Section 14, Schedule 2: Tax Advantaged Employee Share Schemes
Summary
1.Section 14 introduces Schedule 2 which amends the legislation relating to the four tax advantaged employee share schemes - Share Incentive Plans (SIP), Save As You Earn Option Schemes (SAYE), Company Share Option Plans (CSOP) and Enterprise Management Incentives (EMI). These changes give effect to recommendations of the Office of Tax Simplification (OTS). They aim to simplify the employee share scheme rules where these may create undue complexities or unnecessary administrative burdens for scheme users. Most of the changes will take effect on the date Finance Act 2013 receives Royal Assent. Changes under Part 6 of the Schedule relating to the reinvestment of cash dividends paid on SIP shares come into effect on 6 April 2013.
Details of the Schedule
2.Schedule 2 implements a series of changes across the four tax advantaged schemes.
3.The legislation is set out in Income Tax (Earnings and Pensions) Act 2003 (ITEPA). The provisions on SIP are in sections 488 - 515 and Schedule 2 to ITEPA; on SAYE in sections 516 - 519 and Schedule 3; on CSOP in sections 521 - 526 and Schedule 4; and on EMI in sections 527 - 541 and Schedule 5. All statutory references in this Note are to provisions in ITEPA.
Part 1, Retirement of Participants
4.Paragraph 1 introduces amendments to the rules in Part 7 of ITEPA governing when employees are entitled to favourable tax treatment when they leave employment on retirement or after reaching a specified age. The changes will harmonise retirement rules across SIP, SAYE and CSOP, to allow businesses offering these schemes to align the definition of 'retirement' with their broader policy in this area.
5.Paragraphs 2 - 6 remove the requirement for a SIP scheme to include a 'specified retirement age' in the scheme rules, and make consequential changes.
6.Paragraphs 7 - 13 remove the requirement for an SAYE scheme to include a 'specified age' for retirement in the scheme rules, and repeal the provision allowing exercise of options by those who reach the 'specified age' without retiring.
7.Paragraphs 14 - 15 remove the requirement for a CSOP scheme to specify a retirement age in the scheme rules, where these provide for exercise of the CSOP options on retirement.
8.Paragraph 16 provides that the change under paragraph 11 (the repeal of the current provision in paragraph 33 of Schedule 3 allowing exercise of SAYE options by those who reach the 'specified age' without retiring) does not apply to options granted before Royal Assent. These options can therefore still be exercised with favourable tax treatment where the participant reaches the specified age without retiring.
9.Paragraph 17 provides that other changes in Part 1 have effect from the date the legislation receives Royal Assent, and SIP, SAYE and CSOP schemes approved before these changes take effect are to be treated as if relevant provisions included the modifications made by these paragraphs.
10.Sub-paragraphs (2) and (3) of paragraph 17 introduce a modification in the case of free and matching SIP shares awarded before the date these changes take effect. Any provision within a SIP allowing for forfeiture will not apply to these free and matching shares where the employee retires.
Part 2, 'Good Leavers' (other than Retirees)
11.Paragraph 18 introduces amendments to the rules in Part 7 of ITEPA that govern when those leaving employment (other than on retirement) can qualify for favourable tax treatment as 'good leavers'.
12.Paragraphs 19 - 29 address two issues across the three schemes. First, they lay down simpler and more consistent rules for SAYE and CSOP to govern when employees who leave employment other than on retirement are entitled to favourable tax treatment under the schemes. Second, they set out new rules for SIP, SAYE and CSOP for certain cases where there is a cash takeover of the company whose shares are scheme shares.
13.Paragraph 19 amends section 498 by inserting new subsections (3) - (13), to provide that there will be no income tax liability where shares are withdrawn from a SIP during the holding period, on certain cash takeovers of companies. Various conditions have to be satisfied as to the circumstances in which the shares are withdrawn, the assets available to the participant in exchange for their shares and the nature of the offer that constitutes the cash takeover. By virtue of subsection (6) of section 498, favourable tax treatment is not available where it is reasonable to suppose that the shares would not have been awarded had the cash takeover not been in place or under consideration.
14.Paragraph 20 makes consequential changes to paragraph 37 of Schedule 2 (concerning the power of participants in SIP schemes to direct trustees to accept certain takeover offers). Sub-paragraph (7) clarifies when a qualifying 'general offer' takes place for the purposes of this paragraph. SIP schemes approved before these changes come into force are to be treated as if relevant provisions included the modifications made by this paragraph.
