Clause 1012: Reduction in amount of relief

2617.     This clause restricts the relief if the shares are given partly for employment in a qualifying business and partly for employment in a business that does not qualify. It is based on paragraphs 8, 21 and 22C of Schedule 23 to FA 2003.

Clause 1013: How the relief is given

2618.     This clause explains how the relief is given. It is based on paragraphs 9, 10, 22 and 22D of Schedule 23 to FA 2003.

Chapter 3: Relief if employee or other person obtains option to acquire shares

Overview

2619.     The Chapter gives relief for the acquisition of shares “pursuant to an option”. It is based on Part 3 of Schedule 23 to FA 2003. “Option” is defined in clause 1005 to include “any right to acquire shares”. This definition is based on the definition of “securities option” in section 420(8) of ITEPA. Using a similar definition of “option” relates the relief given to the employing company to the income tax charge on the employee.

2620.     The definition is wider than the normal meaning of option as the shares may be acquired without the need to exercise any right. The Chapter follows the source legislation in describing this as the acquisition of shares “pursuant to an option”. This is also to align the language in this Chapter with that used in ITEPA. See, for example, section 477(3)(a) of ITEPA.

2621.     Like Chapter 2 this Chapter gives relief for the acquisition of all types of share including restricted shares and convertible shares. The Chapter has rules to deal with a change in circumstances between the grant of the option and the acquisition of the shares (for example, the death of the employee or original option holder or a take-over of the employing company).

Clause 1014: Overview of Chapter

2622.     This clause gives an overview of the Chapter. It is new.

Clause 1015: Basic requirements for relief under Chapter 3

2623.     This clause sets out the basic requirements for relief under this Chapter. It is based on paragraphs 1, 3 and 27 of Schedule 23 to FA 2003.

2624.     The requirements are very similar to those which apply to relief under Chapter 2. See clause 1007.

Clause 1016: Conditions relating to shares acquired

2625.     This clause identifies the type of shares that have to be acquired. It is based on paragraphs 4 and 12 of Schedule 23 to FA 2003.

Clause 1017: Condition relating to employee’s income tax position

2626.     This clause gives the conditions that must be met in relation to the employee’s income tax position. It is based on paragraphs 14 and 27 of Schedule 23 to FA 2003.

2627.     Subsection (1) gives the basic rule that the acquisition must be a chargeable event for the purposes of section 476 of ITEPA. Section 476(2) of ITEPA provides that “chargeable event” has the meaning given by section 477 of ITEPA. The list of chargeable events is given in section 477(3) of ITEPA.

2628.     The only event relevant to this Chapter is section 477(3)(a) which applies to “the acquisition of securities pursuant to the employment-related securities option by an associated person”. (The definition of “associated person” for the purposes of section 477 of ITEPA, in section 472(1) of ITEPA, includes the person who acquired the option.)

2629.     The income tax condition is satisfied whether or not an amount counts as employment income as a result of the chargeable event. This covers the case in which the shares are acquired under an approved share option scheme under which there is no charge on the acquisition. For example, section 519 of ITEPA provides that no liability to income tax arises on the exercise of an option under an approved SAYE option scheme.

Clause 1018: Calculation of relief if shares are neither restricted nor convertible

2630.     This clause gives the amount of the relief if the shares are neither restricted nor convertible. It is based on paragraph 15 of Schedule 23 to FA 2003.

Clause 1019: Calculation of relief if shares are restricted or convertible

2631.     This clause gives the amount of the relief if the shares are restricted or convertible, where they are acquired pursuant to an option. It is based on paragraphs 21 and 22C of Schedule 23 to FA 2003.

2632.     Subsections (2)(a) and (3)(a) give the basic rule. The relief is equal to the amount that counts as employment income under section 476 of ITEPA when the shares are acquired. The chargeable amount is given in section 478 of ITEPA. In broad terms it is the market value of the shares at the time they are acquired (section 479 of ITEPA) less any consideration given for the shares and any expenses incurred on the acquisition (section 480 of ITEPA).

2633.     Subsections (2)(b) and (3)(b) modify the basic rule if the option is a qualifying option under the EMI (Enterprise Management Incentives) code. The effect of that code is ignored in calculating the amount of the relief. The EMI code is defined in section 527(3) of ITEPA. A qualifying option is defined in section 527(4) of ITEPA.

2634.     This modification is needed to deal with the interaction between sections 476 and 531 of ITEPA. Section 531 of ITEPA sets out how to calculate the amount that counts as employment income under section 476 of ITEPA if the option allows the shares to be acquired at a discount to their market value at the date the option is granted. The amount that counts as employment income is that market value less any consideration given for the option and any consideration given for the shares. This limits the employment income charge on the employee to the amount of the discount.

