes agreeing to the restriction of the exercise of the
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right.
431   Application of this Chapter where employee dies
     (1)    If the employee dies holding the employee’s interest, this Chapter applies as if
the employee had disposed of the interest immediately before dying.

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 2 — Conditional interests in shares
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     (2)    The market value of the interest at the time of that disposal is to be determined
for the purposes of section 428 (amount of charge) on the basis—
           (a)           that it is known that the disposal is being made immediately before the
employee’s death, and
           (b)           that any restriction on disposal is to be disregarded in so far as it is a
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restriction terminating on the employee’s death.
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
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           (b)           the circumstances are such that subsequent events may result in an
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—
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           (a)           the person providing the interest in shares, and
           (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
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in which the interest is provided.
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—
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                  (i)                 the shares cease to be shares in which that person’s interest is
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
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section 427 (charge on interest in shares ceasing to be only conditional
or on disposal).
     (2)    Each of the following persons—
           (a)           the person who provided the interest in shares, and
           (b)           the employer company,
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            must provide the Inland Revenue with particulars in writing of the interest and
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
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     (1)    In this Chapter—
                    “director”—



© Parliamentary copyright 2003	Revised 12 February 2003