Finance Bill

House of Commons

Session 2004 - 05
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Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities and options
28

Disapplication of Chapters 2 and 3B
454
Deemed election for disapplication of Chapter 2
(1)
If the shares are restricted securities (or the interest in shares is a
restricted interest in securities), the employer and the employee are to
be treated as making an election under section 431(1) (election for
5
disapplication of Chapter 2) in relation to the shares (or interest in
shares).
(2)
But the employer and the employee may agree that subsection (1) is not
to apply in relation to the shares (or interest in shares).
(3)
An agreement under subsection (2) is irrevocable and—
10
(a)
must be made in a form approved by the Board of the Inland
Revenue, and
(b)
may not be made more than 14 days after the acquisition.
(4)
If the employer and the employee make an agreement under subsection
(2) in relation to the shares (or interest in shares), subsection (5) applies
15
for the purposes of determining the taxable amount for the purposes of
section 426 (charge on occurrence of chargeable event) on the
occurrence on any chargeable event in relation to the shares (or interest
in shares).
(5)
In determining under section 428(3) (amount of charge) what would
20
have been the market value of the shares (or interest in shares) at the
time of the acquisition but for any restrictions (IUMV), that market
value is to be calculated disregarding the effect on that market value of
the intellectual property agreement and any transfer of intellectual
property pursuant to it.
25
455
Disapplication of Chapter 3B
For the purposes of Chapter 3B (securities with artificially enhanced
market value) neither the intellectual property agreement nor any
transfer of intellectual property pursuant to it are things done
otherwise than for genuine commercial purposes.
30
Supplementary
456
Meaning of “intellectual property” and “transfer”
(1)
In this Chapter “intellectual property” means—
(a)
any patent, trade mark, registered design, copyright or design
right, plant breeders’ rights or rights under section 7 of the Plant
35
Varieties Act 1997,
(b)
any right under the law of a country or territory outside the
United Kingdom corresponding to, or similar to, a right within
paragraph (a),
(c)
any information or technique not protected by a right within
40
paragraph (a) or (b) but having industrial, commercial or other
economic value,
(d)
any licence or other right in respect of anything within
paragraph (a), (b) or (c), or

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities and options
29

(e)
any goodwill (having the meaning that it has for accounting
purposes) associated with anything within paragraphs (a) to
(d).
(2)
The Treasury may by order amend the definition of “intellectual
property” in subsection (1).
5
(3)
For the purposes of this Chapter a transfer of intellectual property
includes—
(a)
a sale of the intellectual property,
(b)
the grant of a licence or other right in respect of it, and
(c)
the assignment of a licence or other right in respect of it.
10
457
Meaning of “research institution”
(1)
In this Chapter “research institution” means—
(a)
any university or other institution that is a publicly funded
institution as defined in section 41(2) of the Higher Education
Act 2004, or
15
(b)
any institution that carries out research activities otherwise than
for profit and that is neither controlled nor wholly or mainly
funded by a person who carries on activities for profit.
(2)
The Treasury may by order amend subsection (1) to include in or
exclude from the definition of “research institution” a person specified
20
in the order or persons of a description specified in the order.
458
Meaning of “involved in research”
For the purposes of this Chapter a person is involved in research in
relation to any intellectual property transferred or to be transferred
from one or more research institutions if—
25
(a)
he has been actively engaged for the research institution (or any
of them) in connection with research (whether as an employee
or otherwise), and
(b)
that research is relevant to anything to which the intellectual
property relates.
30
459
Transfer of intellectual property by controlled company
(1)
For the purposes of this Chapter where a research institution has
control of a company, a transfer of intellectual property from the
company is to be treated as a transfer from the research institution.
(2)
For the purposes of this Chapter where two or more research
35
institutions together have control of a company, a transfer of
intellectual property from the company is to be treated as a transfer
from those research institutions.
(3)
In this section “control” means control within the meaning of section
416 of ICTA.
40
460
Definitions
(1)
In this Chapter—
“interest”, in relation to shares, and
“shares”,

have the meaning indicated in section 420.
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities and options
30

(2)
In this Chapter “market value” has the meaning indicated in section
421(1).
(3)
In this Chapter—
“the acquisition”,
“the employee”, and
5
“the employer”,

have the meaning indicated in section 421B(8).
(4)
In this Chapter—
“restricted interest in securities”, and
“restricted securities”,
10

have the meaning indicated in sections 423 and 424.”
(2)
In consequence of the amendment made by subsection (1), Chapter 1 of Part 7
of ITEPA 2003 (income and exemptions relating to securities: introduction) is
amended as follows.
(3)
Substitute “4A” for “4” in—
15
(a)
subsections (1), (4) and (8) of section 421B,
(b)
the heading of and the heading above that section, and
(c)
subsections (5) and (6) of section 421D.
(4)
In section 421K(3)(g) (reportable events), after “securities)” insert “or would
give rise to such an amount but for Chapter 4A (shares in research institution
20
spin-out companies)”.
(5)
The amendments made by this section have effect in relation to shares (or an
interest in shares) acquired before an agreement for the transfer of intellectual
property is made, or within the period of 183 days beginning with the date on
which such an agreement is made, if—
25
(a)
the date of acquisition of the shares (or interest in shares), or
(b)
the date on which the agreement was made,