2635.     Subsections (2)(b) and (3)(b) ensure that the company gets a deduction for the market value of the shares at the date they are acquired under the option less any consideration given for the shares and any expenses incurred on the acquisition.

2636.     The full out words at the end of subsection (3) are similar to the full out words at the end of clause 1011(3). If the shares are convertible shares they are valued on the basis that they are not convertible. This is the normal method of valuation that section 437(1) of ITEPA applies to such shares.

2637.     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.

2638.     Subsection (4)(a) states the rule that, in calculating the amount of relief given to the company, no deduction is made for the relief given to the employee by sections 481 and 482 of ITEPA. These sections reduce the employment income charge by the amount of certain national insurance contributions paid by the employee.

2639.     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.

2640.     Subsection (6) deals with the case in which the employee dies before the shares are acquired so there is no employment income charge on which to calculate the relief. It is based on paragraph 27(1) of Schedule 23 to FA 2003.

2641.     Strictly speaking paragraph 27(1) of Schedule 23 to FA 2003 deems the employee to be alive only for the purposes of the income tax condition in paragraph 14 of Schedule 23 to FA 2003. Subsection (6) extends that treatment to the calculation of the relief.

Clause 1020: Reduction in amount of relief

2642.     This clause restricts the relief if the shares are given partly for employment in a qualifying business and partly for employment in a business that does not qualify. It is based on paragraphs 15, 21 and 22C of Schedule 23 to FA 2003.

2643.     Its effect is identical to clause 1012.

Clause 1021: How the relief is given

2644.     This clause explains how the relief is given. It is based on paragraph 16 of Schedule 23 to FA 2003 and is identical to clause 1013.

Clause 1022: Takeover of company whose shares are subject to option

2645.     This clause gives relief if the company whose shares are to be acquired is taken over and the original option is exchanged for an option over shares in the new company. It is based on paragraph 13 of Schedule 23 to FA 2003.

Clause 1023: Supplementary provision for purposes of section 1022

2646.     This clause gives the definitions needed for the purposes of clause 1022. It is based on paragraph 13 of Schedule 23 to FA 2003.

2647.     Subsection (3) defines a takeover in terms of one company acquiring control of another. The definition of “control” in section 840 of ICTA applies for this purpose. See clause 1316.

Clause 1024: Transfer of qualifying business by group transfers

2648.     This clause gives relief to a new employing company if the business carried on by the original employing company is transferred within a group of companies. It is based on paragraph 23 of Schedule 23 to FA 2003.

2649.     The definition of group transfer is in clause 1004(3).

2650.     Paragraph 23(1)(a) of Schedule 23 to FA 2003 applies the rule rewritten in this clause to an award of shares. The rule for relief given by Chapter 2 of this Part is not rewritten here as that Chapter gives no scope for a transfer of the business before the shares are acquired.

Chapter 4: Additional relief in cases involving restricted shares

Overview

2651.     This Chapter applies if the shares acquired, either directly or pursuant to an option, are restricted shares. It gives the company further relief if an employment income charge arises after the shares have been acquired or if the employee dies. It is based on Part 4 of Schedule 23 to FA 2003.

2652.     Schedule 2 (transitionals and savings) provides that the special rules for restricted shares in this Part do not apply to shares acquired before 16 April 2003. If shares acquired before that date are forfeitable shares as defined in paragraph 19 of Schedule 23 to FA 2003 (as originally enacted) that Schedule continues to apply.

Clause 1025: Additional relief available if shares acquired are restricted shares

2653.     This clause sets out the basic conditions for the relief to apply and identifies the company to which the relief is given. It is based on paragraph 21 of Schedule 23 to FA 2003.

2654.     Subsection (1) gives the two basic conditions for the relief to apply.

2655.     First, subsection (1)(a), the company must have been entitled to relief under either Chapter 2 or Chapter 3 in relation to restricted shares which have been acquired either directly or through an option. This condition will still be met if the amount of the relief is nil possibly because section 425(1) of ITEPA has applied to an acquisition of forfeitable shares. See the commentary on clause 1009(2).

2656.     For a number of years after this Bill takes effect initial relief on the acquisition of the shares will have been given not under Chapters 2 and 3 of this Part but under Schedule 23 to FA 2003. In that case the continuity of law provisions in Schedule 2 (transitionals and savings), apply to treat references to Chapters 2 and 3 as if they were references to the equivalent provisions in the source legislation. Schedule 2 gives a signpost to those provisions and states their effect.

2657.     Second, subsection (1)(b), after the shares have been acquired either section 426 of ITEPA applies (so giving the employee an amount of employment income) or the employee dies.

