Finance (No. 2) Bill

House of Commons

Session 2004 - 05
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Finance (No. 2) Bill

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 2 — Personal taxation
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(5)
This section has effect in relation to the year 2005-06 and subsequent years of
assessment.
Armed forces
19
Armed forces pensions and compensation schemes
(1)
ITEPA 2003 is amended as follows.
5
(2)
In subsection (1) of section 393 as originally enacted (application of Chapter 2
of Part 6) after “non-approved retirement benefits scheme” insert “other than a
scheme established by an order under section 1(2) of the Armed Forces
(Pensions and Compensation) Act 2004 (armed and reserve forces
compensation schemes)”.
10
(3)
In paragraph (a) of section 639 (exemption from income tax for pensions due to
military service etc)—
(a)
for “the Department of Work and Pensions” substitute “the Ministry of
Defence”;
(b)
for “any Order in Council, Royal Warrant, order or scheme” substitute
15
“instrument specified in subsection (2),”.
(4)
At the end of section 639 (which becomes subsection (1)) insert—
“(2)
The instruments referred to in subsection (1)(a) are—
Defence (Local Defence Volunteers) Regulations 1940
(S.R. & O. 1940/748),
20
War Pensions (Coastguards) Scheme 1944 (S.R. & O. 1944/500),
War Pensions (Naval Auxiliary Personnel) Scheme 1964
(S.I. 1964/1985),
Pensions (Polish Forces) Scheme 1964 (S.I. 1964/2007),
War Pensions (Mercantile Marine) Scheme 1964 (S.I. 1964/2058),
25
Order by Her Majesty concerning pensions and other grants in
respect of disablement or death due to service in the Home
Guard (1964 Cmnd. 2563),
Order by Her Majesty concerning pensions and other grants in
respect of disablement or death due to service in the Home
30
Guard after 27th April 1952 (1964 Cmnd. 2564),
Order by Her Majesty concerning pensions and other grants in
respect of disablement or death due to service in the Ulster
Defence Regiment (1971 Cmnd. 4567),
Personal Injuries (Civilians) Scheme 1983 (S.I. 1983/686),
35
Naval, Military and Air Forces etc. (Disablement and Death)
Service Pensions Order 1983 (S.I. 1983/883).
(3)
The Treasury may by order amend subsection (2).”.
(5)
After section 640 insert—
“640A
Lump sums provided under armed forces early departure scheme
40
No liability to income tax arises on a lump sum provided under a
scheme established by the Armed Forces Early Departure Payments
Scheme Order 2005 (S.I. 2005/437).”.

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities
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(6)
In section 641 (exemption from income tax for armed forces disability pensions
etc), after paragraph (g) of subsection (1) insert—
“(h)
a benefit under a scheme established by an order under section
1(2) of the Armed Forces (Pensions and Compensation) Act
2004 payable to a person by reason of his illness or injury—
5
(i)
by way of a lump sum, or
(ii)
following the termination of the person’s service in the
armed forces or reserve forces.”.
(7)
The amendment made by subsection (2) has effect for the year 2005-06.
(8)
The amendments made by subsections (3) and (4) are deemed always to have
10
had effect.
(9)
The amendments made by subsections (5) and (6) have effect for the year 2005-
06 and subsequent years of assessment.
Chapter 3
Employment-related securities
15
20
Research institution spin-out companies
(1)
In Part 7 of ITEPA 2003 (employment income: income and exemptions relating
to securities), after Chapter 4 insert—
“Chapter 4A
Shares in research institution spin-out companies
20
Introduction
451
Application of this Chapter
(1)
This Chapter applies where—
(a)
an agreement is made for one or more transfers of intellectual
property (an “intellectual property agreement”) from one or
25
more research institutions to a company (a “spin-out
company”),
(b)
a person acquires shares (or an interest in shares) in the spin-out
company before the intellectual property agreement is made or
within the period of 183 days beginning with the date on which
30
it is made,
(c)
the right or opportunity to acquire the shares (or interest in
shares) was available by reason of employment by the research
institution (or any of them) or by the spin-out company, and
(d)
the person is involved in research in relation to any of the
35
intellectual property that is the subject of the intellectual
property agreement.
(2)
But this Chapter does not apply if the avoidance of tax or national
insurance is the main purpose (or one of the main purposes) of the
arrangements under which the right or opportunity to acquire the
40
shares (or interest in shares) is made available.

