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Detailed explanation of the Employee Share Schemes Act 2002 (ESSA 2002)

Employee participation in SIP trusts

Section 1(2) Employee Share Schemes Act 2002 (ESSA 2002) enables companies to involve their employees more closely in the operation of the Share Incentive Plan by setting up a board of trustees for the Plan which may include employee representatives. The provision provides a framework for this. It is not obligatory. Two new model trust deeds will be made available shortly to support this - one for larger companies and one for smaller ones.

Corporation Tax deduction

Section 1(3) allows a company a corporation tax deduction for money paid to its SIP trust after 5 April 2003. The deduction is dependent on the company's payment being used by the trustees to purchase shares in the company. The shares purchased must not be from a company and the trust must acquire not less than 10% of the total ordinary share capital of the company in the year immediately following the initial purchase of shares made with this money. This allows time to administer and pay for a substantial acquisition of this sort. Shares already awarded to employees under the Share Incentive Plan, as long as they continue to be subject to the Plan, count towards the calculation of the 10% holding of the trust (sub-paragraph 1 (3)).

Section 1(4) provides for withdrawal of the full amount of the deduction if at least 30% of the shares acquired with the payment have not been distributed to employee beneficiaries within 5 years, or if all the shares acquired with the payment are not distributed within 10 years. Where the deduction has been withdrawn and the relevant shares are subsequently transferred to employees the company can claim a deduction for the period of account in which all the shares are finally transferred.

Paragraph 1(6) limits the benefit of the relief to awards of shares made to Schedule E taxpayers.


Company makes a payment to a SIP trust of £1000 to purchase 800 shares from the owner. Company claims a deduction of £1000.

3 years later the SIP distributes all the shares bought but two of the recipients are not Schedule E taxpayers. These two received a total of 100 shares. So, 1/8 (£125) of the original deduction is treated as a trading receipt of the company for the period of account in which the shares are awarded to the two non-Sch E taxpayers.

Corporation Tax Deductions - Supplementary changes

Section 2 ESSA 2002 introduces consequential changes to the main Share Incentive Plan legislation at Schedule 8 to Finance Act 2000.

Paragraph 108 Schedule 8 FA 2000 is amended (section 2 (2)) to prevent a deduction being given twice: once when the payment is made to purchase the shares, and again under normal SIP rules when the trustees distribute the shares to employees.

If the SIP has its approval withdrawn then the amendment to paragraph 113 of Schedule 8 FA 2000 (Section 2 (3)) allows the benefit of the new corporation tax deduction to be withdrawn.

Where a SIP is terminated and there are still shares to be transferred to employees the amendment to paragraph 121 of Schedule 8 FA 2000 (Section 2 (4)) sets out the method for clawing back the corporation tax deduction given when the shares were purchased. For example, some of the shares may have been awarded upon termination of the plan but the trustees may not have had time to distribute the balance. In those circumstances the deduction would be partly withdrawn. The new rules allow the withdrawal of the benefit of an appropriate proportion of the deduction based on the proportion of shares that are not awarded to employees.

Deductions - Income Tax and Capital Gains

Section 3 ESSA 2002 makes three changes to the income tax and capital gains parts of Schedule 8 Finance Act 2000.

Paragraph 88 Schedule 8 is amended (Section 3 (2)) to extend to 10 years the time the trustees have to award shares, acquired with the money in respect of which the CT deduction has been given, without having to pay tax on any dividends they receive from those shares.

Paragraph 98 is also amended (Section 3 (3) ) to exempt Share Incentive Plan trustees from capital gains tax on shares they have acquired with the money in respect of which the CT deduction has been given during the time they have to award them to employees.

And finally paragraph 100 is amended (section 3 (4)) so that the shares acquired with the CT deduction are treated as a separate class of shares for the purposes of capital gains tax share identification.'