Finance Act 2000

Section 62.

SCHEDULE 14 U.K. Enterprise management incentives

Part I U.K. Introductory

Qualifying options U.K.

1 (1) In this Schedule a “qualifying option” means an option—

(a) in relation to which the requirements of this Schedule are met at the time the option is granted, and

(b) of which notice is given to the Inland Revenue in accordance with paragraph 2.

(2) The requirements of this Schedule are—

(a) the general requirements in Part II of this Schedule,

(b) that the company whose shares are the subject of the option is a qualifying company (see Part III of this Schedule),

(c) that the individual to whom the option is granted is an eligible employee in relation to that company (see Part IV of this Schedule),

(d) that the option is granted to the employee by reason of his employment—

(i) with that company, or

(ii) if that company is a parent company, with that company or another group company, and

(e) the requirements of Part V of this Schedule as to the terms of the option, the circumstances in which it is granted and other matters.

(3) In this Schedule, in relation to an option—

(a) references to “the relevant company" are to the company whose shares are the subject of the option, and

(b) references to “the employer company" are to the company by reference to which the requirement in sub-paragraph (2)(d) is met.

Notice of option to be given to Inland Revenue U.K.

2 (1) For an option to be a qualifying option notice of the option must be given to the Inland Revenue within 30 days after the grant of the option.

(2) The notice must—

(a) be given by the employer company, and

(b) be in a form required or authorised by the Inland Revenue.

(3) The notice must contain, or be supported by, such information as the Inland Revenue may require for the purpose of determining whether the requirements of this Schedule are met.

(4) The notice must also contain—

(a) a declaration by a director, or the secretary, of the employer company—

(i) that in his opinion the requirements of this Schedule are met in relation to the option, and

(ii) that the information provided is to the best of his knowledge correct and complete, and

(b) a declaration by the individual to whom the option was granted that he meets the requirement of paragraph 29 (commitment of working time) in relation to the option.

Correction of notice by Revenue U.K.

3 (1) The Inland Revenue may amend a notice given under paragraph 2 so as to correct obvious errors or omissions in the notice.

(2) A correction under this paragraph is made by notice to the employer company.

(3) No such correction may be made more than nine months after the day on which the notice under paragraph 2 was given to the Inland Revenue.

(4) A correction under this paragraph is of no effect if the employer company within three months from the date of issue of the notice of correction gives notice rejecting the correction.

Notice of enquiry U.K.

4 (1) The Inland Revenue may enquire into an option of which notice is given under paragraph 2 if they give notice to the employer company of their intention to do so in accordance with this paragraph.

(2) Where notice is given under paragraph 2, the Inland Revenue may enquire into whether paragraph 29 (commitment of working time) is met by the individual to whom the option was granted if they give him notice of their intention to do so in accordance with this paragraph.

(3) The Inland Revenue shall give a copy of any notice under sub-paragraph (2) to the employer company.

(4) Notice of enquiry may be given at any time within the period of 12 months beginning with the end of the period of 30 days mentioned in paragraph 2(1) (the period within which notice under that paragraph must be given).

(5) Notice of enquiry may be given at any time if the Inland Revenue discover that any of the information provided in or in connection with the notice under paragraph 2 was false or misleading in a material particular.

(6) An option that has been the subject of one notice of enquiry under sub-paragraph (1) or (2) may not be the subject of another notice under the same sub-paragraph, unless it is given by virtue of sub-paragraph (5).

Completion of enquiry U.K.

5 (1) An enquiry under paragraph 4(1) is completed when the Inland Revenue by notice inform the employer company that they have completed their enquiry and state their decision whether the requirements of this Schedule are met in relation to the option.

(2) If the Inland Revenue conclude that the requirements of this Schedule are not met, they must also give notice of that decision to the individual to whom the option was granted.

(3) An enquiry under paragraph 4(2) is completed when the Inland Revenue by notice inform the individual concerned and the employer company that they have completed their enquiry and state their decision whether the requirement of paragraph 29 (commitment of working time) is met by that individual in relation to the option.

(4) References in this Part to a “closure notice" are to a notice under sub-paragraph (1) or (3).

(5) A closure notice takes effect when it is issued.

(6) An application may be made by—

(a) the employer company, or

(b) in a case within paragraph 4(2), the individual concerned,

for a direction that the Inland Revenue give a closure notice within a specified period.

(7) An application under sub-paragraph (6) must be made to the General Commissioners or, if the applicant so elects (in accordance with section 46(1) of the M1 Taxes Management Act 1970), to the Special Commissioners.

(8) Any such application shall be heard and determined in the same way as an appeal.

(9) The Commissioners hearing the application shall give a direction unless they are satisfied that the Inland Revenue have reasonable grounds for not giving a closure notice within a specified period.

Marginal Citations

M1 1970 c. 9.

Effect of enquiry U.K.

6 (1) If the Inland Revenue do not give notice of enquiry, the requirements of this Schedule are taken to be met in relation to the option.

(2) If the Inland Revenue do give notice of enquiry, their decision stated in the closure notice is conclusive as to whether the requirements of this Schedule are met in relation to the option, subject—

(a) if their decision is that the requirements are not met, to the outcome of any appeal against that decision;

(b) if their decision is that the requirements are met, to the outcome of any further enquiry under paragraph 4(5) (enquiry arising from discovery of false or misleading information).

(3) This paragraph does not affect the provisions of paragraphs 47 to 53 (which relate to disqualifying events).

Appeals U.K.

7 (1) The employer company may appeal against a decision of the Inland Revenue—

(a) that notice of the grant of the option was not given in accordance with paragraph 2, or

(b) that the requirements of this Schedule are not met in relation to the option.

(2) An individual may appeal against a decision of the Inland Revenue that he does not meet the requirement of paragraph 29 (commitment of working time).

(3) Notice of the appeal must be given to the Inland Revenue within 30 days after the closure notice is given to the employer company or individual.

(4) The appeal lies to the General Commissioners or, if the employer company or individual so elects (in accordance with section 46(1) of the M2 Taxes Management Act 1970), to the Special Commissioners.

Marginal Citations

M2 1970 c. 9.

Part II U.K. General requirements

Introduction U.K.

8 An option is not a qualifying option unless the requirements of this Part of this Schedule are met as to—

(a) the purpose for which the option is granted (see paragraph 9),

(b) the maximum entitlement of an employee (see paragraph 10), and

(c) the maximum number of employees who can hold qualifying options (see paragraph 11).

Purpose of granting the option U.K.

9 An option is a qualifying option only if it is granted for commercial reasons in order to recruit or retain a key employee in a company, and not as part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax.

Maximum entitlement of employee U.K.

10 (1) An employee may not hold unexercised qualifying options which—

(a) are in respect of shares with a total value of more than £100,000, and

(b) were granted by reason of his employment—

(i) with one company, or

(ii) with two or more companies which are members of the same group.

(2) An option is not a qualifying option if the limit in sub-paragraph (1) is already exceeded at the time it is granted.

(3) If the grant of an option causes that limit to be exceeded, the option is not a qualifying option so far as it relates to the excess.

(4) Where by reason of his employment with one company, an employee has been granted qualifying options in respect of shares with a total value of £100,000 (whether or not they have been exercised or released), any further option granted by reason of his employment with—

(a) that company, or

(b) if it is a member of a group, any company that is a member of that group,

within three years of the date of the grant of the last qualifying option is not a qualifying option.

(5) Where, by reason of his employment with two or more companies which are members of the same group, an employee has been granted qualifying options in respect of shares with a total value of £100,000 (whether or not they have been exercised or released), any further option granted, by reason of his employment with any member of that group, within three years of the date of the grant of the last qualifying option is not a qualifying option.