15.Paragraph 21 amends section 519 and inserts new subsections (3A) - (3J), which provide that there will be no income tax liability where an SAYE option is exercised before the third anniversary of grant on certain cash takeovers of companies. Various conditions have to be met as to the circumstances in which the option is exercised, the assets available to the participant in exchange for the shares under option and the nature of the offer that constitutes the cash takeover. By virtue of new subsections (3A)(d) and (3A)(e) of section 519, favourable tax treatment is not available where the cash takeover was in place or under consideration at the time it was decided to grant the option. New subsection (3A)(g) makes availability of this favourable tax treatment subject to an anti-avoidance condition.
16.Paragraph 23 inserts new sub-paragraphs (2)(c) and (d) into paragraph 34 of Schedule 3, to provide that the scheme rules must allow for exercise of SAYE options when employment ceases in relation to a transfer within the meaning of Transfer of Undertakings (Protection of Employment) Regulations, and certain cases of companies ceasing to be associated with the company organising the scheme on a change of control.
17.Paragraphs 24 and 25 amend paragraphs 37 and 38 Schedule 3 to extend the circumstances in which exercise of SAYE options is permitted on the occurrence of certain company events within the Companies Act 2006. Sub-paragraphs (2) of paragraph 24 and (3) of paragraph 25 clarify when a qualifying 'general offer' can take place for the purposes of paragraphs 37 and 38. SAYE schemes approved before these changes come into force are to be treated as if relevant provisions included the modifications made by this paragraph.
18.Paragraph 26 amends section 524 concerning CSOP.
19.Sub-paragraphs (2) - (4) make amendments to subsection (2B) of section 524, to extend the circumstances in which favourable tax treatment is available where CSOP options are exercised before the third anniversary of the date on which they were granted. New subsections (2B)(a)(ii) and (a)(iii) apply to those exercising CSOP options when employment ceases in relation to a transfer within the meaning of Transfer of Undertakings (Protection of Employment) Regulations; and in the case of group schemes where the company employing an individual ceases to be controlled by the company organising the scheme. Several consequential changes are also made.
20.Sub-paragraph (5) of paragraph 26 inserts new subsections (2E) - (2N) in section 524, which provide that there will be no income tax liability where a CSOP option is exercised before the third anniversary of grant on certain cash takeovers of companies. Various conditions have to be met as to the circumstances in which the option is exercised, the assets available to the participant in exchange for the shares under option and the nature of the offer that constitutes the cash takeover. By virtue of new subsections (2E)(d) and (2E)(e) of section 524, favourable tax treatment is not available where the cash takeover was in place or under consideration at the time it was decided to grant the option. New subsection (2E)(g) makes availability of this favourable tax treatment subject to an anti-avoidance condition.
21.Paragraphs 27 and 28 make consequential changes to Part 5 of Schedule 4.
22.Paragraph 29 extends the circumstances in which exercise of CSOP options is permitted, to cover certain company events within the Companies Act 2006 and certain offers to acquire the share capital of the company.
23.Paragraph 30 amends paragraph 26 Schedule 4 to extend the circumstances in which exchange of CSOP options is permitted on company reorganisation, to include certain company events within the Companies Act 2006. It also clarifies when a 'general offer' will be a company reorganisation for the purposes of this paragraph. CSOP schemes approved before this change comes into force are to be treated as if relevant provisions included the modifications made by this paragraph.
24.Paragraph 31 is concerned with the circumstances in which EMI options can be exercised on the occurrence of certain company reorganisations. It clarifies when a 'general offer' will be a company reorganisation for the purposes of paragraph 39 of Schedule 5. Paragraph 31 takes effect from a date to be specified by Treasury Order.
Part 3, Material Interest Rules
25.Paragraph 32 introduces amendments to the rules on 'material interest' in Part 7 of ITEPA for SIP, SAYE and CSOP, under which employees are not allowed to participate in these schemes if, broadly, they own more than 25 per cent of the ordinary share capital of a company (or in some cases the assets of the business).
26.Paragraphs 33 - 38 remove the material interest requirement for determining whether an individual is eligible to participate in a SIP scheme and make consequential changes. The changes have effect from the date the legislation receives Royal Assent, and SIP schemes approved before these changes take effect are to be treated as if relevant provisions included the modifications made by these paragraphs.