2658.     The chargeable events that can give rise to a post-acquisition employment income charge under section 426 of ITEPA are listed in section 427(3) of ITEPA.

2659.     The definition of “associated person” in section 421C(1) of ITEPA includes the person who acquired the shares.

2660.     There will be no employment income charge if the employee dies before any of the events listed in section 427(3) of ITEPA occurs. Section 421B(4) and (6) of ITEPA provides that Chapter 2 of Part 7 of ITEPA ceases to apply to the securities immediately before the death of the employee.

2661.     Subsection (1) treats the death as a chargeable event and gives the relief that would have been given if there had been an actual chargeable event at the date of death. No further relief is available under subsection (1) as the death of the employee prevents any further charge arising under section 426 of ITEPA.

2662.     This clause does not give relief if the employee has died before the shares are acquired. First, the deeming provision in paragraph 20(3) of Schedule 23 to FA 2003 (see the commentary on clause 1009) is not expressed to apply to paragraph 21 of Schedule 23. Second, paragraph 21(2)(c) of Schedule 23, when read with paragraph 21(7) of Schedule 23, can work sensibly only if the employee dies after the shares are acquired. Third, the inclusion of paragraph 21(2)(c) of Schedule 23 itself indicates that paragraph 21(2)(b) of Schedule 23 applies only while the employee is alive.

Clause 1026: Relief available on occurrence of chargeable event

2663.     This clause gives the relief available if there is a chargeable event as defined in section 427(3) of ITEPA. It is based on paragraphs 21 and 22 of Schedule 23 to FA 2003.

2664.     Various reliefs are available in calculating the amount that counts as employment income but these reliefs are not deducted from the relief given to the company (see subsection (4)).

Clause 1027: Relief available on death of employee

2665.     This clause gives the relief available on the death of the employee. It is based on paragraphs 21 and 22 of Schedule 23 to FA 2003.

2666.     The amount of the relief is calculated by deeming the shares to be sold to an unconnected person immediately before the death of the employee (see subsection (3)). This deemed sale is a chargeable event within section 427(3) of ITEPA.

Clause 1028: Supplementary provision for purposes of sections 1026 and 1027

2667.     This clause explains how relief is given under the Chapter. It is based on paragraphs 9, 16 and 21 of Schedule 23 to FA 2003.

2668.     The clause does not repeat the rules but cross-refers to the equivalent provisions in Chapters 2 and 3.

Clause 1029: Transfer of qualifying business by group transfers

2669.     This clause gives relief to the successor company if the business carried on by the employing company is transferred before a chargeable event or the death of the employee. It is based on paragraph 23 of Schedule 23 to FA 2003.

2670.     The clause is very similar to clause 1024 which gives relief to a successor company if the business is transferred some time between the grant of the option and the acquisition of shares pursuant to the option. Clause 1024 identifies this time-frame as the “option period”.

2671.     Subsection (6) provides that the “interim period” for this clause starts when the shares or option are acquired. If the original relief has been given under Chapter 3 this means the “interim period” will include the period before the shares are acquired. This rule is needed to give relief to the successor company if there is a group transfer before the shares are acquired.

2672.     Clause 1024 will give relief under Chapter 3 and clause 1029 will give relief under this Chapter. Clause 1029 would apply also if there was a further transfer after the shares had been acquired but before a chargeable event or the death of the employee.

Chapter 5: Additional relief in cases involving convertible securities

Overview

2673.     This Chapter provides relief if the shares acquired, either directly or pursuant to an option, are convertible shares. It gives additional relief if a further employment income charge arises or the employee dies after the shares have been acquired and it also applies if there is an acquisition of convertible securities which are converted into qualifying shares. It is based on Part 4A of Schedule 23 to FA 2003.

Clause 1030: Application of Chapter

2674.     This clause gives the conditions for the Chapter to apply. It is based on paragraphs 22B and 22C of Schedule 23 to FA 2003.

2675.     As with relief under Chapter 4 the continuity of law provisions will apply if the shares or securities were acquired when Schedule 23 to FA 2003 was still in force. See the commentary on clause 1025.

2676.     Subsection (5) applies if the original recipient of an option dies and as a result the shares or securities are acquired by a different person. Relief under Chapter 3 on the acquisition of the shares is given by clause 1015(3) which treats the shares as acquired by the original recipient of the option. Subsection (5) does the same for relief under this Chapter.

2677.     Subsection (6) applies if there has been a takeover of the company whose shares were to be acquired and the options have been exchanged for options in a new company. Clause 1022 gives relief under Chapter 3. Subsection (6) does the same for relief under this Chapter.