(6) Where, at the time an option is granted to an employee, he holds unexercised CSOP options granted by reason of his employment with—

(a) the employer company, or

(b) if that company is a member of a group, any member of that group,

those options shall be treated for the purposes of this paragraph as if they were unexercised qualifying options.

For this purpose a “CSOP option" is an option to acquire shares under a scheme approved under Schedule 9 to the Taxes Act 1988 by reference to the requirements of Part IV of that Schedule (non-savings-related share option schemes).

(7) For the purposes of this paragraph—

(a) the value of shares means the market value at the time the option is granted of shares of the same class as those that may be acquired by exercise of the option; and

(b) an option is treated as granted in respect of the maximum number of shares that may be acquired under it.

(8) For the purposes of this paragraph the market value of shares subject to restrictions or risk of forfeiture shall be determined as if there were no such restriction or risk.

For this purpose shares are “subject to risk of forfeiture” if the interest that may be acquired is only conditional within the meaning of section 140C of the Taxes Act 1988.

Number of employees who may hold qualifying options U.K.

11 Not more than 15 employees may hold qualifying options in respect of shares in the relevant company at the same time.

Part III U.K. Qualifying companies

Introduction U.K.

12 A qualifying company is a company in relation to which the requirements of this Part of this Schedule are met as to—

(a) independence (see paragraph 13),

(b) having only qualifying subsidiaries (see paragraph 14),

(c) gross assets (see paragraph 16), and

(d) trading activities (see paragraph 17).

The independence requirement U.K.

13 (1) The independence requirement is that the company is not—

(a) a 51% subsidiary of another company, or

(b) under the control of another company (or of another company and any other person connected with that other company), without being a 51% subsidiary of that other company,

and that no arrangements are in existence by virtue of which the company could become such a subsidiary or fall under such control.

(2) For the purposes of this requirement arrangements with a view to a qualifying exchange of shares (within the meaning of paragraph 60) shall be disregarded.

(3) In this paragraph “control” has the meaning given by section 840 of the Taxes Act 1988.

The qualifying subsidiaries requirement U.K.

14 (1) A company that has one or more subsidiaries is not a qualifying company unless every subsidiary of the company is a qualifying subsidiary.

(2) For this purpose—

(a) “subsidiary” means any company which the company controls, either on its own or together with any person connected with it, and

(b) the question whether a person controls a company shall be determined in accordance with section 416(2) to (6) of the Taxes Act 1988.

Meaning of “qualifying subsidiary" U.K.

15 (1) A company ( “the subsidiary”) is a qualifying subsidiary of another company ( “the company”) if the following conditions are met.

(2) The conditions are—

(a) that the company or another of its subsidiaries possesses not less than 75% of the issued share capital of, and not less than 75% of the voting power in, the subsidiary;

(b) that the company or another of its subsidiaries would—

(i) in the event of a winding up of the subsidiary, or

(ii) in any other circumstances,

be beneficially entitled to receive not less than 75% of the assets of the subsidiary which would then be available for distribution to the shareholders of the subsidiary;

(c) that the company or another of its subsidiaries is beneficially entitled to not less than 75% of any profits of the subsidiary which are available for distribution to the shareholders of the subsidiary;

(d) that no person other than the company or another of its subsidiaries has control of the subsidiary within the meaning of section 840 of the Taxes Act 1988; and

(e) that no arrangements are in existence by virtue of which the conditions in paragraphs (a) to (d) would cease to be met.

(3) The subsidiary shall not be regarded, at a time when it or another company is being wound up, as having ceased on that account to be a company in relation to which the conditions in sub-paragraph (2) are met if—

(a) the conditions in that sub-paragraph would be met apart from the winding up, and

(b) the winding up is for commercial reasons and is not part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax.

(4) The subsidiary shall not be regarded, at any time when arrangements are in existence for the disposal by the company or (as the case may be) by another subsidiary of the company of all its interest in the subsidiary in question, as having ceased on that account to be a qualifying subsidiary if the disposal is to be for commercial reasons and not part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax.

The gross assets requirement U.K.

16 (1) The gross assets requirement in the case of a single company is that the value of the company’s gross assets does not exceed £15 million.

(2) The gross assets requirement in the case of a parent company is that the consolidated value of the group assets does not exceed £15 million.

(3) The consolidated value of the group assets means the aggregate value of the gross assets of the group, disregarding any that consist in rights against, or shares in or securities of, another company in the group.

The trading activities requirement U.K.

17 (1) The trading activities requirement in the case of a single company is that the company—

(a) disregarding any incidental purposes, exists wholly for the purpose of carrying on one or more qualifying trades, and

(b) is carrying on a qualifying trade or preparing to do so.

(2) The trading activities requirement in the case of a parent company is that—

(a) the business of the group does not consist wholly or as to a substantial part in the carrying on of non-qualifying activities, and

(b) at least one group company—

(i) disregarding any incidental purposes, exists wholly for the purpose of carrying on one or more qualifying trades, and

(ii) is carrying on a qualifying trade or preparing to do so.

(3) The business of the group means what would be the business of the group if the activities of the group companies taken together were regarded as one business.

(4) For the purposes of determining whether a company falls within sub-paragraph (1)(a) or (2)(b)(i), the purposes for which it exists shall be disregarded to the extent that they consist in the carrying on of the following activities—

(a) in the case of a single company, the holding and managing of property used by the company for one or more qualifying trades carried on by it, and

(b) in the case of a group company, any activities within sub-paragraph (5).

(5) For the purposes of determining the business of a group, activities of a group company shall be disregarded to the extent that they consist in—

(a) the holding of shares in or securities of, or the making of loans to, another group company; or

(b) the holding and managing of property used by a group company for the purposes of one or more qualifying trades carried on by a group company; or

(c) incidental activities of a company which meets the trading activities requirement for a single company.

(6) In sub-paragraph (2)(a) “non-qualifying activities” means—

(a) excluded activities other than—

(i) the letting of ships to which paragraph 21 applies (ships other than oil rigs or pleasure craft) in circumstances where the requirements of sub-paragraph (2) of that paragraph are met; or

(ii) the receiving of royalties or licence fees within paragraph 22 in circumstances where the requirements mentioned in sub-paragraph (2) of that paragraph are met; or

(b) activities carried on otherwise than in the course of a trade.

(7) In this paragraph—

(a) “incidental purposes” means purposes having no significant effect (other than in relation to incidental matters) on the extent of the company’s activities; and

(b) “incidental activities” means activities carried on in pursuance of incidental purposes.

Meaning of “qualifying trade" U.K.

18 (1) A trade is a qualifying trade if—

(a) it is carried on wholly or mainly in the United Kingdom,

(b) it is conducted on a commercial basis and with a view to the realisation of profits, and

(c) it does not consist wholly or as to a substantial part in the carrying on of excluded activities.

(2) The carrying on of activities of research and development from which it is intended that a connected qualifying trade will be derived or benefit is treated as the carrying on of a qualifying trade.

But preparing to carry on such activities does not count as preparing to carry on a qualifying trade.

(3) For the purposes of sub-paragraph (2) a “connected qualifying trade” means a qualifying trade carried on—

(a) by the company carrying on the activities of research and development, or

(b) if that company is a member of a group, by any other group company.

Excluded activities U.K.

