FINANCE BILL 2002 :EXPLANATORY NOTE
CLAUSE 39: EMPLOYEE SHARE OWNERSHIP PLANS: MINOR AMENDMENTS
SUMMARY
1. This clause makes three minor amendments to the rules for share incentive plans (SIP) set out in Schedule 8 FA 2000. All three amendments correct minor defects in the way the legislation was drafted and ensure that the provisions work as intended. The changes will also help the Tax Law Rewrite Project make the legislation easier to understand in the rewrite Bill planned for later in 2002.
DETAILS OF THE CLAUSE
2. Subsection (1) introduces the amendments.
3. Subsection (2) sets out when PAYE applies to an income tax charge which may arise when shares cease to be subject to a plan. Section 203F ICTA 1988 requires an employer (or former employer) to operate PAYE if income is provided in the form of an asset which can readily be converted into cash (e.g. quoted shares). That is why paragraph 94 of Schedule 8 sends readers to section 203F. But Part X of Schedule 8 provides that participants should be taxed, when the shares cease to be subject to the plan, on the market value of shares at that time or as at the date they were awarded. This subsection amends paragraph 94 to make it clear that section 203F should apply as if the participant receives income in the form of shares at the time the shares cease to be subject to the plan. But, as now, the amount of that income will be determined by Part X of Schedule 8.
4. Subsections (3) and (4) make clearer what company should be considered as the ?employer company? in the event that the participant is no longer in relevant employment at the time the obligation to make a PAYE deduction arises, under paragraphs 95 and 96 respectively.
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5. Subsection (5) amends paragraph 127 of Schedule 8 which concerns the eligibility of companies owned equally by 2 other companies to participate in any SIP operated by the joint owners. The general rule for groups is that a subsidiary may participate in the plan of its parent, but a jointly owned company (?JOC?) is not a member of the group of either owner. Paragraph 127 allows the JOC to participate in the plan run by either owner, but not both.
6. Paragraph 127 did not properly deal with subsidiaries of a JOC. In order to mirror the position for groups generally any subsidiaries of a JOC should similarly be entitled to participate in the plan run by only one owner and the JOC and its subsidiaries should all go into the same plan. This amendment provides for that and removes the unintended flexibility in the original legislation. It also aligns the treatment of JOCs in the context of SIPs with the treatment of JOCs in other share incentive schemes.
7. Subsection (6) is related to subsection (2) and arises out of the definition of ?readily convertible asset? in section 203F(2) ICTA 1988. This amendment ensures that the ?gloss? on that definition which is introduced by paragraph 128(2) Schedule 8 applies in circumstances where paragraph 94 is in point.
8. Subsection (7) ensures that these amendments have effect for 2002/03 and subsequent years.
9. Subsection (8) is a transitional provision. It is possible, though unlikely, that a subsidiary of a JOC is a member of more than one plan or that the JOC and a subsidiary (or 2 subsidiaries) are members of plans operated by different owners. If that is the case this provision ensures that those arrangements may continue.
BACKGROUND NOTE
10. Schedule 8 of Finance Act 2000 introduced and provided rules for the operation of employee share ownership plans. Such plans have recently been rebranded as share incentive plans (?SIPs?). The aim is to foster share ownership in a company by providing for plans which are open to the whole of a company's workforce.
11. SIPs provide tax advantages by granting exemptions from income tax charges that would otherwise arise on the grant, holding and disposal of shares awarded by reason of the employment. There are however consequential charges in certain circumstances in connection with an approved SIP, for example where the employee disposes of the shares before the end of the required holding period.