Details of the Schedule
Part 1: Income tax treatment of employee shareholder shares
2.Part 1 of the Schedule amends provisions within the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
3.Paragraph 2 amends section 19(2) of ITEPA to include an amount treated as earnings of an employee shareholder under new section 226A of ITEPA within rules that determine when non-money earnings are treated as having been received for relevant tax purposes.
4.Paragraph 3 introduces new sections 226A to 226D of ITEPA. They provide for the income tax treatment of employee shareholder shares, and for the £2,000 payment an employee shareholder is deemed to have made for shares in certain circumstances.
New Section 226A of ITEPA: Amount treated as earnings
5.New section 226A of ITEPA provides for amounts that are to be treated as earnings in relation to employee shareholder shares. New subsection (1) sets out the circumstances in which this new section applies. New subsection (7) makes clear that certain provisions that affect the market value of shares for other income tax purposes do not apply in determining the market value for the purposes of new subsection (1).
6.New subsections (2) and (3) provide that an amount equal to the market value of the employee shareholder shares, reduced by any payment an employee shareholder is deemed to have made for the shares under new section 226B of ITEPA, is to be treated as earnings of the employee shareholder from the employment for the year in which these shares are acquired.
7.New subsection (4) disapplies this provision for employee shareholder shares acquired pursuant to an employment-related securities option. Instead, the normal rules that apply to shares acquired pursuant to employment-related securities options apply equally for employee shareholder shares so acquired. Any payment an employee shareholder is deemed to have made for the shares under new section 226B of ITEPA is taken into account when calculating any tax chargeable, as set out at paragraphs 12 to 14 of this Schedule.
8.New subsection (5) ensures that if subsection (2) applies, no other sums can constitute earnings from employment in respect of the acquisition of the shares.
9.New subsection (6) provides definitions of various terms used in the new sections 226A to 226D of ITEPA.
New Section 226B of ITEPA: Deemed payment for employee shareholder shares
10.New section 226B of ITEPA provides that, subject to certain conditions, an employee shareholder is deemed to have made a payment of £2,000 for employee shareholder shares. For the purposes of determining the date on which this payment is deemed to have been made, subsection (2) applies where all the employee shareholder shares are acquired on the same day and subsection (3) applies where employee shareholder shares are acquired on more than one day.
11.New subsections (4) and (5) set out arrangements for the allocation of this £2,000 deemed payment in cases where employee shareholder shares with a value in excess of this amount are acquired.
12.New subsection (6) makes this deemed £2,000 payment subject to conditions set out in new sections 226C and 226D of ITEPA.
13.New subsection (7) provides that an employee shareholder is treated as not having given any consideration (other than the deemed £2,000 payment where applicable) for shares they acquire as an employee shareholder.
14.New subsection (8) provides that subsection (7) of new section 226A of ITEPA also applies for the purpose of determining the market value of shares in new section 226B.
New section 226C of ITEPA: Only one payment deemed to be made under associated agreements
15.New section 226C of ITEPA ensures that the deemed payment set out in new section 226B of ITEPA is only available to the employee shareholder on the first occasion on which they acquire ‘qualifying shares’ under an employee shareholder agreement. New subsection (1) sets out this condition.
16.New subsections (2) and (3) define ‘qualifying shares’ for the purposes of the condition in new subsection (1) and provide that, for the purposes of this condition, any shares acquired under previous employee shareholder agreements with the same employing company, or with associated companies, are taken into account.
17.New subsection (4)(a) defines two companies as associated for the purposes of this condition if either one has control of the other, or both are under the control of the same person or persons. New subsection (4)(b) provides that for the purposes of this condition, where one company controls another when an employee shareholder agreement is made with an individual, that control is treated as continuing if a subsequent employee shareholder agreement is made with the same individual.
18.New subsection (5) excludes from new subsection 4(b) certain cases where a person who was an employee shareholder with a company that has been dissolved becomes an employee shareholder with an associated company. This is subject to two years having passed between the dissolution of the company in question and the subsequent employee shareholder agreement, during which time that individual has not been employed or engaged by any company associated with the dissolved company.
New section 226D of ITEPA: Shareholder or connected person having material interest in company
19.New section 226D of ITEPA prevents an employee shareholder benefiting from the deemed payment set out in new section 226B of ITEPA where they, or persons connected with them, have a material interest in their employer or a parent of their employer; or have had such a material interest at any time in the 12 months prior to the acquisition of the employee shareholder shares. New subsections (1) and (2) set out this condition.
20.New subsections (4) and (5) define a material interest for the purposes of this condition. New subsection (4) provides that an individual has a material interest in a company if at least 25 per cent of the voting rights in that company are exercisable by that individual, by persons connected with that individual, or by the individual and persons connected with them together. New subsection (5) provides that in the case of a close company, an individual has a material interest if, in any circumstances, at least 25 per cent of the net assets of the company would be available for distribution to that individual, persons connected with that individual, or the individual and persons connected with them together.