19 (1) The following are excluded activities—

(a) dealing in land, in commodities or futures or in shares, securities or other financial instruments;

(b) dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution;

(c) banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;

(d) leasing (including letting ships on charter or other assets on hire) or receiving royalties or licence fees;

(e) providing legal or accountancy services;

(f) property development;

(g) farming or market gardening;

(h) holding, managing or occupying woodlands, any other forestry activities or timber production;

(i) operating or managing hotels or comparable establishments, or managing property used as a hotel or comparable establishment; and

(j) operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home.

(2) Sub-paragraph (1) is supplemented by the following provisions—

paragraph 20 (wholesale and retail distribution);

paragraph 21 (leasing of ships);

paragraph 22 (receipt of royalties and licence fees);

paragraph 23 (property development);

paragraph 24 (hotels and comparable establishments);

paragraph 25 (nursing homes and residential care homes); and

paragraph 26 (provision of facilities for another business).

Excluded activities: wholesale and retail distribution U.K.

20 (1) This paragraph supplements paragraph 19(1)(b).

(2) A trade of wholesale distribution is one in which the goods are offered for sale and sold to persons for resale by them, or for processing and resale by them, to members of the general public for their use or consumption.

(3) A trade of retail distribution is one in which the goods are offered for sale and sold to members of the general public for their use or consumption.

(4) A trade is not an ordinary trade of wholesale or retail distribution if—

(a) it consists, to a substantial extent, in dealing in goods of a kind which are collected or held as an investment, or in that activity and any other excluded activity taken together, and

(b) a substantial proportion of those goods are held by the company for a period which is significantly longer than the period for which a vendor would reasonably be expected to hold them while endeavouring to dispose of them at their market value.

(5) In determining whether a trade carried on by any person is an ordinary trade of wholesale or retail distribution, regard shall be had to the extent to which it has the following features—

(a) the goods are bought by that person in quantities larger than those in which he sells them;

(b) the goods are bought and sold by that person in different markets;

(c) that person employs staff and incurs expenses in the trade in addition to the cost of the goods and, in the case of a trade carried on by a company, to any remuneration paid to any person connected with it;

(d) there are purchases or sales from or to persons who are connected with that person;

(e) purchases are matched with forward sales or vice versa;

(f) the goods are held by that person for longer than is normal for goods of the kind in question;

(g) the trade is carried on otherwise than at a place or places commonly used for wholesale or retail trade;

(h) that person does not take physical possession of the goods;

(6) The features specified in sub-paragraph (5)(a) to (c) are indications that the trade is such an ordinary trade.

Those in sub-paragraph (5)(d) to (h) are indications of the contrary.

Excluded activities: leasing of ships U.K.

21 (1) This paragraph supplements paragraph 19(1)(d) so far as it relates to the leasing of ships other than oil rigs or pleasure craft.

(2) A trade shall not be treated as not being a qualifying trade by reason only of its consisting in letting such ships on charter if the following requirements are met—

(a) every ship let on charter by the company carrying on the trade is beneficially owned by the company;

(b) every ship beneficially owned by the company is registered in the United Kingdom;

(c) the company is solely responsible for arranging the marketing of the services of its ships; and

(d) the conditions mentioned in sub-paragraph (3) are satisfied in relation to every letting of a ship on charter by the company.

(3) The conditions are that—

(a) the letting is for a period not exceeding 12 months and no provision is made at any time (whether in the charterparty or otherwise) for extending it beyond that period otherwise than at the option of the charterer;

(b) during the period of the letting there is no provision in force (whether by virtue of being contained in the charterparty or otherwise) for the grant of a new letting to end, otherwise than at the option of the charterer, more than 12 months after that provision is made;

(c) the letting is by way of a bargain made at arm’s length between the company and a person who is not connected with it;

(d) under the terms of the charter the company is responsible as principal—

(i) for taking, throughout the period of the charter, management decisions in relation to the ship, other than those of a kind generally regarded by persons engaged in trade of the kind in question as matters of husbandry; and

(ii) for defraying all expenses in connection with the ship throughout that period, or substantially all such expenses, other than those directly incidental to a particular voyage or to the employment of the ship during that period;

and

(e) no arrangements exist by virtue of which a person other than the company may be appointed to be responsible for the matters mentioned in paragraph (d) on behalf of the company.

(4) In relation to any letting between one company and another where—

(a) one of those companies is the company carrying on the trade and the other is a qualifying subsidiary of that company, or

(b) both companies are qualifying subsidiaries of the company carrying on the trade,

sub-paragraph (3) has effect with the omission of paragraph (c).

(5) Where any of the requirements in sub-paragraph (2) are not met in relation to any lettings, the trade shall not thereby be treated as not a qualifying trade if those lettings and any other excluded activities do not, taken together, amount to a substantial part of the trade.

(6) In this paragraph—

• “oil rig” means any ship which is an offshore installation for the purposes of the M3 Mineral Workings (Offshore Installations) Act 1971; and

• “pleasure craft” means any ship of a kind primarily used for sport or recreation.

Marginal Citations

M3 1971 c. 61.

Excluded activities: receipt of royalties and licence fees U.K.

22 (1) This paragraph supplements paragraph 19(1)(d) so far as it relates to the receipt of royalties and licence fees.

(2) A trade shall not be regarded as not being a qualifying trade by reason only that it consists to a substantial extent in the receiving of royalties or licence fees if the royalties and licence fees (or all but for a part that is not a substantial part in terms of value) are attributable to the exploitation of relevant intangible assets.

(3) For this purpose an intangible asset is a “relevant intangible asset” if the whole or greater part (in terms of value) of it has been created—

(a) by the company carrying on the trade, or

(b) by a company which at all times during which it created the asset was—

(i) the parent company of the company carrying on the trade, or

(ii) a qualifying subsidiary of that parent company.

(4) In this paragraph “intangible asset” means any asset which falls to be treated as an intangible asset in accordance with normal accounting practice.

For this purpose “normal accounting practice” means normal accounting practice in relation to the accounts of companies incorporated in any part of the United Kingdom.

(5) In the case of a relevant asset that is intellectual property, references in this paragraph to the creation of the asset by a company are to its creation in circumstances in which the right to exploit it vests in the company (whether alone or jointly with others).

(6) In sub-paragraph (5) “intellectual property” means—

(a) any patent, trade mark, registered design, copyright, design right, performer’s right or plant breeder’s right; and

(b) any rights under the law of a country or territory outside the United Kingdom which correspond or are similar to those falling within paragraph (a).

Excluded activities: property development U.K.

23 (1) This paragraph supplements paragraph 19(1)(f).

(2) “Property development” means the development of land—

(a) by a company which has, or at any time has had, an interest in the land, and

(b) with the sole or main object of realising a gain from the disposal of an interest in the land when it is developed.

(3) For this purpose “interest in land” means, subject to sub-paragraph (4)—

(a) any estate, interest or right in or over land, including any right affecting the use or disposition of land, or

(b) any right to obtain such an estate, interest or right from another which is conditional on the other’s ability to grant it.

(4) References in this paragraph to an interest in land do not include—

(a) the interest of a creditor (other than a creditor in respect of a rentcharge) whose debt is secured by way of mortgage, an agreement for a mortgage or a charge of any kind over land, or

(b) in the case of land in Scotland, the interest of a creditor in a charge or security of any kind over land.

Excluded activities: hotels and comparable establishments U.K.

24 (1) This paragraph supplements paragraph 19(1)(i).

(2) The reference to a comparable establishment is to a guest house, hostel or other establishment the main purpose of maintaining which is the provision of facilities for overnight accommodation (with or without catering services).

(3) The activities of a person shall not be taken to fall within paragraph 19(1)(i) unless that person has an estate or interest in, or is in occupation of, the hotel or comparable establishment in question.

