Clause 987: Deduction for costs of setting up an approved share incentive plan

2530.     This clause gives a deduction for the costs setting up a SIP. It is based on paragraph 7 of Schedule 4AA to ICTA.

2531.     Subsection (4) applies if there is a delay between the company incurring the costs and the SIP being approved. The deduction is given for the period of account in which the scheme is approved. This avoids the company having to amend its company tax return for the period in which the expenditure was incurred or in an extreme case being outside the time limit for amending that return.

Clause 988: Deductions for running expenses of an approved share incentive plan

2532.     This clause prevents any prohibitive rule in this Chapter denying a deduction for the costs of running a SIP. It is based on paragraph 8 of Schedule 4AA to ICTA.

2533.     The trustees of a SIP will incur costs related to the day to day running of the SIP. For example, they will have to operate a PAYE scheme to deal with the employees’ income tax liabilities. They will also incur incidental costs in acquiring the shares. The employing company will have to meet these costs.

2534.     The clause does not itself give the company a deduction for payments made to the trustees to enable them to meet the running costs. It provides that none of the prohibitive rules in this Chapter, such as clause 994(7), prevents a deduction being given for running expenses. As the SIP is run for the benefit of its employees the costs would usually be allowed as a normal deduction in calculating the company’s taxable profits. Whether or not a deduction is allowed is considered on first principles.

2535.     Subsection (3) makes clear that running expenses do not include the cost of acquiring the shares except for the incidental costs listed in subsection (4). The reference to stamp duty reserve tax is new.

Clause 989: Deduction for contribution to plan trust

2536.     This clause allows a deduction for a payment to the trustees which they use to buy shares for later award under the SIP. It is based on paragraphs 9 and 10 of Schedule 4AA to ICTA.

2537.     In broad terms the purpose of this clause is to give the company a deduction at the time when it funds the purchase of the shares and not when the shares are awarded to the employee. Without this clause it could be difficult for companies to finance the purchase of shares in advance of them being awarded.

2538.     The clause applies to payments made on or after 6 April 2003. This commencement is preserved in Schedule 2 (transitionals and savings).

2539.     “Plan trust” has the meaning given in paragraph 71(3) of Schedule 2 to ITEPA.

2540.     Subsection (2) provides that at the end of the period of 12 months beginning when the trustees make the acquisition with the payment the trustees must hold at least 10% of the ordinary share capital of the company in which the shares are acquired. This total applies to all the shares held. There is no requirement that the total is made up of shares acquired using the payment.

2541.     Under the SIP rules shares will be appropriated to an employee but the employee is required to leave the shares with the trustees. For example, paragraph 36(1) of Schedule 2 to ITEPA requires free shares to remain in the hands of the trustees for a holding period of at least three years. Subsection (3) makes clear that these shares count towards the 10% total.

Clause 990: Withdrawal of deduction under section 989

2542.     This clause withdraws the relief given by clause 989 if the shares acquired with the payment are not awarded within specified time limits. It is based on paragraph 10 of Schedule 4AA to ICTA.

2543.     Subsection (4) provides that the relief is withdrawn by treating the deduction as an amount received by the company. This amount is taxed in accordance with the rules in clause 986.

2544.     This clause refers to a deduction being given under clause 989. It is possible that the deduction may have been given under paragraph 9 of Schedule 4AA to ICTA if the relief was given in an accounting period before this Bill took effect. The general continuity of law provisions in Schedule 1 to this Bill provide that where necessary references to the new legislation should be read as applying also to the source legislation. So the recovery provisions still apply.

2545.     This clause contains a change to clarify and make more consistent the way in which withdrawn relief is treated. See Change 76 in Annex 1 and the commentary on clause 986.

Clause 991: Another deduction to be allowed if all acquired shares are awarded

2546.     This clause allows a further deduction if the relief is withdrawn under clause 990 but all the acquired shares are awarded at a later date. It is based on paragraph 10 of Schedule 4AA to ICTA.

Clause 992: Award of shares to excluded employee

2547.     This clause withdraws a proportion of the relief given under clauses 989 and 991 if shares are awarded to an excluded employee. It is based on paragraph 10 of Schedule 4AA to ICTA.