or both, fell on or after 2nd December 2004.
(6)
Where section 454 of ITEPA 2003 (as inserted by subsection (1)) has effect (by
virtue of subsection (5)) in relation to shares (or an interest in shares) acquired
30
before 2nd December 2004, it applies in relation to them (or it) so as to treat the
election under section 431(1) as made on that date.
(7)
Where section 454 of ITEPA 2003 (as inserted by subsection (1)) has effect (by
virtue of subsection (5)) in relation to shares (or an interest in shares) acquired
before 1st October 2005, it has effect with the substitution in subsection (3)(b)
35
of that section of “later than 15th October 2005” for “more than 14 days after the
acquisition of the shares (or interest in shares)”.
34
Research institution spin-out companies: pre-2nd December 2004 cases
(1)
Subsections (2) to (7) have effect where—
(a)
Chapter 4A of Part 7 of ITEPA 2003 (as inserted by section 33) would
40
apply but for subsection (5) of that section (commencement), and
(b)
an election is made under this subsection by the employee and the
employer no later than 15th October 2005.
(2)
Section 452(1) and (2)(a), (c) and (d) and section 453(1) of ITEPA 2003 apply.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities and options
31

(3)
But when the chargeable event occurs in relation to the shares (or interest in
shares), the taxable amount counts as employment income of the employee for
the tax year in which the chargeable event occurs.
(4)
The chargeable event occurs in relation to the shares (or interest in shares) on
the earlier of—
5
(a)
the day on which there is a disposal for consideration of the shares, or
any interest in them, by an associated person otherwise than to another
associated person, and
(b)
the day specified in any election made by an employee under this
subsection.
10
(5)
The taxable amount for the purposes of subsection (3) is—

where—
MV is the market value of the shares (or interest in shares) immediately
before the occurrence of the chargeable event, and
DA is the total of any deductible amounts.
15
(6)
Each of the following is a deductible amount—
(a)
the amount of any consideration given for the acquisition of the shares
(or interest in shares),
(b)
any amount that constituted earnings from the employee’s
employment under Chapter 1 of Part 3 of ITEPA 2003 (earnings) in
20
respect of the acquisition of the shares (or interest in shares),
(c)
any amount that counted as employment income in relation to the
shares (or interest in shares) under Chapter 2 or 4 of Part 7 of that Act
as originally enacted otherwise than by virtue of section 457 of that Act
(as originally enacted) (charge on receipt of chargeable benefit),
25
(d)
if the shares (or interest in shares) were (or was) acquired on a
conversion of other shares (or of another interest in shares), any
amount that counted as employment income of the employee under
Chapter 3 of that Part (including that Chapter as originally enacted)
(convertible securities) by reason of the conversion,
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(e)
if the acquisition of the shares (or interest in shares) was pursuant to a
securities option, any amount that counted as employment income of
the employee under section 476 of that Act (or section 476 or 477 as
originally enacted) (acquisition of securities pursuant to securities
option) by reason of the acquisition, and
35
(f)
in the case of a chargeable event under subsection (4)(a), the amount of
any expenses incurred by the holder of the shares (or interest in shares)
in connection with the disposal.
(7)
An election under subsection (1) or (4) is irrevocable and must be made in a
form approved by the Board of Inland Revenue.
40
(8)
The Treasury may by regulations modify—
(a)
this section,
(b)
any provision of Part 4 of TCGA 1992, and
(c)
any provision of Part 7 of ITEPA 2003,

in relation to shares (or interests in shares) to which Chapter 4A of that Part
45
would apply but for section 33(5) and which are restricted securities (or

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities and options
32

restricted interests in securities) or convertible securities (or interests in
convertible securities).
(9)
The power conferred by subsection (8) is exercisable by statutory instrument.
(10)
A statutory instrument containing regulations under subsection (8) is subject
to annulment in pursuance of a resolution of the House of Commons.
5
(11)
In this section—
“associated person” has the same meaning as in Chapters 1 to 5 of Part 7
of ITEPA 2003 (see section 421C of that Act),
“Board of Inland Revenue” has the same meaning as in that Act (see
section 720(2) of that Act), and
10
“convertible securities” has the same meaning as in Chapter 3 of Part 7 of
that Act (see section 436 of that Act),