27.Paragraphs 39 - 43 remove the material interest requirement for determining whether an individual is eligible to participate in an SAYE option scheme, and make consequential changes. These changes have effect from the date the legislation receives Royal Assent, and SAYE schemes approved before these changes take effect are to be treated as if relevant provisions included the modifications made by these paragraphs.
28.Paragraph 44 amends the CSOP legislation by adjusting from 25 to 30 per cent the figure for determining whether an individual has a material interest in the share capital or assets of the company. The change has effect from the date the legislation receives Royal Assent, and CSOP schemes approved before these changes take effect are to be treated as if relevant provisions included the modifications made by this paragraph.
Part 4, Restricted Shares
29.Paragraph 45 introduces changes to Part 7 of ITEPA as it relates to the use of restricted shares in SIP, SAYE and CSOP.
30.Paragraphs 47 - 51 amend Schedule 2 to omit the requirement that shares awarded under a SIP may be subject to only certain kinds of restrictions, and make consequential changes. Paragraph 50 introduces new sub-paragraph (2A) of paragraph 43 of Schedule 2, which provides that partnership shares may not be subject to forfeiture.
31.Paragraph 52 sets out a requirement at new sub-paragraphs (2)(aa) and (3)(aa) of paragraph 75 of Schedule 2 for employees to be provided with details of any restrictions applying to SIP shares.
32.Paragraph 53 makes consequential changes to paragraph 84 of Schedule 2 concerning disqualifying events.
33.Paragraph 55 amends paragraph 92 of Schedule 2 to provide that, for the purposes of Schedule 2, SIP shares subject to restrictions are to be valued as if they were not restricted.
34.Paragraphs 56 and 57 set out a definition of a 'restriction' in relation to shares for the purposes of the SIP code and make consequential amendments.
35.Paragraph 58 provides that the changes take effect from the date the legislation receives Royal Assent and apply only to shares awarded after that date. SIP schemes approved before these changes take effect, whose scheme rules contain provisions of the type modified by paragraphs 46 - 57, are treated as if any such modification had been made.
36.Paragraphs 59 - 61 amend Schedule 3 to remove the requirement that shares to which an SAYE scheme can apply may be subject to only certain kinds of restrictions, and make consequential changes.
37.Paragraph 62 sets out requirements at new sub-paragraphs (5) and (6) of paragraph 28 of Schedule 3 for employees to be notified of the detail of restrictions applying to SAYE shares at the time options are granted; and for restricted shares to be valued as if they were not restricted in determining the price at which shares may be acquired.
38.Paragraph 63 introduces a rule at new sub-paragraph (7) of paragraph 39 of Schedule 3 in relation to exchanges of SAYE share options, requiring restricted shares to be valued as if they were not restricted.
39.Paragraphs 65 - 66 amend paragraph 48 of Schedule 3 to provide a definition of a 'restriction' in relation to shares for the purposes of the SAYE code, and make consequential amendments.
40.Paragraph 67 provides that the amendments take effect from the date the legislation receives Royal Assent in relation to options granted after that date. SAYE schemes approved before the present changes take effect, whose scheme rules contain provisions of the type modified by paragraphs 59 - 66, are treated as if any such modification had been made.
41.Paragraph 68 amends paragraph 6 of Schedule 4, to provide at new sub-paragraph (4) that when calculating the limit on the value of shares subject to a CSOP, shares subject to restrictions are valued as if they were not restricted.
42.Paragraphs 69 - 71 amend Part 4 of Schedule 4 to remove the requirement that shares to which a CSOP can apply may be subject to only certain kinds of restriction, and make consequential changes.
43.Paragraph 72 sets out requirements at new sub-paragraphs (5) and (6) of paragraph 22 of Schedule 4 for employees to be notified of the detail of restrictions applying to CSOP shares at the time options are granted; and for restricted shares to be valued as if they were not restricted in determining the price at which shares may be acquired.
44.Paragraph 73 introduces a rule at new sub-paragraph (7) of paragraph 27 of Schedule 4 in relation to exchanges of share options, requiring restricted shares to be valued as if they were not restricted.
45.Paragraphs 75 - 76 amend paragraph 36 of Schedule 4 to provide a definition of a 'restriction' in relation to shares for the purposes of the CSOP code, and make consequential amendments.