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities
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Tax relief on acquisition
452
Market value on acquisition
(1)
For the relevant tax purposes the market value of the shares (or interest
in shares) at the time of the acquisition is to be calculated disregarding
the effect on that market value of the intellectual property agreement
5
and any transfer of intellectual property pursuant to it.
(2)
For the purposes of subsection (1) “the relevant tax purposes” are—
(a)
determining any amount that is to constitute earnings from the
employment under Chapter 1 of Part 3 (earnings),
(b)
determining the amount of any gain realised on the occurrence
10
of an event that is a chargeable event by virtue of section
439(3)(a) (conversion),
(c)
operating Chapter 3C of this Part (acquisition of securities for
less than market value), and
(d)
determining any amount that counts as employment income of
15
the employee under Chapter 5 of this Part (securities acquired
pursuant to securities option).
Tax relief following acquisition
453
Taxable amount under Chapter 4
(1)
If the shares are (or interest in shares is) acquired before the intellectual
20
property agreement is made, or before any transfer of intellectual
property pursuant to it, and any benefit deriving from the intellectual
property agreement or any such transfer is received by the employee in
connection with the shares (or interest in shares), the taxable amount
determined under section 448 (post-acquisition benefits from
25
securities: amount of charge) is to be treated as nil.
(2)
But this section does not apply if something which affects the shares (or
interest in shares) has been done (at or before the time when the
intellectual property agreement is made or intellectual property is
transferred) as part of a scheme or arrangement the main purpose (or
30
one of the main purposes) of which is the avoidance of tax or national
insurance contributions.
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
35
restricted interest in securities), the employer and the employee are to
be treated as making an election under section 431(1) (election for
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
40
to apply in relation to the shares (or interest in shares).
(3)
An agreement under subsection (2) is irrevocable and—
(a)
must be made in a form approved by the Board of the Inland
Revenue, and

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities
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(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
for the purposes of determining the taxable amount for the purposes of
section 426 (charge on occurrence of chargeable event) on the
5
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
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
10
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.
455
Disapplication of Chapter 3B
For the purposes of Chapter 3B (securities with artificially enhanced
15
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.
Supplementary
456
Meaning of “intellectual property” and “transfer”
20
(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
Varieties Act 1997,
(b)
any right under the law of a country or territory outside the
25
United Kingdom corresponding to, or similar to, a right within
paragraph (a),
(c)
any information or technique not protected by a right within
paragraph (a) or (b) but having industrial, commercial or other
economic value,
30
(d)
any licence or other right in respect of anything within
paragraph (a), (b) or (c), or
(e)
any goodwill (having the meaning that it has for accounting
purposes) associated with anything within paragraphs (a) to
(d).
35
(2)
The Treasury may by order amend the definition of “intellectual
property” in subsection (1).
(3)
For the purposes of this Chapter a transfer of intellectual property
includes—
(a)
a sale of the intellectual property,
40
(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.
457
Meaning of “research institution”
(1)
In this Chapter “research institution” means—

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities
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(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
(b)
any institution that carries out research activities otherwise than
for profit and that is neither controlled nor wholly or mainly
5
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
in the order or persons of a description specified in the order.
458
Meaning of “involved in research”
10
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—
(a)
he has been actively engaged for the research institution (or any
of them) in connection with research (whether as an employee
15
or otherwise), and
(b)
that research is relevant to anything to which the intellectual
property relates.
459
Transfer of intellectual property by controlled company
(1)
For the purposes of this Chapter where a research institution has
20
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
institutions together have control of a company, a transfer of
intellectual property from the company is to be treated as a transfer
25
from those research institutions.
(3)
In this section “control” means control within the meaning of section
416 of ICTA.
460
Definitions
(1)
In this Chapter—
30
“interest”, in relation to shares, and
“shares”,

have the meaning indicated in section 420.
(2)
In this Chapter “market value” has the meaning indicated in section
421(1).
35
(3)
In this Chapter—
“the acquisition”,
“the employee”, and
“the employer”,

have the meaning indicated in section 421B(8).
40
(4)
In this Chapter—
“restricted interest in securities”, and
“restricted securities”,

have the meaning indicated in sections 423 and 424.”

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities
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(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—
(a)
subsections (1), (4) and (8) of section 421B,
5
(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
spin-out companies)”.
10
(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—
(a)
the date of acquisition of the shares (or interest in shares), or
15
(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
before 2nd December 2004, it applies in relation to them (or it) so as to treat the
20
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)
of that section of “later than 15th October 2005” for “more than 14 days after the
25
acquisition of the shares (or interest in shares)”.
21
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 20) would
apply but for subsection (5) of that section (commencement), and
30
(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.
(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
35
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—
(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
40
associated person, and
(b)
the day specified in any election made by an employee under this
subsection.
(5)
The taxable amount for the purposes of subsection (3) is—

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities
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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.
(6)
Each of the following is a deductible amount—
5
(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
respect of the acquisition of the shares (or interest in shares),
10
(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),
(d)
if the shares (or interest in shares) were (or was) acquired on a
15
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,
(e)
if the acquisition of the shares (or interest in shares) was pursuant to a
20
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
(f)
in the case of a chargeable event under subsection (4)(a), the amount of
25
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.
(8)
The Treasury may by regulations modify—
30
(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
would apply but for section 20(5) and which are restricted securities (or
35
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.
40
(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
45
“convertible securities” has the same meaning as in Chapter 3 of Part 7 of
that Act (see section 436 of that Act),