Excluded activities: nursing homes and residential care homes U.K.

25 (1) This paragraph supplements paragraph 19(1)(j).

(2) “Nursing home” means an establishment that exists wholly or mainly for the provision of nursing care—

(a) for persons suffering from sickness, injury or infirmity, or

(b) for women who are pregnant or have given birth to children.

(3) “Residential care home” means an establishment that exists wholly or mainly for the provision of residential accommodation, together with board and personal care, for persons in need of personal care by reason of—

(a) old age,

(b) mental or physical disability,

(c) past or present dependence on alcohol or drugs,

(d) any past illness, or

(e) past or present mental disorder.

(4) The activities of a person shall not be taken to fall within paragraph 19(1)(j) unless that person has an estate or interest in, or is in occupation of, the nursing home or residential care home in question.

Excluded activities: provision of facilities for another business U.K.

26 (1) Providing services or facilities for a business carried on by another person is an excluded activity if—

(a) the business consists to a substantial extent in excluded activities within paragraph 19(1), and

(b) a controlling interest in the business is held by a person (other than a company of which the company providing the services or facilities is a subsidiary) who also has a controlling interest in the business carried on by the company providing the services or facilities.

(2) Sub-paragraphs (3) to (5) define what is meant by a controlling interest in a business for the purposes of sub-paragraph (1)(b).

(3) In the case of a business carried on by a company, a person has a controlling interest if—

(a) he controls the company,

(b) the company is a close company and he or an associate of his, being a director of the company, either—

(i) is the beneficial owner of more than 30% of the ordinary share capital of the company, or

(ii) is able, directly or through the medium of other companies or by any other indirect means, to control more than 30% of that share capital,

or

(c) not less than half of the business could, in accordance with section 344(2) of the Taxes Act 1988, be regarded as belonging to him for the purposes of section 343 of that Act.

(4) In any other case, a person has a controlling interest in a business if he is entitled to not less than half of the assets used for, or of the income arising from, the business.

(5) For the purposes of sub-paragraph (3)(a) the question whether a person controls a company shall be determined in accordance with section 416(2) to (6) of the Taxes Act 1988.

(6) For the purposes of this paragraph there shall be attributed to any person any rights or powers of any other person who is an associate of his.

(7) In this paragraph—

• “associate” has the meaning given in section 417(3) and (4) of the Taxes Act 1988, except that in those subsections as they apply for the purposes of this paragraph “relative” does not include a brother or sister;

• “business” includes any trade, profession or vocation; and

• “director” shall be construed in accordance with section 417(5) of the Taxes Act 1988.

Part IV U.K. Eligible employees

Introduction U.K.

27 An individual is an eligible employee in relation to the relevant company if the requirements of this Part of this Schedule are met as to—

(a) employment (see paragraph 28),

(b) commitment of working time (see paragraph 29), and

(c) no material interest (see paragraph 30).

The employment requirement U.K.

28 An employee is an eligible employee in relation to the relevant company only if he is an employee—

(a) of that company, or

(b) if that company is a parent company, of that company or a qualifying subsidiary of that company.

The requirement as to commitment of working time U.K.

29 (1) An employee is an eligible employee in relation to the relevant company only if his committed time amounts to—

(a) at least 25 hours a week, or

(b) if less, 75% of his working time.

(2) An employee’s “committed time” means the time that he is required as an employee in relevant employment to spend—

(a) on the business of the relevant company, or

(b) if the relevant company is a parent company, on the business of the group.

(3) It includes any time which the employee would have been required to spend as mentioned in sub-paragraph (2) but for—

(a) injury, ill-health or disability,

(b) pregnancy, childbirth, maternity or paternity leave or parental leave,

(c) reasonable holiday entitlement, or

(d) not being required to work during a period of notice of termination of employment.

(4) For the purposes of this paragraph an employee is in “relevant employment” if he is employed—

(a) by the relevant company, or

(b) where the relevant company is a parent company, by any group company.

References to an employee beginning or ceasing to be in relevant employment are to his becoming or no longer being so employed.

(5) In sub-paragraph (1)(b) “working time” means—

(a) time spent on remunerative work as an employee or self-employed person, or

(b) time which would have been so spent but for any of the reasons specified in sub-paragraph (3)(a) to (d).

(6) In sub-paragraph (5)(a) “remunerative work” means—

(a) work the income from which is chargeable to tax under Case I of Schedule E, and

(b) work undertaken with a view to profit the profits (if any) from which are (or would be) chargeable to tax under Case I or II of Schedule D,

or, in either case, which would be so chargeable if the employee were resident and ordinarily resident in the United Kingdom.

The “no material interest" requirement U.K.

30 (1) An individual is not an eligible employee in relation to the relevant company if he has a material interest in—

(a) that company, or

(b) if that company is a parent company, any group company.

(2) For the purposes of this paragraph an individual is regarded as having a material interest in a company if—

(a) the individual,

(b) the individual together with one or more associates of his, or

(c) any associate of the individual’s, with or without any other such associates,

has a material interest in the company.

(3) No account shall be taken for the purposes of this paragraph of shares that an individual may acquire under a qualifying option, but once such shares have been acquired they are taken into account.

(4) This paragraph is supplemented—

(a) as regards the meaning of “material interest”, by paragraphs 31 to 33; and

(b) as regards the meaning of “associate”, by paragraph 34 (read with paragraphs 35 and 36).

Meaning of “material interest" U.K.

31 (1) For the purposes of paragraph 30 a material interest in a company means—

(a) beneficial ownership of, or the ability to control, directly or through the medium of other companies or by any other indirect means, more than 30% of the ordinary share capital of the company; or

(b) where the company is a close company, possession of or entitlement to acquire such rights as would, in the event of the winding up of the company or in any other circumstances, give an entitlement to receive more than 30% of the assets that would then be available for distribution among the participators.

(2) In this paragraph—

• “close company” includes a company that would be a close company but for—

  (a)

  section 414(1)(a) of the Taxes Act 1988 (exclusion of companies not resident in the United Kingdom), or

  (b)

  section 415 of that Act (exclusion of certain quoted companies);

• “participator” has the meaning given by section 417(1) of that Act.

(3) This paragraph is supplemented by paragraph 32 (options etc.) and paragraph 33 (shares held by trustees of approved profit-sharing schemes).

Material interest: options etc. U.K.

32 (1) For the purposes of paragraph 31 (meaning of “material interest”) a right to acquire shares (however arising) is treated as a right to control them.

(2) In any case where—

(a) the shares attributed to an individual consist of or include shares which he or another person has a right to acquire, and

(b) the circumstances are such that if that right were to be exercised the shares acquired would be shares which were previously unissued and which the company is contractually bound to issue in the event of the exercise of the right,

then in determining at any time prior to the exercise of the right whether the number of shares attributed to the individual exceeds a particular percentage of the ordinary share capital of the company, that ordinary share capital shall be taken to be increased by the number of unissued shares referred to in paragraph (b).

(3) The references in sub-paragraph (2) to the shares attributed to an individual are to the shares which in accordance with paragraph 31(1)(a) fall to be brought into account in his case to determine whether their number exceeds a particular percentage of the company’s ordinary share capital.

Material interest: shares held by trustees of approved profit-sharing schemes etc. U.K.

33 In applying paragraph 31 (meaning of “material interest”) there shall be disregarded—

(a) the interest of the trustees of—

(i) any profit-sharing scheme approved under Schedule 9 to the Taxes Act 1988, or

(ii) any employee share ownership plan approved under Schedule 8 to this Act,

in any shares which are held by them in accordance with the scheme or plan but which have not been appropriated to, or acquired on behalf of, an individual; and

(b) any rights exercisable by those trustees by virtue of any such interest.

