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Income Tax (Earnings and Pensions) Act 2003


2214.This Chapter contains provisions relating to employee benefit trusts. It deals with two issues.

2215.The first issue dealt with is the obvious question “What is an employee benefit trust?”. In the source legislation an employee benefit trust is stated, in the case of each of the four schemes, to have the same meaning as in paragraph 7 of Schedule 8 to ICTA. That Schedule is not being re-enacted, as it relates to profit-related pay schemes which will be effectively spent by the time that this Act takes effect. It will therefore no longer be possible to refer to the meaning of “employee benefit trust” as used in the legislation relating to profit related pay schemes. That definition, instead, is set out in this Chapter. The definition, in sections 550 and 551, derives from paragraph 7 of Schedule 8 to ICTA.

2216.The second issue dealt with relates to the general rule mentioned in paragraph 2213: for there are cases where the general rule is supplemented by further rules. In these cases, which depend upon the employee or an associate receiving a payment from the employee benefit trust, the employee (or the associate) is treated as owning the “appropriate percentage” of the ordinary share capital of the company, in addition to any percentage of that share capital actually owned. These provisions, in sections 552 to 554, derive from paragraph 7(9) to (12) of Schedule 8 to ICTA.

Section 549: Application of this Chapter

2217.This section sets out the ambit of this Chapter. Subsections (1) to (3) are drafting additions, while subsection (4) derives from material in paragraph 7(3) and (12) of Schedule 8 to ICTA.

2218.In subsection (4)(b), the words “the company which are subject to” have been added near the end of this provision. Although these words do not form part of paragraph 7(12), it is thought that they should have been included, and that the legislation is easier to understand if they are included. See Note 54 in Annex 2.

2219.Subsection (5) provides that, in this Chapter, the term “employee” includes the holder of an office. This general proposition holds good for the employment income Parts (see section 5), but was disapplied for the purposes of Part 7 in section 421. However, the provisions of this Chapter are governed by the definition of the term “employment” in section 169(1) of ICTA, which includes an office, so the general proposition that an “employee” includes an office-holder has been reinstated.

Section 550: Meaning of “employee benefit trust”

2220.This section sets out the basic ingredients of an employee benefit trust, as follows:

  • all or most of the employees of the company must be eligible to benefit; and

  • apart from certain exceptions, there have been no disposals of property subject to the trust since 13 March 1989.

2221.This section derives from paragraph 7(5) of Schedule 8 to ICTA.

2222.Subsection (4) provides more information about the exceptions to the “no disposals since 13 March 1989” rule. Disposals that do not prevent the trust from being an employee benefit trust are either those made in the ordinary course of the management of the trust or “qualifying disposals”, as defined in section 551.

Section 551: “Qualifying disposals” for purposes of section 550

2223.This section sets out that a “qualifying disposal” can be of any of the ordinary share capital of the company, or money paid outright, provided one of three conditions is met. This section derives from paragraph 7(6) and (7) of Schedule 8 to ICTA.

2224.The conditions mentioned are set out in subsections (2), (4) and (5).

2225.Subsection (3) is new. Although subsection (2) refers to “employees of the company”, it is Inland Revenue practice to extend the benefit of this provision to employees of a subsidiary company (a subsidiary company being taken to mean a company under another company’s control, with the word “control” taking the meaning in section 840 of ICTA). Subsection (3) reflects that Inland Revenue practice. See Change 133 in Annex 1.

Section 552: Attribution of interest in company to beneficiary or associate

2226.This section sets out that in certain circumstances the individual (or an associate of the individual) is treated as owning the “appropriate percentage” of the company’s ordinary share capital. It derives from paragraph 7(9) of Schedule 8 to ICTA.

2227.The relevant circumstances are that the individual in question (or an associate) has received a payment from the employee benefit trust since 13 March 1989 and the property subject to the trust included any ordinary share capital of the company at any time during the three years preceding that payment.

2228.The “appropriate percentage” of the company’s ordinary share capital that the individual (or associate) is treated as owning in those circumstances is specified in section 553.

Section 553: Meaning of “appropriate percentage” for purposes of section 552

2229.This section sets out how the “appropriate percentage” is to be calculated. It derives from paragraph 7(10) of Schedule 8 to ICTA.

2230.There are a number of factors to be taken into account in working out the “appropriate percentage” of the company’s ordinary share capital for the purposes of section 552. The main calculation consists of a straightforward fraction using “P” and “D” to signify the numbers to be fed into that fraction. The expressions “P” and “D”, however, take rather more explaining.

2231.“P” is either the total of any payments received by the individual or associates from the trust during the 12 months up to and including the day the relevant payment is made (subsection (2)) or, if smaller, the distributions made by the company to the trustees of the employee benefit trust during the period of three years up to and including the day the relevant payment is made (subsection (3)).

2232.“D” is the aggregate distributions made during the three years preceding the relevant payment, divided by the number of years in which such distributions were actually made (subsection (4)).

2233.It is difficult to express the ideas in this calculation in simpler terms than those used in paragraph 7(10) of Schedule 8 to ICTA; but the section includes a mini method statement for the calculation of “D”.

Section 554: Attribution of further interest in company

2234.This section sets out in that in certain circumstances the individual (or an associate of the individual) is treated as owning, not only the “appropriate percentage” of the company’s ordinary share capital determined under section 552 but an additional percentage as well. It derives from paragraph 7(11) of Schedule 8 to ICTA.

2235.The “appropriate percentage” may be increased if the individual (or associate) receives payments from other trusts that own shares in the company. This section sets out in what circumstances the appropriate percentage may be so increased, and how to work out the total percentage of the company’s share capital that the individual (or associate) is treated as owning.

2236.Subsection (3) sets out material that has no precise counterpart in ICTA; but its inclusion in this Act should make the legislation clearer.

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