46.Paragraph 77 provides that the requirement for valuing restricted CSOP shares as if they were not restricted (paragraph 68 of this Schedule) does not apply in relation to options granted before Royal Assent. All other changes to the CSOP code take effect from the date the legislation receives Royal Assent. CSOP schemes approved before these changes take effect, whose scheme rules contain provisions of the type modified by paragraphs 68 - 76, are treated as if any such modification had been made.
Part 5, Share Incentive Plans: Partnership Shares
47.Paragraph 78 introduces amendments to paragraph 52 of Schedule 2 of ITEPA in relation to the allocation of SIP shares where a company allows employees to purchase these shares by deduction from salary over a period of time not exceeding 12 months, referred to in the legislation as an 'accumulation period'.
48.Paragraph 79 inserts new sub-paragraphs (2A), (3A) and (3B) of paragraph 52 of Schedule 2, to introduce a revised method for determining the number of shares awarded to an employee when applying money deducted in an accumulation period. Companies are allowed to make a choice between three possible methods of valuing the shares in these cases; and whichever method is chosen must be specified in the company’s partnership share agreement.
49.Paragraph 80 amends sub-paragraph 3(c) of paragraph 75 of Schedule 2 to introduce a requirement for the SIP trustees to inform scheme participants of the basis on which the number of shares allocated was determined.
50.Paragraph 81 provides that these changes take effect from the date the legislation receives Royal Assent, and SIP trust instruments in force on that date have effect as if they included the modifications made by paragraph 79.
Part 6, Share Incentive Plans: Dividend Shares
51.Paragraph 82 introduces amendments to Part 8 of Schedule 2 of ITEPA in relation to SIP 'dividend shares'.
52.Paragraphs 83 - 86 provide that a company may decide what amount of the cash dividends in respect of plan shares is to be reinvested in dividend shares. Companies may apply their own limits for this purpose. This change takes effect from the date the legislation receives Royal Assent, and SIP schemes approved before the change takes effect are to be treated as if relevant provisions included the modifications made by these paragraphs.
53.Paragraphs 87 - 89 remove the £1,500 annual limit on reinvestment of cash dividends in respect of plan shares and make consequential changes. Paragraph 90 removes the three year time limit for reinvestment and makes consequential changes. The changes introduced by paragraphs 87 - 90 apply for the tax year 2013-14 onwards. SIP schemes approved before 6 April 2013 which provide for the reinvestment of dividend shares are treated as if they include the modifications made by these paragraphs.
Part 7, Share Incentive Plans: Employee Share Ownership Trusts
54.Paragraph 91 introduces amendments to Part 9 of Schedule 2 of ITEPA.
55.Paragraphs 92 and 93 remove the requirement in paragraph 78 of Schedule 2 for the SIP trust instrument to include a provision in relation to the acquisition by the SIP trustees of shares from qualifying employee share ownership trusts, and make consequential changes. The change takes effect from the date the legislation receives Royal Assent. Any SIP trust instrument in force on that date the legislation takes effect has effect with the omission of the provision deleted by paragraph 93.
Part 8, Enterprise Management Incentives: Consequences of Disqualifying Events
56.Paragraph 94 amends section 532 ITEPA to extend from 40 to 90 days the time available for those holding qualifying EMI options to exercise them with favourable tax treatment after a 'disqualifying event' occurs. The change takes effect from the date the legislation receives Royal Assent.
Background
57.SIP is an 'all employee' scheme under which employees may purchase 'partnership' shares out of their pre-tax (gross) salary; be awarded 'matching' or 'free' shares by their employer; or reinvest dividends earned on SIP shares into 'dividend' shares.
58.SAYE is an 'all employee' share option scheme under which employees save out of taxed earnings and can use their savings to purchase shares in their company at a discounted price.
59.CSOP is a scheme under which selected employees may be awarded options to purchase shares in their company.
60.EMI is a scheme targeted on small and medium sized businesses carrying out certain trades, under which selected employees may be awarded share options in their company.
61.The Government asked the OTS in 2011 to evaluate the four tax advantaged employee share schemes, identify areas where they created undue complexities or disproportionate administrative burdens for scheme users, and make recommendations on how the schemes could be simplified.
62.The OTS report was published on the HM Treasury website on 6 March 2012. It contained a series of recommended changes to the underlying legislation and related provisions.
63.Draft legislation, addressing the OTS recommendations the Government had decided to implement, was published for consultation on 11 December 2012.