2548.     The definition of excluded employee in subsection (2) is the same as that in paragraph 4(2) of Schedule 4AA to ICTA which is rewritten as Exclusion 1 in clause 996.

2549.     This clause contains a change to clarify and make more consistent the way in which withdrawn relief is treated. See Change 76 in Annex 1 and the commentary on clause 986.

Clause 993: Termination plan notice

2550.     This clause withdraws a proportion of the relief given by clause 989 if the company terminates the SIP before all the shares have been awarded. It is based on paragraph 12 to Schedule 4AA to ICTA.

2551.     This clause contains a change to clarify and make more consistent the way in which withdrawn relief is treated. See Change 76 in Annex 1 and the commentary on clause 986.

Clause 994: Deduction for providing free or matching shares

2552.     This clause gives a deduction for providing free or matching shares. It is based on paragraph 2 of Schedule 4AA to ICTA.

2553.     A “free share” is defined in paragraph 2(1)(a) of Schedule 2 to ITEPA. It means a share appropriated to the employee without payment.

2554.     A “matching share” is defined in paragraph 3(1) of Schedule 2 to ITEPA. It means a share appropriated to the employee without payment in proportion to the partnership shares acquired by the employee.

2555.     A “group plan” is defined in paragraph 4 of Schedule 2 to ITEPA. It means a SIP established by a parent company in which the companies it controls are allowed to participate.

Clause 995: Deduction for additional expense in providing partnership shares

2556.     This clause gives a deduction for any contribution the company makes towards the acquisition of partnership shares. It is based on paragraph 3 of Schedule 4AA to ICTA.

2557.     A “partnership share” is defined in paragraph 2(1)(a) of Schedule 2 to ITEPA. It means a share acquired by the trustees on behalf of an employee out of sums deducted from the employee’s salary.

2558.     This clause is concerned with the case to which paragraph 52 of Schedule 2 to ITEPA applies. Partnership shares are acquired by the trustees with funds provided by the employee. The rules of the SIP may require the employee to make payments to the trustees over an accumulation period which cannot last longer than twelve months. Paragraph 52(3) of Schedule 2 to ITEPA provides the number of partnership shares awarded to the employee is calculated at the end of the accumulation period by reference to the lower of:

• the market value of the shares at the beginning of the period; or

• the market value of the shares on the date on which they are to be acquired.

2559.     If the market value of the shares at the end of the period is greater than the value at the beginning the company will make up the difference. This clause gives the company a deduction for the excess.

Clause 996: Shares excluded from sections 994 and 995

2560.     This clause identifies the shares that do not qualify for relief if they are awarded as free, matching or partnership shares. It is based on paragraphs 4, 6 and 9 of Schedule 4AA to ICTA.

2561.     Exclusion 1 is similar to the exclusion in clause 992(2). It requires the employee to whom the shares are awarded to be within the charge to income tax on any earnings from the employment in respect of which the shares were awarded. Generally, it has the effect of excluding any shares awarded to non-UK resident employees.

2562.     Exclusion 2 is intended to protect the employee by acting as a disincentive to the award of shares that are intended to reduce in value.

2563.     Exclusion 3 applies if the company or an associated company operates another share scheme, including another SIP, and has already had a deduction for the cost of providing the shares for use by that scheme. As shares are not identifiable individually, rules are needed to identify when the shares included in an award were acquired. Subsection (6)(b) identifies whether shares included in an award have already had relief under another SIP or share scheme.

Clause 997: No deduction for expenses in providing dividend shares

2564.     This clause provides that no deduction is allowed for the cost of providing dividend shares. It is based on paragraph 5 of Schedule 4AA to ICTA.

2565.     The expression “dividend shares” is defined in paragraph 62(3)(b) of Schedule 2 to ITEPA. They are shares acquired by the trustees reinvesting cash dividends declared on plan shares the trustees hold on behalf of employees participating in the SIP.

Clause 998: Withdrawal of deductions if approval for share incentive plan withdrawn

2566.     This clause withdraws any deduction given under this Chapter if approval for the SIP is withdrawn. It is based on paragraph 11 of Schedule 4AA to ICTA.