Meaning of “associate" U.K.

34 (1) In paragraph 30 (the “no material interest” requirement) “associate”, in relation to an individual, means—

(a) any relative or partner of that individual,

(b) the trustee or trustees of any settlement in relation to which that individual, or any relative of his (living or dead), is or was a settlor, and

(c) where that individual is interested in any shares or obligations of the company which are subject to any trust, or are part of the estate of a deceased person, the trustee or trustees of the settlement concerned or, as the case may be, the personal representatives of the deceased.

(2) In sub-paragraph (1)(a) and (b) “relative” means husband or wife, parent or remoter forebear, or child or remoter issue.

(3) In sub-paragraph (1)(b) “settlor” and “settlement” have the same meaning as in Chapter IA of Part XV of the Taxes Act 1988 (see section 660G(1) and (2)).

Meaning of “associate": trustees of employee benefit trust U.K.

35 (1) This paragraph applies for the purposes of paragraph 34(1)(c) (meaning of “associate”: trustees of settlement) where an individual is interested as a beneficiary of an employee benefit trust in shares or obligations of a company (“the company”) in relation to which it falls to be determined whether that individual has an interest.

(2) The trustees of the employee benefit trust are not regarded as associates of the individual by reason only of his being so interested if neither—

(a) the individual, nor

(b) the individual together with one or more associates of his, nor

(c) any associate of the individual’s, with or without any other such associates,

has at any time on or after 14th March 1989 been the beneficial owner of, or able (directly or through the medium of other companies or by any other indirect means) to control, more than 30% of the ordinary share capital of the company.

(3) In this paragraph “employee benefit trust” has the same meaning as in paragraph 7 of Schedule 8 to the Taxes Act 1988.

(4) Sub-paragraphs (9) to (12) of that paragraph apply for the purposes of this paragraph in relation to an individual as they apply for the purposes of that paragraph in relation to an employee.

(5) In sub-paragraph (2)(b) and (c) “associate" does not include the trustees of an employee benefit trust by reason only that the individual has an interest in shares or obligations of the trust.

Meaning of “associate": trustees of discretionary trust U.K.

36 (1) This paragraph applies for the purposes of paragraph 34(1)(c) (meaning of “associate”: trustees of settlement) where—

(a) an individual (“the beneficiary”) is one of the objects of a discretionary trust, and

(b) the property subject to the trust has at any time consisted of or included shares or obligations of the company (“the company”) in relation to which it falls to be determined whether that individual has an interest.

(2) If—

(a) the beneficiary has ceased to be eligible to benefit under the discretionary trust by reason of—

(i) an irrevocable disclaimer or release executed by him, or

(ii) the irrevocable exercise by the trustees of a power to exclude him from the objects of the trust,

(b) immediately after the beneficiary ceased to be so eligible, no associate of his was interested in the shares or obligations of the company which were subject to the trust, and

(c) during the period of twelve months ending with the date when the beneficiary ceases to be so eligible, neither he nor any associate of his received any benefit under the trust,

the beneficiary is not regarded by reason only of the matters mentioned in sub-paragraph (1) as having been interested in the shares or obligations of the company at any time during the period of twelve months mentioned in paragraph (c) above.

(3) In sub-paragraph (2) “associate” has the meaning given by paragraph 34, but with the omission of sub-paragraph (1)(c) of that paragraph (trusts and estates).

Part V U.K. Requirements as to terms of option etc.

Introduction U.K.

37 An option is not a qualifying option unless the requirements of this Part of this Schedule are met as to—

(a) the type of shares that may be acquired (see paragraph 38);

(b) when the option is capable of being exercised (see paragraph 39);

(c) the terms being agreed in writing (see paragraph 40); and

(d) the non-assignability of rights (see paragraph 41).

Type of shares that may be acquired U.K.

38 (1) The option must confer a right to acquire shares that—

(a) form part of the ordinary share capital of the relevant company,

(b) are fully paid up, and

(c) are not redeemable.

(2) Shares are not fully paid up for the purposes of sub-paragraph (1)(b) if there is any undertaking to pay cash to the relevant company at a future date.

(3) For the purposes of sub-paragraph (1)(c) “redeemable” shares include shares that may become redeemable at a future date.

Option to be capable of exercise within 10 years U.K.

39 (1) The option must be capable of being exercised within the period of ten years beginning with the date on which it is granted.

(2) Where the exercise of the option is dependent on the fulfilment of conditions, it is taken to be capable of being exercised within the period mentioned in sub-paragraph (1) if the conditions may be fulfilled within that period.

Terms of option to be agreed in writing U.K.

40 (1) The option must take the form of a written agreement between the person granting the option and the employee which meets the following requirements.

(2) The agreement must state—

(a) the date on which the option is granted;

(b) that it is granted under the provisions of this Schedule;

(c) the number, or maximum number, of shares that may be acquired;

(d) the price (if any) payable by the employee to acquire them, or the method by which that price is to be determined; and

(e) when and how the option may be exercised.

(3) The agreement must set out any conditions, such as performance conditions, affecting the terms or extent of the employee’s entitlement.

(4) The agreement must contain details of any restrictions attaching to the shares.

(5) Where the shares that may be acquired by the employee are subject to risk of forfeiture, the agreement must contain details of the conditions.

For this purpose shares are “subject to risk of forfeiture” if the interest that may be acquired is only conditional within the meaning of Section 140C of the Taxes Act 1988.

Non-assignability of rights U.K.

41 An option is not a qualifying option unless the terms on which it is granted—

(a) prohibit the person to whom it is granted from transferring any of his rights under it, and

(b) if they permit its exercise after that person’s death, do not permit such exercise more than one year after the death.

Part VI U.K. Income tax

Introduction U.K.

42 (1) The provisions of this Part of this Schedule give relief from income tax in respect of the grant or exercise of a qualifying option.

(2) Relief in respect of the exercise of a qualifying option applies only to exercise within the period of ten years after—

(a) the grant of the option, or

(b) if it is a replacement option, the grant of the original option.

(3) In this Part the references to the “original option", where there has been one or more replacement options, are to the option that the replacement option (or, if there has been more than one, the first of them) replaced.

Exclusion of charge on grant U.K.

43 Tax is not chargeable under any provision of the Tax Acts in respect of the grant of the option.

Exercise of option to acquire shares at market value U.K.

44 (1) This paragraph applies if the option is to acquire shares at not less than their market value—

(a) at the time the option is granted, or

(b) if it is a replacement option, at the time the original option was granted.

(2) In that case no amount is chargeable to income tax under section 135 of the Taxes Act 1988 (taxation of share options) in respect of the exercise of the option.

(3) This paragraph has effect subject to paragraph 53 (effect of disqualifying event).

Exercise of option to acquire shares at less than market value U.K.

45 (1) This paragraph applies if the option is to acquire shares at less than their market value—

(a) at the time the option is granted, or

(b) if it is a replacement option, at the time the original option was granted.

(2) In that case for the purposes of section 135 of the Taxes Act 1988 (taxation of share options) the amount of the gain realised by the exercise of the option is taken to be—

(a) the amount of the discount, or

(b) if lower, the amount by which the market value of the shares at the time the option is exercised exceeds the amount for which they are acquired.

(3) The amount of the discount means the amount by which the market value of the shares—

(a) at the time the option was granted, or

(b) if it is a replacement option, at the time the original option was granted,

exceeds the amount for which they are acquired.