and expressions used in this section and in Chapter 4A of Part 7 of that Act
have the same meaning in this section as in that Chapter.
35
Capital gains
15
(1)
TCGA 1992 is amended as follows.
(2)
In section 119A(3) (increase in expenditure by reference to tax charged in
relation to employment-related securities: events giving rise to relevant
income tax charge)—
(a)
after “employment income” insert “in respect of the employment-
20
related securities”,
(b)
for the word “or” at the end of paragraph (c) substitute—
“(ca)
under section 447 of ITEPA 2003 (receipt of benefit) in a
case where the benefit is an increase in the market value
of the employment-related securities,”,
25
(c)
after paragraph (d) insert “or—
(e)
under subsection (3) of section 34 of the Finance Act
2005 (transitional charge in relation to shares in spin-out
companies) by virtue of subsection (4)(b) of that section
(election by employee).”, and
30
(d)
omit the words following the paragraphs.
(3)
After section 149AA insert—
“149AB
Shares in research institution spin-out companies
(1)
Where an individual has acquired shares (or an interest in shares) in
circumstances where section 452(1) and (2)(a) of ITEPA 2003 (shares in
35
research institution spin-out companies: market value on acquisition)
apply (and section 149AA does not apply in relation to those shares (or
interest in shares)) the consideration for the acquisition shall (subject to
section 119A) be taken to be equal to the aggregate of—
(a)
the actual amount or value given for the shares (or interest in
40
shares), and
(b)
any amount that constituted earnings under Chapter 1 of Part 3
of ITEPA 2003 (earnings) in respect of the acquisition.
(2)
Subsection (1) above applies only to the individual making the
acquisition and, accordingly, is to be disregarded in calculating the
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Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 4 — Scientific research organisations
33

consideration received by the person from whom the shares (or interest
in shares) are (or is) acquired.”
(4)
The amendment made by paragraph (b) of subsection (2) has effect only in
relation to disposals on or after 6th April 2005; but the other amendments made
by that subsection have effect in relation to any disposal (whether before or
5
after the passing of this Act).
(5)
The amendment made by subsection (3) has effect in relation to any acquisition
(whether before or after the passing of this Act).
Chapter 4
Scientific research organisations
10
36
Corporation tax exemption for organisations
(1)
Section 508 of ICTA (tax exemption for scientific research organisations) is
amended as follows.
(2)
In subsection (1) (Associations undertaking scientific research and approved
by Secretary of State), for paragraph (a) substitute—
15
“(a)
an Association has as its object the undertaking of research and
development which may lead to or facilitate an extension of any
class or classes of trade; and”.
(3)
In that subsection, for “Board, be allowed in the case of the Association”
substitute “Board in relation to any accounting period, be allowed in the case
20
of the Association for that accounting period”.
(4)
After that subsection insert—
“(1A)
The Treasury may by regulations prescribe circumstances in which the
conditions in subsection (1) above shall be deemed not to be complied
with.
25
(1B)
The Treasury may by regulations make provision specifying for the
purposes of paragraph (a) of that subsection—
(a)
what shall be deemed to be, or not to be, an Association,
(b)
circumstances in which an Association shall be deemed to have,
or not to have, the undertaking of research and development as
30
its object,
(c)
circumstances in which the undertaking of research and
development shall be deemed to be, or not to be, capable of
leading to or facilitating an extension of a class of trade, or
(d)
what shall be deemed to be, or not to be, a class of trade.”
35
(5)
For subsection (3) (meaning of “scientific research”) substitute—
“(3)
Section 837A (meaning of “research and development”) applies for the
purposes of subsection (1)(a) above.
(4)
Regulations under subsection (3) of that section (power to prescribe
activities which are, or are not, research and development) may make
40
provision for the purposes of that section as it applies by virtue of
subsection (3) of this section which is additional to, or different from,
the provision made otherwise for the purposes of that section.”

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 4 — Scientific research organisations
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(6)
This section has effect in relation to accounting periods beginning on or after
such day as the Treasury may by order made by statutory instrument appoint.
37
Income tax deduction for payments to organisations
(1)
Section 88 of ITTOIA 2005 (income tax deduction for payments to research
associations etc.) is amended as follows.
5
(2)
In subsection (1) (conditions for deduction), for the words from the beginning
of paragraph (a) to “research” in paragraph (b) substitute—
“(a)
pays any sum to an Association in the case of which exemption
may be claimed under section 508 of ICTA and which has as its
object the undertaking of research and development which may
10
lead to or facilitate an extension of the class of trade to which the
trade carried on by the person belongs, or
(b)
pays any sum to be used for scientific research related to that
class of trade”.
(3)
In subsection (4), omit paragraph (a) (meaning of “approved” in relation to
15
scientific research association).
(4)
In subsection (5) (references to scientific research related to a class of trade), for
“references in this section” substitute “reference in subsection (1)(b)”.
(5)
This section has effect in relation to sums paid to an Association during any
accounting period of the Assocation beginning on or after the day appointed
20
under section 36(6).
38
Corporation tax deduction for payments to organisations
(1)
Section 82B of ICTA (corporation tax deduction for payments to research
associations etc.) is amended as follows.
(2)
In subsection (1) (conditions for deduction), for the words from the beginning
25
of paragraph (a) to “above” in paragraph (b) substitute—
“(a)
pays any sum to an Association in the case of which exemption
may be claimed under section 508 and which has as its object the
undertaking of research and development which may lead to or
facilitate an extension of the class of trade to which the trade
30
carried on by the company belongs, or
(b)
pays any sum to be used for scientific research related to that
class of trade”.
(3)
In subsection (3) (reference to scientific research related to a class of trade), for
“this section” substitute “subsection (1)(b) above”.
35
(4)
This section has effect in relation to sums paid to an Association during any
accounting period of the Assocation beginning on or after the day appointed
under section 36(6).