2567.     Paragraph 83 of Schedule 2 to ITEPA allows an officer of Revenue and Customs to issue a notice to the company withdrawing approval of a SIP. If approval is withdrawn a separate notice must be issued under subsection (2) of this clause to recover any relief given under this Chapter.

2568.     The relief is withdrawn by treating the company as receiving an amount equal to the amount of the deduction. Clause 986 sets out how this amount is taxed.

2569.     This clause contains a change to clarify and make more consistent the way in which withdrawn relief is treated. See Change 76 in Annex 1 and the commentary on clause 986.

Chapter 2: SAYE option schemes, Company share option schemes and Employee share options trusts

Clause 999: Deduction for costs of setting up SAYE option scheme or CSOP scheme

2570.     This clause allows a deduction for the costs of setting up an approved “save as you earn” (SAYE) option scheme or an approved “company share option plan” (CSOP) scheme. It is based on sections 21A, 75 and 84A of ICTA.

2571.     A CSOP scheme is commonly known as a company share option plan.

2572.     The clause is very similar to clauses 987 and 1000. The deduction is given in calculating the trade or property business profits, subsection (3), or as an expense of managing an investment business, subsection (4). If the business is both an investment business and a property business subsection (4) gives priority to the property business. This order of priority is based on section 75(2) of ICTA which provides that a deduction as an expense of management is not given if the deduction is otherwise allowable.

2573.     Subsection (6) applies if there is a delay between the company incurring the costs and the scheme being approved. The deduction is given for the period of account in which the scheme is approved. This avoids the company having to amend its company tax return for the period in which the expenditure is incurred or in an extreme case being outside the time limit for amending that return.

2574.     Relief for providing the shares under the schemes is given by Part 12, which rewrites Schedule 23 to FA 2003.

2575.     A CSOP can be set up by a non-UK resident company which trades in the United Kingdom otherwise than through a permanent establishment. Such a non-UK resident company would be subject to income tax, rather than corporation tax.

Clause 1000: Deduction for costs of setting up employee share ownership trust

2576.     This clause gives relief for the costs of setting up a qualifying employee share ownership trust (QUEST). It is based on sections 21A, 75 and 85A of ICTA.

2577.     In practice it is unlikely that a QUEST would be set up in an accounting period to which this Bill applies. Section 67 of FA 1989 gave relief for employers’ contributions to QUESTs. That relief was withdrawn by section 142 of FA 2003 with effect for contributions made in accounting periods beginning on or after 1 January 2003. Relief for the provision of shares through a QUEST is given now by Schedule 23 to FA 2003, rewritten in Part 12 of this Bill.

2578.     The relief given by section 85A of ICTA for the setting up costs was not withdrawn and is still available in the event that a company did set up a new QUEST. The clause is very similar to clause 999.

2579.     This Bill does not rewrite section 85 of ICTA (payments to trustees of approved profit sharing schemes). Approved profit sharing schemes were phased out by section 49 of FA 2000, and the deduction in section 85 of ICTA was phased out by section 50 of FA 2000. This Bill accordingly does not rewrite section 85 of ICTA (or section 50 of FA 2000).

Part 12: Other relief for employee share acquisitions

Overview

2580.     This Part and Part 11 give specific statutory deductions for various costs associated with setting up and operating employee share schemes. These are arrangements under which employers provide incentives for their employees in the form of shares. This Part is based on Schedule 23 to FA 2003.

2581.     The relief given is available to companies carrying on all types of business. There are no requirements as to how the company funds or structures the arrangements. It applies to shares that are newly issued, acquired in the market or acquired by private purchase. It applies to formal plans operated through trusts and to informal arrangements.

2582.     Although the Part gives relief to a company, usually the employing company, in calculating its corporation tax profits the availability and the amount of the relief are closely related to the income tax position of the employee. Because of the links to employment income this Part makes frequent reference to provisions in ITEPA.

Chapter 1: Introduction

Clause 1001: Overview of Part

2583.     This clause gives an overview of the Part. It is new.

Clause 1002: “Employment”

2584.     This clause gives the meaning of “employment” for the purposes of the Part. It is based on paragraph 26 of Schedule 23 to FA 2003.

Clause 1003: “Shares” etc

2585.     This clause gives the meaning of “shares” for the purposes of the Part. It is based on paragraphs 10, 17, 22, 22D and 30 of Schedule 23 to FA 2003.