(4) If the market value of the shares at the time the option is exercised does not exceed the amount for which they are acquired, no amount is chargeable to income tax under section 135 of the Taxes Act 1988 (taxation of share options) in respect of the exercise of the option.

(5) This paragraph has effect subject to paragraph 53 (effect of disqualifying event).

Exercise of option to acquire shares at nil cost U.K.

46 (1) This paragraph applies if the option is to acquire shares at a nil cost.

(2) In that case for the purposes of section 135 of the Taxes Act 1988 (taxation of share options) the amount of the gain realised by the exercise of the option is taken to be—

(a) the market value of the shares—

(i) at the time the option was granted, or

(ii) if it is a replacement option, at the time the original option was granted, or

(b) if lower, the market value of the shares at the time the option is exercised.

(3) This paragraph has effect subject to paragraph 53 (effect of disqualifying event).

Main disqualifying events U.K.

47 (1) The following are “disqualifying events" in relation to a qualifying option—

(a) the relevant company—

(i) becoming a 51% subsidiary of another company, or

(ii) coming under the control of another company (or of another company and any other person connected with that other company), without being a 51% subsidiary of that other company;

(b) the relevant company ceasing to meet the trading activities requirement;

(c) the employee ceasing to be an eligible employee in relation to the relevant company by reason of ceasing to meet—

(i) the requirement in paragraph 28 (the employment requirement), or

(ii) the requirement in paragraph 29 (the requirement as to commitment of working time);

(d) any variation of the terms of the option the effect of which is—

(i) to increase the market value of the shares that are the subject of the option, or

(ii) that the requirements of this Schedule would no longer be met in relation to the option;

(e) any alteration to the share capital of the relevant company that is within paragraph 49 and is made without the prior approval of the Inland Revenue;

(f) a conversion of any of the shares to which the option relates into shares of a different class, except in a case within paragraph 50; and

(g) the grant to the employee of a relevant CSOP option, if immediately after it is granted the employee holds unexercised employee options in respect of shares with a total value of more than £100,000.

(2) A disqualifying event is treated as occurring in relation to a qualifying option if—

(a) the relevant company was a qualifying company at the time the option was granted by reason only of preparations to carry on a qualifying trade, and

(b) either—

(i) the preparations cease to be carried on, or

(ii) the period of two years from the grant of the original option comes to an end,

without the relevant company or, if it is the parent company of a group, any group company beginning to carry on that qualifying trade.

(3) A disqualifying event is also treated as occurring in relation to a qualifying option if in any tax year the employee’s relevant working time amounts to less than 25 hours a week or, if less, 75% of his working time.

(4) This paragraph is supplemented by the following provisions—

paragraph 48 (company reorganisation);

paragraph 49 (alterations of share capital);

paragraph 50 (conversion of shares);

paragraph 51 (grant of CSOP option); and

paragraph 52 (actual relevant working time).

Disqualifying events: company reorganisation U.K.

48 Where a replacement option has been granted (see paragraph 61), if an event within paragraph 47(1)(a) (loss of independence) has occurred in relation to the old option at any time during the period—

(a) beginning at the same time as the period within which the replacement option had to be granted (see paragraph 62), and

(b) ending with the release of the rights under the old option,

that event shall not be regarded as a disqualifying event in relation to the old option.

Disqualifying events: alterations of share capital U.K.

49 (1) An alteration of the share capital of the relevant company is within this paragraph if—

(a) it affects (or but for the occurrence of some other event would affect) the value of the shares which are the subject of the qualifying option, and

(b) it consists of or includes—

(i) the creation, variation or removal of a right relating to any shares in the relevant company,

(ii) the imposition of a restriction relating to any such shares, or

(iii) the variation or removal of a restriction to which any such shares are subject.

For this purpose references to restrictions relating to shares or to which shares are subject, or to rights relating to shares, include restrictions imposed or rights conferred by any contract or arrangement or in any other way.

(2) The Inland Revenue shall not withhold their approval under paragraph 47(1)(e) unless it appears to them that the effect of the alteration would be—

(a) to increase the market value of the shares that are the subject of the qualifying option, or

(b) that the requirements of this Schedule would no longer be met in relation to the option.

(3) Where the Inland Revenue withhold their approval the employer company may appeal against that decision.

(4) Notice of appeal must be given to the Inland Revenue within 30 days after their notice of their decision was given to the employer company.

(5) An appeal under this paragraph lies to the General Commissioners or, if the employer company so elects (in accordance with section 46(1) of the M4 Taxes Management Act 1970), to the Special Commissioners.

Marginal Citations

M4 1970 c. 9.

Disqualifying events: conversion of shares U.K.

50 (1) A conversion of shares is not a disqualifying event if—

(a) the conversion is a conversion of shares of one class only (“the original class”) into shares of one other class only (“the new class”);

(b) all shares of the original class are converted into shares of the new class; and

(c) one of the conditions in sub-paragraph (2) is fulfilled.

(2) The conditions are—

(a) that immediately before the conversion the majority of the relevant company’s shares of the original class are held otherwise than by or for the benefit of—

(i) directors or employees of the relevant company,

(ii) an associated company of the relevant company, or

(iii) directors or employees of such an associated company; and

(b) that immediately before the conversion the relevant company is employee-controlled by virtue of holdings of shares of the original class.

(3) For the purposes of this paragraph “director”, “employee”, “associated company” and “employee-controlled” have the same meaning as in section 140D of the Taxes Act 1988 (convertible shares).

Disqualifying events: grant of CSOP option U.K.

51 (1) This paragraph applies where it falls to be determined whether a disqualifying event within sub-paragraph (1)(g) of paragraph 47 has occurred in relation to a qualifying option (“the qualifying option”) granted to an employee.

(2) For the purposes of that sub-paragraph and this paragraph “CSOP option” has the meaning given in paragraph 10(6).

(3) A CSOP option is a “relevant" CSOP option if it is granted to the employee by reason of his employment with—

(a) the employer company, or

(b) if that company is a member of a group, any member of that group.

(4) An option is an “employee option" if it is—

(a) the qualifying option,

(b) another qualifying option granted to the employee by reason of his employment with the employer company or, if that company is a member of a group, any member of that group, or

(c) a relevant CSOP option.

(5) Paragraph 10(7) and (8) (determination of value of shares) apply for the purposes of paragraph 47(1)(g) as they apply for the purposes of paragraph 10.

Disqualifying events: actual relevant working time U.K.

52 (1) For the purposes of paragraph 47(3) an employee’s relevant working time means the time that he in fact spends as an employee in relevant employment—

(a) on the business of the relevant company, or

(b) if the relevant company is a parent company, on the business of the group.

(2) The time at which the disqualifying event is taken to have occurred is determined in accordance with the following provisions.

(3) Subject to sub-paragraphs (4) and (5), the time at which the disqualifying event occurred is determined as follows:

Method

1. For each calendar month calculate whether over the tax year to date the employee’s relevant working time amounts to less than 25 hours a week or, if less, 75% of his working time.

2. If it does, the disqualifying event is taken to have occurred—

(a) at the end of the previous calendar month, or

(b) if the calendar month for which the calculation is done is April, at the end of the previous tax year.

(4) In the case of an employee who begins or ceases to be in relevant employment during the tax year, the references in sub-paragraph (3) above and paragraph 47(3) to that tax year shall be construed as references to the part of the tax year in which he is in relevant employment.

(5) If the time determined under sub-paragraph (3) or (4) falls before the grant of the option, the option is treated for the purposes of this Schedule as if it had never been a qualifying option.