21.New subsection (7) provides that for the purposes of this condition, an individual has a material interest in a company if they, or persons connected with them, have an entitlement to acquire rights that would give them a material interest in the company. This also applies where an individual and any connected persons together have such an entitlement.
22.New subsection (8) provides that for the purposes of this condition, an individual has a material interest in a company if there are arrangements in place that would enable them, or persons connected with them, to acquire such an interest. This also applies where such arrangements would enable an individual and any connected persons together to acquire a material interest in a company.
23.Paragraphs 4 to 11 and paragraph 15 of the Schedule make amendments to various provisions of ITEPA to take into account employee shareholder shares and ensure that, where relevant, amounts treated as earnings under new section 226A of ITEPA are treated in the same way as other earnings from the employment.
24.Paragraph 12 amends section 479 of ITEPA to make clear that when calculating tax chargeable in relation to employee shareholder shares acquired pursuant to an employment-related securities option, the £2,000 payment deemed to have been made by the employee shareholder under new section 226B of ITEPA is regarded as the amount of consideration given for the shares, subject to the restrictions set out at new sections 226C and 226D of ITEPA.
25.Paragraphs 13 and 14 make clear that this is also the case in relation to employee shareholder shares acquired pursuant to a share option granted under the Enterprise Management Incentives tax advantaged employee share scheme, for which special rules apply when calculating any amounts of tax to be charged.
26.Paragraph 16 introduces new section 385A of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA).
New section 385A of ITTOIA: No charge to tax on purchase by company of exempt employee shareholder shares
27.New section 385A of ITTOIA prevents an income tax charge arising when employee shareholder shares are sold back to the company. It applies where the employee shareholder is no longer an employee or officer of the employer company (or an associated company) and ensures that payment received from the company gives rise to a gain (that may be exempt by virtue of Part 2 of this Schedule).
Part 2: Capital Gains Tax exemption for employee shareholder shares
28.Part 2 of the Schedule amends the Taxation of Chargeable Gains Act 1992 (TCGA).
29.Paragraph 18 of the Schedule inhibits the operation of the no gain no loss provisions for transfers between spouses and civil partners ensuring that the transferor benefits fully from the CGT relief and the transferee has a base cost on acquisition of the market value of the shares at the time of the transfer.
30.Paragraph 19 amends section 149AA of TCGA so that amounts treated as earnings for income tax purposes under Chapter 1 of Part 3 or new section 226A of ITEPA are deductible in computing gains and losses on employee shareholder shares, but no other consideration is treated as having been given for the acquisition of those shares.
31.Paragraph 20 introduces six new sections into Part 7 of TCGA relating to employee shareholders. These new sections provide for exemption from CGT and impose an upper limit on the value of the shares to which the exemption applies.
New section 236B of TCGA: Exemption for employee shareholder shares
32.New section 236B of TCGA provides that gains on exempt employee shareholder shares are not chargeable gains when the shares are disposed of by the person who acquired them under an employee shareholder agreement, and defines exempt employee shareholder shares as employee shareholder shares which meet the further requirements in new sections 236C and 236D of TCGA.
33.New subsection (3) defines various terms used in the new sections 236B to 236G of TCGA.
New section 236C of TCGA: Only first £50,000 of shares under associated agreements to be exempt
34.New subsection (1) provides that an employee shareholder share is exempt if, when it is acquired, the total value of all employee shareholder shares acquired under the relevant employee shareholder agreement, and under certain other employee shareholder agreements, does not exceed £50,000.
35.New subsections (2) and (3) provide that for the purpose of applying the £50,000 limit in new subsection (1), any shares acquired under previous employee shareholder agreements with the same employing company, or with associated companies, are taken into account.
36.New subsection 4(a) defines two companies as associated if either one has control of the other, or both are under the control of the same person or persons. New subsection (4)(b) provides that where one company controls another when an employee shareholder agreement is made with an individual, that control is treated as continuing if a subsequent employee shareholder agreement is made with the same individual.
37.New subsection (5) excludes from new subsection 4(b) certain cases where a person who was an employee shareholder with a company that has been dissolved becomes an employee shareholder with an associated company. This is subject to two years having passed between the dissolution of the company in question and the subsequent employee shareholder agreement, during which time that individual has not been employed or engaged by any company associated with the dissolved company.
38.New subsections (6) and (7) provide a means of determining which employee shareholder shares are treated as exempt where the number of shares acquired on a day takes the recipient over the £50,000 limit. The shares are deemed to be acquired in two tranches, one of which consists of the maximum number which may be acquired without breaching the £50,000 limit.