2586.     The test in subsection (2), which determines when the shares are acquired, is identical to that in section 477(4) of ITEPA. This correlation is important as that section determines the income tax position of the employee for the purposes of clause 1017.

Clause 1004: Groups, consortiums and commercial associations of companies

2587.     This clause gives various definitions that apply when considering employee share acquisitions within a group of companies. It is based on paragraphs 23, 28 and 29 of Schedule 23 to FA 2003.

2588.     Any group company that owns shares in the consortium company is treated as a member of the consortium. But a member of a group of companies is not part of the consortium simply because another member of the group holds shares in the consortium company.

Clause 1005: Other definitions

2589.     This clause gives various definitions used for the purposes of the Part. It is based on paragraph 30 of Schedule 23 to FA 2003.

2590.     “Convertible securities” has the same meaning as that in section 436 of ITEPA.

2591.     “Restricted shares” means shares that are restricted securities or a restricted interest in securities for the purposes of Chapter 2 of Part 7 of ITEPA. These terms are defined in section 423 of ITEPA.

Chapter 2: Relief if shares acquired by employee or other person

Overview

2592.     This Chapter gives relief for an acquisition of shares. It is based on Part 2 of Schedule 23 to FA 2003. The source legislation describes the process by which the shares are acquired as an award of the shares. For the purposes of Schedule 23 it means any acquisition of shares that does not require the exercise of a right to make the acquisition. Relief for shares acquired through the exercise of an option is given by Part 3 of Schedule 23 to FA 2003, rewritten as Chapter 3 of this Part.

2593.     This Chapter refers merely to shares being acquired by the employee or another person. The boundary between this Chapter and Chapter 3 is created by clause 1007(1)(e). This prevents relief being given under both Chapters and gives priority to Chapter 3.

2594.     This Chapter applies to the acquisition of all types of shares including restricted shares and convertible shares. This is a different structure from that in the source legislation. In the source legislation the application of Part 2 of Schedule 23 is modified to deal with restricted shares and convertible shares. In this Chapter, and Chapter 3, the conditions to qualify for relief and the amount of the relief are set out in full. Chapters 4 and 5 then give additional relief for future events that affect restricted shares and convertible shares after they have been acquired.

Clause 1006: Overview of Chapter

2595.     This clause gives an overview of the Chapter. It is new.

Clause 1007: Basic requirements for relief under Chapter 2

2596.     This clause sets out the basic requirements for relief under this Chapter. It is based on paragraphs 1 and 3 of Schedule 23 to FA 2003.

Clause 1008: Conditions relating to shares acquired

2597.     This clause identifies the type of shares that have to be acquired. It is based on paragraphs 4 and 6 of Schedule 23 to FA 2003.

Clause 1009: Conditions relating to employee’s income tax position

2598.     This clause gives the conditions that must be met in relation to the employee’s income tax position. It is based on paragraphs 7 and 20 of Schedule 23 to FA 2003.

2599.     The “employee” is the person defined in clause 1007(1)(a) as the person in respect of whose employment the shares are acquired.

2600.     Subsection (1) deals with the acquisition of shares other than restricted shares. So it applies to the acquisition of convertible shares. The acquisition of the shares has to result in an income tax charge on the employee.

2601.     Relief is not given if section 446UA of ITEPA applies to the shares. That provision applies to shares acquired for less than their market value under arrangements that seek to avoid the income tax charge or the national insurance contribution on the employment income.

2602.     Subsection (2) applies if the shares are restricted shares.

2603.     Relief will be available in two circumstances.

2604.     First, if as a result of the acquisition there is an employment income tax charge on earnings as defined in Chapter 1 of Part 3 of ITEPA. This is a charge on the money’s worth of the shares. The test is met at the time of acquisition.

2605.     Second, if on acquisition there is no immediate employment income tax charge, but there will be such a charge if there occurs later a chargeable event in respect of the shares. The test is met at the time of acquisition. The company does not have to suspend its claim until that later event actually occurs. It is sufficient that on acquisition the circumstances are such that it appears that the employee will become subject to a charge under section 426 of ITEPA. One reason why there may be no immediate income tax charge is if the shares are forfeitable and the exemption in section 425(2) of ITEPA applies.