(6) Expressions used in paragraph 47(3) or this paragraph that are defined for the purposes of paragraph 29 (requirement as to commitment of working time) have the same meaning as in that paragraph.

Effect of disqualifying event U.K.

53 (1) This paragraph applies where—

(a) a disqualifying event occurs in relation to a qualifying option before the option is exercised, and

(b) the option is not exercised within 40 days of that event.

(2) For the purposes of section 135 of the Taxes Act 1988 (taxation of share options) the amount of the gain realised on the exercise of the option is taken—

(a) where paragraph 44 applies (option to acquire shares at market value), to be, and

(b) where paragraph 45 or 46 applies (option to acquires shares at less than market value or for nil cost), to be increased by,

the amount (if any) by which the market value of the shares when the option is exercised exceeds their market value immediately before the disqualifying event.

This is subject to sub-paragraph (3).

(3) Paragraphs 44 to 46 and sub-paragraph (2) of this paragraph do not apply if the amount chargeable under section 135 of the Taxes Act 1988 on the exercise of the option would, in the absence of those provisions, be less than the amount so chargeable by virtue of those provisions.

Exclusion of charge on acquisition at under-value U.K.

54 (1) Section 162(1) of the Taxes Act 1988 (deemed employment-related loan in case of acquisition of shares at an undervalue), as it applies in relation to an employee chargeable to tax under Case I of Schedule E, does not apply in relation to the acquisition of shares by the exercise of a qualifying option.

(2) This does not affect any charge to tax under section 162(6) of that Act (stop-loss provisions).

Saving for other income tax charges U.K.

55 (1) Nothing in this Part of this Schedule affects—

(a) any charge to tax under section 135 of the Taxes Act 1988 (taxation of share options) in respect of the release of rights conferred by a qualifying option;

(b) any charge to tax under section 78 or 80 of the M5 Finance Act 1988 (charge on removal of restrictions etc. or on special benefits) in respect of shares acquired under a qualifying option; or

(c) subject to sub-paragraph (2), any charge to tax under—

(i) section 140A of the Taxes Act 1988 (charge on interest in shares ceasing to be only conditional), or

(ii) section 140D of that Act (convertible shares),

in respect of shares acquired under a qualifying option.

(2) The amount of relief under this Schedule shall be treated as a deductible amount for the purposes of any charge to tax under section 140A or 140D of the Taxes Act 1988 in respect of shares acquired under a qualifying option.

The amount of relief means the difference between the amount on which tax would have been chargeable under section 135 of that Act in respect of the exercise of the option apart from this Schedule and the amount (if any) in fact so chargeable.

Marginal Citations

M5 1988 c. 39.

Part VII U.K. Capital gains tax

Qualifying shares U.K.

56 (1) In this Part of this Schedule “qualifying shares”—

(a) means shares acquired by the exercise of a qualifying option, subject to sub-paragraphs (2) and (3), and

(b) includes shares (“replacement shares”) which—

(i) are treated under section 127 of the M6 Taxation of Chargeable Gains Act 1992 (company reorganisations etc.) as the same asset as a holding of qualifying shares, and

(ii) meet the requirements of paragraph 38 (type of shares that may be acquired under qualifying option).

(2) If a disqualifying event occurs in relation to a qualifying option (whether the original option or a replacement option), shares acquired by the exercise of the option are qualifying shares only if the option is exercised within 40 days of that event.

(3) References in this Part to “the original option", where there has been one or more replacement options, are to the option that the replacement option (or, if there has been more than one, the first of them) replaced.

Marginal Citations

M6 1992 c. 12.

Taper relief on disposal of qualifying shares U.K.

57 For the purposes of computing taper relief on a disposal of qualifying shares, the shares are treated as if they had been acquired when the original option was granted.

Rights issues in respect of qualifying shares U.K.

58 Where—

(a) an individual holds qualifying shares, and

(b) there is, by virtue of any such allotment for payment as is mentioned in section 126(2)(a) of the M7 Taxation of Chargeable Gains Act 1992, a reorganisation affecting that holding,

sections 127 to 130 of that Act shall not apply in relation to that holding.

Marginal Citations

M7 1992 c. 12.

Part VIII U.K. Company reorganisations

Introduction U.K.

59 (1) The provisions of this Part of this Schedule apply in relation to company reorganisations.

(2) For the purposes of this Part a “company reorganisation” means where a company (“the acquiring company”)—

(a) obtains control of a company whose shares are subject to a qualifying option which has yet to be exercised—

(i) as a result of making a general offer to acquire the whole of the issued ordinary share capital of that company which is made on a condition such that if it is satisfied the person making the offer will have control of the company, or

(ii) as a result of making a general offer to acquire all the shares in the company which are of the same class as those to which the option relates; or

(b) obtains control of such a company in pursuance of a compromise or arrangement sanctioned by the court under section 425 of the M8 Companies Act 1985 or Article 418 of the M9 Companies (Northern Ireland) Order 1986; or

(c) becomes bound or entitled under sections 428 to 430 of that Act or Articles 421 to 423 of that Order to acquire shares of the same class as shares that are subject to a qualifying option that has yet to be exercised; or

(d) obtains all the shares of a company whose shares are subject to such a qualifying option as a result of a qualifying exchange of shares (see paragraph 60).

(3) In this Part of this Schedule “control” has the meaning given by section 840 of the Taxes Act 1988.

Marginal Citations

M8 1985 c. 6.

M9 S.I. 1986/1032 N.I. 6.

Meaning of “qualifying exchange of shares" U.K.

60 (1) For the purposes of this Part of this Schedule there is a “qualifying exchange of shares” where arrangements are made in accordance with which a company (“the new company”) acquires all the shares (“old shares”) in another company (“the old company”) and the following conditions are met.

(2) The conditions are—

(a) that the consideration for the old shares consists wholly of the issue of shares (“new shares”) in the new company;

(b) that new shares are issued in consideration of old shares only at times when there are no issued shares in the new company other than—

(i) subscriber shares, and

(ii) new shares previously issued in consideration of old shares;

(c) that the consideration for new shares of each description consists wholly of old shares of the corresponding description;

(d) that new shares of each description are issued to the holders of old shares of the corresponding description in respect of, and in proportion to, their holdings; and

(e) that by virtue of section 127 of the M10 Taxation of Chargeable Gains Act 1992 as applied by section 135(3) of that Act, the exchange of shares is not treated as involving a disposal of the old shares or an acquisition of the new shares.

(3) For the purposes of this paragraph old shares and new shares are of a corresponding description if, on the assumption that they were shares in the same company, they would be of the same class and carry the same rights.

(4) In this paragraph references to “shares", except in the expression “subscriber shares", include securities.

Marginal Citations

M10 1992 c. 12.

Grant of replacement option U.K.

61 (1) This paragraph applies where in the case of a company reorganisation—

(a) the holder of a qualifying option, by agreement with the acquiring company, releases his rights under that option (“the old option”) in consideration of the grant to him of rights (“the new option”) which are equivalent but relate to shares in the acquiring company, and

(b) the requirements of the following paragraphs are met—

paragraph 62 (period within which replacement option must be granted), and

paragraph 63 (qualifying requirements for replacement option).

(2) Where this paragraph applies, the new option shall be treated for the purposes of this Schedule as a “replacement option”.

(3) Except as otherwise provided—

(a) references in this Schedule to a qualifying option include a replacement option, and

(b) a replacement option is treated for the purposes of this Schedule as if it had been granted on the date on which the old option was granted.

(4) In this Schedule references to “the old option” or “the new option” shall be construed in accordance with this paragraph.

Period within which replacement option must be granted U.K.