39.New subsections (8) and (9) provide for the value ascribed to shares on their acquisition to be their unrestricted market value and define ‘unrestricted market value’ as what the shares’ market value would be but for any restrictions which apply to them (that is to say, any provision relating to the shares made by any contract, agreement, arrangement or condition). ‘Restriction’ follows the definition in section 432(8) of ITEPA.
New section 236D of TCGA: Shares not exempt if shareholder or connected person has material interest in company
40.New section 236D of TCGA prevents an individual from benefiting from exemption on employee shareholder shares where they, or persons connected with them, have a material interest in their employer or a parent company of their employer; or have had such a material interest at any time in the 12 months prior to the acquisition of employee shareholder shares. New subsections (1) and (2) set out this condition.
41.New subsections (4) and (5) define a material interest for the purposes of this condition. New subsection (4) provides that an individual has a material interest in a company if at least 25 per cent of the voting rights in that company are exercisable by that individual, by persons connected with that individual, or by the individual and persons connected with them together. New subsection (5) provides that in the case of a close company, an individual has a material interest if, in any circumstances, at least 25 per cent of the net assets of the company would be available for distribution to that individual, persons connected with that individual, or the individual and persons connected with them together.
42.New subsection (7) provides that for the purposes of this condition, an individual has a material interest in a company if they, or persons connected with them, have an entitlement to acquire rights that would give them a material interest in the company. This also applies where an individual and any connected persons together have such an entitlement.
43.New subsection (8) provides that for the purposes of this condition, an individual has a material interest in a company if there are arrangements in place that would enable them, or persons connected with them, to acquire such an interest. This also applies where such arrangements would enable an individual and any connected persons together to acquire a material interest in a company.
44.New subsection (9) provides definitions for ‘arrangements’ and other terms used in this section.
New section 236E of TCGA: Identification of exempt employee shareholder shares
45.New subsection (1) disapplies the share pooling and share identification rules in TCGA, which would normally apply both to exempt employee shareholder shares and to non-exempt employee shareholder shares taken together.
46.New subsections (2) and (3) permit a person who holds both exempt and non-exempt employee shareholder shares of the same class in a company, and who disposes of shares of that class to specify how many exempt shares they have sold (up to number they held).
47.New subsection (4) defines what is meant by shares in a company being ‘of the same class’ for the purposes of this section.
New section 236F of TCGA: Reorganisation of share capital involving employee shareholder shares
48.New section 236F of TCGA provides that the rules at section 127 of TCGA, which apply to shares involved in reorganisations of share capital, schemes of reconstruction or in share exchanges, do not apply to exempt employee shareholder shares
New section 236G of TCGA: Relinquishment of employment rights is not disposal of an asset
49.New section 236G of TCGA ensures that for capital gains tax purposes an individual is treated as having made no disposal of any asset in consideration of entering into an employee shareholder agreement.
Part 3: Corporation Tax
50.Part 3 of the Schedule amends the Corporation Tax Act 2009 (CTA 2009). It provides that for various purposes relating to corporation tax, any £2,000 payment deemed to have been made by an employee shareholder under new section 226B of ITEPA is to be disregarded.
51.Paragraphs 22 to 32 and paragraph 36 amend various provisions of CTA 2009 to take account of employee shareholder shares, and ensure that, where appropriate for the purposes of these provisions, any amounts treated as earnings under new section 226A of ITEPA are treated in the same way as other earnings. When read with new section 1038B of CTA 2009, these paragraphs also provide that any £2,000 payment deemed to have been made by an employee shareholder under new section 226B of ITEPA is disregarded when determining the amount of relief available to a company in relation to the employee shareholder’s acquisition of shares.
52.Paragraph 33 introduces new section 1038B of CTA 2009 (employee shareholder shares), which provides that any £2,000 payment deemed to have been made by an employee shareholder under new section 226B of ITEPA is disregarded for various purposes of Part 12 CTA 2009 affecting the availability of relief, or the amount of any relief available to a company.
53.Paragraphs 34 and 35 amend sections 1292 and 1293 of CTA 2009 (in relation to ‘qualifying benefits’) to provide that where a corporation tax deduction in relation to employee shareholder shares is subject to conditions set out in these sections, any £2,000 payment deemed to have been made by an employee shareholder under new section 226B of ITEPA is disregarded for various purposes affecting the availability of deductions, or the amount of any deduction available to a company.
54.Paragraph 36 provides information relation to the definition of ‘employee shareholder share’.
Part 4: Employment Income Exemption
55.Chapter 11 of Part 4 of ITEPA is amended to include new section 326B.
56.New section 326B(1) provides that no income tax liability arises on an individual in respect of reasonable costs of relevant independent advice whether or not they are paid or reimbursed by an employer.
57.New section 326B (2) sets out the meaning of ‘relevant advice’ for the purposes of this legislation.
Part 5: Commencement
58.Part 5 of the Schedule provides for the Treasury to make an order bringing this legislation into force.