2606.     The events that trigger a later charge are listed in section 427(3) of ITEPA. They include, for example, a lifting of the restrictions at a time when the recipient of the shares or an associated person still owns the shares. (The definition of associated person for the purposes of section 427 of ITEPA is in section 421C(1) of ITEPA and includes the person who acquired the shares.)

2607.     This clause does not rewrite paragraph 20(3) of Schedule 23 to FA 2003. Paragraph 20(3) provides that the test in paragraph 20(2)(a)(ii) of Schedule 23 to FA 2003 is applied on the assumption that section 426 of ITEPA continues to apply after the employee dies. Paragraph 20(2)(a)(ii) of Schedule 23 to FA 2003 is rewritten as subsection (2)(b).

2608.     Paragraph 20(3) of Schedule 23 to FA 2003 is not necessary where the employee dies after acquiring shares but before becoming subject to a charge. This is because the test in paragraph 20(2)(a)(ii) of Schedule 23 to FA 2003 is applied to the circumstances existing on acquisition. It does not apply on the subsequent chargeable event (for example, the lifting of the restriction). Since the test has already been met on acquisition, it is not necessary to rely on paragraph 20(3) to provide for the case in which section 426 of ITEPA ceases to apply because of some future event. The fact that the employee dies before the restriction is lifted and the section 426 charge does not materialise is irrelevant for the purposes of the test in paragraph 20(2)(a)(ii).

2609.     Paragraph 20(3) of Schedule 23 to FA 2003 cannot be relevant to a company’s entitlement to relief under this Part where the employee dies before acquiring shares. If while alive the employee possesses a right to acquire shares then the employee possesses an option and corporation tax relief will be available under Chapter 3 of this Part. If while alive the employee does not enjoy a right to acquire shares and no shares are acquired by a person before the employee’s death, but after the employee’s death shares are acquired by a person, then for both practical and technical reasons corporation tax relief under this Part is not available. See also the commentary on clause 1025.

Clause 1010: Calculation of relief if shares are neither restricted nor convertible

2610.     This clause gives the amount of the relief if the shares are neither restricted nor convertible. It is based on paragraph 8 of Schedule 23 to FA 2003.

Clause 1011: Calculation of relief if shares are restricted or convertible

2611.     This clause gives the amount of relief if the shares are restricted or convertible. It is based on paragraphs 21 and 22C of Schedule 23 to FA 2003.

2612.     Subsections (2) and (3) give the basic rule that the relief is equal to the amount that counts as earnings of the employee from the employment in respect of which the shares were acquired. This is the money’s worth charge in Chapter 1 of Part 3 of ITEPA. It will be equal to the market value of the shares.

2613.     If the shares are restricted shares the valuation takes account of the restriction unless the employer and employee have made a joint election under section 431 of ITEPA that the shares are valued as if they were not restricted shares (section 431(1)), or as if particular restrictions did not apply (section 431(2)). Either election will give the employee a higher employment income charge on acquisition which is mirrored in greater relief being given to the employer. If an election under section 431(1) is made there will be no later employment income charge if the restrictions are lifted and no additional relief will be available to the employer under Chapter 4 of this Part.

2614.     If the shares are convertible shares the basis of valuation in section 437(1) of ITEPA applies. The shares are valued as if they are not convertible. Instead of referring the reader to section 437(1), and rewriting the disapplication of section 437(2) in paragraph 22C(4A) of Schedule 23 to FA 2003, the full out words in subsection (3) state the valuation rule in section 437(1).

2615.     There is a difference between subsections (2) and (3) which is not apparent from the text. This is that the calculation under subsection (2) is made by reference to Chapter 2 of Part 7 of ITEPA, while the calculation under subsection (3) is made by reference to Chapter 3 of that Part. In effect, different rules apply to the calculation under these two subsections. It is therefore possible that the calculations under these two subsections will yield different amounts.

2616.     Subsection (5) rewrites the comparison in paragraphs 21(5) and 22C(5) of Schedule 23 to FA 2003 if the shares are both restricted and convertible. The company may claim relief for the higher figure (as yielded by subsection (2) or (3)) even if the employee has or will be chargeable to tax on a different amount in respect of the shares acquired.