62 The new option does not qualify as a replacement option unless it is granted within—

(a) if the company reorganisation falls within paragraph 59(2)(a), the period of six months beginning with the time when the person making the offer has obtained control of the company and any condition subject to which the offer is made is satisfied;

(b) if the company reorganisation falls within paragraph 59(2)(b) or (d), the period of six months beginning with the time when the acquiring company obtains control of the company whose shares are subject to the old option;

(c) if the company reorganisation falls within paragraph 59(2)(c), the period during which the acquiring company remains bound or entitled as mentioned in that paragraph.

Qualifying requirements for replacement option U.K.

63 A new option qualifies as a replacement option only if—

(a) the option is granted to the holder of the old option by reason of his employment—

(i) with the acquiring company, or

(ii) if that company is a parent company, with that company or another group company;

(b) at the time of the release of rights under the old option, the requirements of—

(i) paragraph 9 (purpose of granting the option), and

(ii) paragraph 11 (number of employees who may hold qualifying options),

are met in relation to the new option;

(c) at that time, the independence requirement and the trading activities requirement are met in relation to the acquiring company;

(d) at that time, the individual to whom the new option is granted is an eligible employee in relation to the acquiring company;

(e) at that time, the requirements of Part V are met in relation to the new option;

(f) the total market value, immediately before the release, of the shares which were subject to the old option is equal to the total market value, immediately after the grant, of the shares in respect of which the new option is granted; and

(g) the total amount payable by the employee for the acquisition of shares in pursuance of the new option is equal to the total amount that would have been payable for the acquisition of shares in pursuance of the old option.

Part IX U.K. Supplementary provisions

Power to require information U.K.

64 (1) The Inland Revenue may by notice require any person to furnish them, within such time as the Inland Revenue may direct (not being less than three months), with such information as—

(a) the Inland Revenue think necessary for the performance of their functions under this Schedule, and

(b) the person to whom the notice is addressed has or can reasonably obtain.

(2) The power conferred by this paragraph extends, in particular, to information to enable the Inland Revenue—

(a) to decide whether an option is a qualifying option, or

(b) to determine the liability to tax, including capital gains tax, of any person who has been granted a qualifying option.

(3) In section 98 of the M11 Taxes Management Act 1970 (penalties in connection with returns, etc.), in the first column of the table, after the final entry insert—

“paragraph 64 of Schedule 14 to the Finance Act 2000;”.

Marginal Citations

M11 1970 c. 9.

Annual returns U.K.

65 (1) A company whose shares are the subject of a qualifying option at any time during a tax year must deliver a return to the Inland Revenue.

(2) The return must—

(a) contain such information as the Inland Revenue may require, and

(b) be made within three months after the end of the tax year to which it relates.

(3) In section 98 of the M12 Taxes Management Act 1970 (penalties in connection with returns, etc.), in the second column of the table, after the final entry insert—

“paragraph 65 of Schedule 14 to the Finance Act 2000;”.

Marginal Citations

M12 1970 c. 9.

Meaning of “market value" of shares U.K.

66 (1) For the purposes of this Schedule the “market value” of shares has the same meaning as, for the purposes of the M13 Taxation of Chargeable Gains Act 1992, it has by virtue of Part VIII of that Act.

This is subject to paragraph 10(8) (determination of value of shares subject to restriction or risk of forfeiture).

(2) Where the market value of shares on any date falls to be determined for the purposes of this Schedule, the Inland Revenue and the employer company may agree that it shall be determined by reference to such date or dates, or to an average of the values on a number of dates, as may be provided in the agreement.

Marginal Citations

M13 1992 c. 12.

Determination of market value U.K.

67 (1) The market value of shares for the purposes of this Schedule, if not agreed between the employer company and the Inland Revenue or referred to the Commissioners under sub-paragraph (4), shall be determined by the Inland Revenue.

(2) The employer company may appeal against any such determination.

(3) Notice of appeal must be given to the Inland Revenue within 30 days after their notice of their determination was given to the employer company.

(4) The employer company may, at any time before notice of determination by the Inland Revenue has been given to it, by notice given to the Inland Revenue require the question of the market value of the shares to be referred to the Commissioners.

Any such reference shall be determined by the Commissioners in the same way as an appeal.

(5) An appeal or reference under this paragraph lies to the General Commissioners or, if the employer company so elects (in accordance with section 46(1) of the M14 Taxes Management Act 1970), to the Special Commissioners.

Marginal Citations

M14 1970 c. 9.

Exercise of functions conferred on “the Inland Revenue" U.K.

68 Functions conferred by this Schedule on “the Inland Revenue" may be exercised by any officer of the Board.

Power to amend by Treasury order U.K.

69 The Treasury may by order amend this Schedule—

(a) to make such amendments of paragraphs 17 to 26 (the trading activities requirement and related provisions) as they consider expedient;

(b) to substitute different sums of money for those for the time being specified in—

paragraph 10(1), (4) and (5) (maximum entitlement of employee), or

paragraph 16(1) and (2) (the gross assets requirement).

Compliance with time limits U.K.

70 (1) For the purposes of this Part and Part I of this Schedule a person is not taken to have failed to do anything required to be done within a limited time if—

(a) he had a reasonable excuse for not doing it within that time, and

(b) if the excuse ceased, he did it without unreasonable delay after the excuse ceased.

(2) Where sub-paragraph (1)(b) applies any further time limit expressed by reference to the time when the thing should have been done shall have effect as if it had been expressed by reference to the time when it was done.

Minor definitions U.K.

71 (1) In this Schedule—

• “arrangements” includes any scheme, agreement or understanding, whether or not legally enforceable;

• “company” means any body corporate;

• “group”, in relation to a parent company, means that company and its 51% subsidiaries;

• “group company”, in relation to a parent company, means that company or any of its 51% subsidiaries;

• “parent company” means a company that has one or more 51% subsidiaries and “single company” means a company that does not;

• “option” means any right to acquire shares;

• “ordinary share capital” has the meaning given in section 832(1) of the Taxes Act 1988;

• “research and development” has the meaning given by section 837A of the Taxes Act 1988;

• “shares” includes stock; and

• “tax year” means a year of assessment.

(2) Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this Schedule.

Index of defined expressions U.K.

72 In this Schedule the following expressions are defined or otherwise explained by the provisions indicated:

arrangements	paragraph 71(1)
closure notice (in Part I)	paragraph 5(4)
company	paragraph 71(1)
company reorganisation (in Part VIII)	paragraph 59(2)
connected person	paragraph 71(2)
disqualifying event	paragraphs 47 to 52
eligible employee	paragraph 27
employer company	paragraph 1(3)
excluded activities	paragraph 19
gross assets requirement	paragraph 16
group and group company	paragraph 71(1)
the independence requirement	paragraph 13
the Inland Revenue	paragraph 68
market value	paragraph 66 (and see paragraph 10(8))
new option	paragraph 61(4)
old option	paragraph 61(4)
option	paragraph 71(1)
ordinary share capital	paragraph 71(1)
original option (in Parts VI and VII)	paragraph 56(3)
parent company	paragraph 71(1)
qualifying company	paragraph 12
qualifying option	paragraph 1 (and see paragraph 61(3))
qualifying shares (in Part VII)	paragraph 56
qualifying subsidiary	paragraph 15
qualifying trade	paragraph 18
relevant company	paragraph 1(3)
replacement option	paragraph 61(2)
research and development	paragraph 71(1)
shares	paragraph 71(1) (and see paragraph 60(4))
single company	paragraph 71(1)
tax year	paragraph 71(1)
trading activities requirement	paragraph 17