Clause 1031: Additional relief available if shares acquired are convertible shares etc

2678.     This clause governs the events upon which and the timing on which relief is available. It is based on paragraphs 22C and 22D of Schedule 23 to FA 2003.

2679.     Subsection (2) applies if the employee has died and there is a chargeable event that would have given rise to an employment income charge if the employee had been alive. Paragraph 22C(2)(c) of Schedule 23 to FA 2003 refers to relief being available on the death of the employee. In fact the availability of the relief is not triggered by the death of the employee but by the occurrence of a later chargeable event after the death. This sequence is reflected in subsection (3).

Clause 1032: Meaning of “chargeable event”

2680.     This clause gives the meaning of “chargeable event”. It is based on paragraph 22C of Schedule 23 to FA 2003.

Clause 1033: Relief available on occurrence of chargeable event

2681.     This clause identifies the amount and timing of relief available on a chargeable event. It is based on paragraphs 22C and 22D of Schedule 23 to FA 2003.

Clause 1034: Relief available following death of employee

2682.     This clause identifies the amount of the relief available if the employee dies. It is based on paragraphs 22C and 22D of Schedule 23 to FA 2003.

2683.     Subsections (3) and (4) provide relief which is similar to that given by clause 1027 for restricted shares in that it is the amount that would count as employment income if the employee were still alive. But, under subsection (2), unlike clause 1027, relief is given for the accounting period in which the event occurs, not the period in which the employee dies.

Clause 1035: Supplementary provision for purposes of sections 1033 and 1034

2684.     This clause explains how relief is given under the Chapter. It is based on paragraphs 9, 16 and 22C of Schedule 23 to FA 2003.

2685.     The clause does not repeat the rules but cross-refers to the equivalent provisions in Chapters 2 and 3.

Clause 1036: Transfer of qualifying business by group transfers

2686.     This clause gives relief to the successor company if the business carried on by the employing company is transferred before a chargeable event or the death of the employee. It is based on paragraph 23 of Schedule 23 to FA 2003.

2687.     The clause performs the same function for convertible shares that clause 1029 performs for restricted shares.

Chapter 6 Relationship between relief under this Part and other reliefs

Clause 1037: Priority of Chapter 1 of Part 11

2688.     This clause gives priority to any deduction available under Chapter 1 of Part 11 of this Bill. It is based on paragraph 24 to Schedule 23 to FA 2003.

2689.     Chapter 1 of Part 11 of this Bill gives relief for SIP schemes.

Clause 1038: Exclusion of other deductions

2690.     This clause provides that no other deduction is available for the provision of shares if relief is, or could be, given under this Part. It is based on paragraph 25 of Schedule 23 to FA 2003.

Part 13: Additional relief for expenditure on research and development

Overview

2691.     This Part gives additional relief for expenditure by a company on research and development including research and development into certain vaccines. It is based on Schedule 20 to FA 2000 and Schedules 12 and 13 to FA 2002.

2692.     The relief is given in addition to any deduction allowed in calculating the company’s trade profits. For example, clause 87 in Part 3 (trading income) provides a deduction for expenditure on research and development.

2693.     References to research and development are abbreviated to R&D when used in a longer phrase or a long clause title. See, for example, “R&D threshold” in clause 1050.

2694.     In this Part, the rates at which the various reliefs are stated to be available apply only if the expenditure was incurred on or after 1 August 2008. Schedule 2 (transitionals and savings) preserves this commencement rule by providing that, in relation to expenditure incurred before that date, the reliefs are available at the rates previously applicable.

Chapter 1: Introduction

Clause 1039: Overview of Part

2695.     This clause gives an overview of the Part. It is new.

2696.     The source legislation refers to “tax relief” given to companies in calculating their trade profits. Subsection (1) makes clear that the relief is given only to companies liable to corporation tax. See Change 77 in Annex 1. This change affects the following clauses in this Part: clauses 1044, 1045, 1063, 1068, 1074, 1087 and 1092.

2697.     The reference to Part 9A of Schedule 18 to FA 1998 in subsection (10) is to that Part as amended by this Bill (see Schedule 1). As this Bill brings all the additional reliefs for research and development together, it repeals Parts 9BA and 9C of Schedule 18 to FA 1998.

2698.     Chapters 2 to 4 and 7 of this Part provide for relief in the case of companies which are small or medium-sized enterprises as defined for the purposes of European Union rules on state aid. Clause 1120 modifies the basic definition of “small or medium-sized enterprise” in clause 1119 by increasing the limits above which a company ceases to be a small or medium-sized enterprise. Schedule 2 (transitionals and savings) contains provision excluding that modified definition in relation to expenditure incurred before 1 August 2008.