Background
1802.Companies have often wished to reward employees by allowing them to acquire shares in the company on advantageous terms. As a matter of legal form, the company may achieve this objective in any one of three ways, for the employee may be given:
shares (if the company issues its own shares direct to the employee);
a purely monetary benefit (if the company allows the employee to acquire shares on advantageous terms); or
an option (if the company grants the employee an option to buy shares in the company at some future date).
1803.It is well established that if an employee is given shares, or is allowed to acquire shares on advantageous terms, the amount of the advantage is chargeable to income tax as an earning from the employment. The leading case is Weight (HM Inspector of Taxes) - v - Salmon (1935) 19 TC 174 (HL), where the taxpayer took up opportunities given to him to apply for unissued shares in the company at their par value, which was always less than their market value. The House of Lords held that the difference was an emolument of the taxpayer’s employment. In the words of the basic charge to income tax under Schedule E, as it stood at that time, the taxpayer, who was a person “having or exercising an office or employment of profit” had received a “profit” from that office.
1804.As a means of avoiding the charge to tax on such arrangements, established by the decision in Weight - v - Salmon, share option schemes became increasingly popular. These schemes differed: but, typically, a company granted to employees, for a nominal sum, an option to buy a stated number of shares at a stated price, which was normally their market value at the date of the grant. If the price of the company’s shares rose, an employee could exercise the option and acquire shares at less than the market value then current.
1805.The efficacy of share option schemes was tested in the case of Abbott - v - Philbin (HM Inspector of Taxes) (1960) 39 TC 82 (HL), [1961] AC 352, where the House of Lords had to consider two assessments to income tax for different years of assessment. The first assessment was for the year in which the taxpayer received the option. The decision regarding that assessment was that the taxpayer did receive an emolument during that year of assessment, but that the taxpayer obtained no benefit from it at that time, because the option was to buy at what was then the market value. The second assessment was for the year in which the taxpayer exercised the option. The House of Lords held, for that later year of assessment, that the advantage that arose was not a perquisite or profit from the office or employment during the year of assessment. Instead it was an advantage which accrued to the taxpayer as the holder of a legal right that he had acquired in an earlier year. (It might well have been possible to say that the taxpayer had made a gain from the disposal of an asset - the option - but capital gains tax was only introduced by FA 1965.)
1806.Legislation to counteract the effect of the decision in Abbott - v - Philbin was enacted as section 25 of FA 1966, which imposed a charge to income tax when the option was exercised. This legislation was later re-enacted, and eventually became sections 135 to 140 of ICTA 1988. It now constitutes Chapter 5 of this Part of this Act.
1807.As a means of avoiding a charge under section 25 of FA 1966, share incentive schemes became increasingly popular. These schemes differed: but, typically, a company awarded shares subject to restrictions to employees. The restrictions might (for example) have the result that the shares carried no rights to receive dividends or to vote. The shares, consequently, might be expected to have only a low value. At a later date (or dates) the restrictions would be removed. The consequent increase in value, however, was not subject to the share option rules in section 25 of FA 1966: for the employee did not realise a gain by exercising an option to acquire shares. The shares were already owned.
1808.Legislation to counteract share incentive schemes by charging the employee to income tax on the increase in the value of the shares was introduced in FA 1972. That legislation was considerably amended over the years; and successor legislation was introduced by sections 77 to 89 of FA 1988. That legislation is rewritten in Chapter 4 of this Part of this Act.
1809.At a later stage, long-term incentive plans came increasingly to be used. These schemes also differed; but, typically, a company awarded shares to employees, at no cost or at nominal cost, in circumstances where the employee was only able to enjoy the benefit of those shares if performance conditions specified at the time of the award were met. Some time later, after the performance conditions had been met, the employee would become fully entitled to enjoy the benefit of the shares.
1810.It was initially assumed that there was no charge on the initial award of the shares, but that a charge arose when the employee became entitled to enjoy the full benefit of the shares. Prevailing practice reflected this assumption. However, the view was taken later that a charge arose on the initial award of the shares but not at the later time when the employee became fully entitled to enjoy the benefit of the shares.
1811.Legislation was accordingly introduced in section 50 of FA 1998, which provided for sections 140A to 140C to be inserted into ICTA. The new legislation broadly restored the position to the previous practice - this time on a statutory basis. This legislation now constitutes Chapter 2 of this Part of this Act.
1812.Further legislation was introduced in section 51 of FA 1998, which provided for sections 140D to 140F to be inserted into ICTA. This legislation was aimed at counteracting possible tax avoidance where there was a conversion of one class of shares into another. As a result of such a conversion it was possible to devise structures under which employees could be provided with valuable shares as a form of remuneration without the full value of the shares being brought into charge to income tax. This legislation imposed a charge to income tax at the time of conversion. This legislation now constitutes Chapter 3 of this Part of this Act.
1813.But not all of the legislation relating to employees who acquire shares or options in the companies for which they work is of the type so far described. Various Governments have decided that they wish to confer various advantages on a range of schemes and plans. This has meant additional legislation to set out:
the characteristics to be possessed by the scheme or plan before it may be approved;
the tax advantages that an approved scheme or plan possesses;
any procedure to be undertaken before the scheme or plan may be approved;
any tax charges that will apply if the shares or options are removed from the scheme or plan (or other “inappropriate” actions are undertaken); and
any supplementary provisions.
1814.There are currently five different schemes or plans in existence:
Approved profit sharing (“APS”) schemes. The legislation relating to these schemes was originally contained in FA 1978; and that legislation was consolidated in sections 186 and 187 of, and Schedules 9 and 10 to, ICTA. These schemes are being phased out and they are not included in this Act. There is a cross-reference to these schemes in section 418(3).
Approved save as you earn (“SAYE”) option schemes. The legislation relating to these schemes was originally contained in FA 1980; and that legislation was consolidated in sections 185 and 187 of, and Schedule 9 to, ICTA. The legislation relating to these schemes now constitutes Chapter 7 of this Part and Schedule 3.
Approved company share option plans (“CSOPs”). The legislation relating to these schemes was originally contained in FA 1984; and that legislation was consolidated in sections 185 and 187 of, and Schedule 9 to, ICTA. These schemes were then much affected by section 114 of FA 1996. The legislation relating to these schemes now constitutes Chapter 8 of this Part and Schedule 4.
Share incentive plans (“SIPs”). The legislation relating to these schemes is principally contained in Schedule 8 to FA 2000, under the name “Employee share ownership plans”. The legislation relating to these schemes now constitutes Chapter 6 of this Part and Schedule 2.
Enterprise management incentives (“EMI”). The legislation relating to the options that qualify as EMI is principally contained in Schedule 14 to FA 2000. That legislation now constitutes Chapter 9 of this Part and Schedule 5 to this Act.