Overview
3458.This Schedule, which is introduced in Chapter 9 of Part 7, deals with the rules relating to qualifying options for the purposes of “the EMI code”. The legislation relating to EMI, which is contained in Chapter 9 of Part 7 and in this Schedule, is called “the EMI code”. This term was introduced in section 527. Chapter 9 of Part 7 deals with the tax exemptions available in connection with a qualifying EMI option.
3459.The legislation relating to these schemes derives from Schedule 14 to FA 2000 (introduced by section 62 of FA 2000). This Schedule was amended by Schedule 14 to FA 2001 and by SI 2001 No 3799.
3460.This Schedule contains further provisions relating to EMI. After the introductory Part (Part 1) it deals with the following matters:
it specifies the requirements that must be met in relation to a qualifying EMI option (in Parts 2 to 6);
it deals with the notification processes (in Part 7); and
it deals with supplementary matters (in Part 8).
3461.EMI is different from SAYE, CSOP and SIPs in that it is not a “scheme” or a “plan”, with an approval procedure and the administrative structure that goes with it. Nevertheless this Schedule follows the pattern in Schedules 8 and 14 to FA 2000 which has been developed in the Schedules in this Act for SAYE, CSOP and SIPs. So where it seems helpful the opportunity has been taken to list the requirements relevant for a Part in an introductory paragraph.
Part 1: Introduction
Paragraph 1: Enterprise management incentives: qualifying options
3462.This paragraph is a scene-setting paragraph explaining how the Schedule applies to determine what share options qualify under EMI and where within the Schedule the various requirements may be found. It derives from paragraph 1(1) and (2) of Schedule 14 to FA 2000.
3463.The connection between “relevant company” and “qualifying company” has been clarified in sub-paragraph (3)(b).
3464.Also there is a new definition of “appropriate time” in sub-paragraph (4). This term is used in the opening paragraphs in Parts 2 to 5 of this Schedule to demonstrate clearly that the requirements have to be met, when the option is granted. There is also a link back to this phrase in paragraph 44(7) of this Schedule, which provides the same clarification for Part 7. Part 6, which deals with company reorganisations, has its own timing rules in paragraph 43 of this Schedule.
Paragraph 2: Meaning of “the relevant company” and “the employer company”
3465.This paragraph defines the EMI terms “the relevant company” and “the employer company”. It derives from paragraph 1(3) of Schedule 14 to FA 2000.
Part 2: General requirements
Paragraph 3: General requirements: introduction
3466.This paragraph is introductory and derives from paragraph 8 of Schedule 14 to FA 2000.
Paragraph 4: Purpose of granting the option
3467.This section derives from paragraph 9 of Schedule 14 to FA 2000.
Paragraph 5: Maximum entitlement of employee: financial limit on unexercised options
3468.This paragraph derives from paragraph 10(1) to (3) and (6) to (8) of Schedule 14 to FA 2000 and sets out a limit of £100,000 on the value of shares in respect of which “unexercised qualifying options” are held by each individual employee. If the grant of an option causes this limit to be exceeded, then the option does not qualify under EMI so far as it relates to that excess. If the limit is already exceeded at the time that further options are granted, those further options do not qualify.
3469.There is no guidance in the legislation on the tax treatment when an option, that includes a qualifying element and a non-qualifying element, is partially exercised. The option agreement itself may provide guidance on this. Otherwise, in practice, the person exercising the option will be able to decide which part of the option was exercised, enabling the relief to be taken in the way that suits the option holder.
3470.This paragraph also contains information about how to arrive at the share values. Sub-paragraph (6)(a) makes it clear that the value of the shares for the £100,000 test is frozen at the time when the option is granted. This was the intention of the original clause and is the way the provision has been interpreted. As this is part of the definition of “unexercised qualifying options” it has an impact on the test in paragraph 7(1) of this Schedule and in turn on paragraphs 41 and 43 as well. See Change 177 in Annex 1.
Paragraph 6: Maximum entitlement of employee: further limit of 3 years
3471.This paragraph derives from paragraph 10(4) to (8) of Schedule 14 to FA 2000. If the limit set out in paragraph 5 has been reached, no further qualifying option can be granted for three years from the date of the grant of the last qualifying option.
Paragraph 7: Maximum value of options in respect of relevant company’s shares
3472.This paragraph sets out the limit on the value of shares in the relevant company that can be the subject of unexercised qualifying options. That limit is £3 million. This paragraph derives from paragraph 11 of Schedule 14 to FA 2000.
3473.There is a cross-reference in sub-paragraph (6) to the rules about the valuation of the shares subject to the option in paragraph 5(6) to (8) of this Schedule.
Part 3: Qualifying companies
3474.There is a considerable overlap in this Part between EMI and the investment schemes EIS, VCT and CVS, (the Enterprise Investment Scheme, Venture Capital Trusts and the Corporate Venturing Scheme).
Paragraph 8: Qualifying companies: introduction
3475.This paragraph is introductory and derives from paragraph 12 of Schedule 14 to FA 2000.
Paragraph 9: The independence requirement
3476.In order to qualify under EMI, a company must not be under the control of another company. This paragraph sets out the criteria for this independence requirement and derives from paragraph 13 of Schedule 14 to FA 2000.
Paragraph 10: The qualifying subsidiaries requirement
3477.This paragraph stipulates that if a company controls other companies, all the companies that it controls must be “qualifying subsidiaries”, as defined in paragraph 11 of this Schedule. This requirement derives from paragraph 14 of Schedule 14 to FA 2000.
Paragraph 11: Meaning of “qualifying subsidiary”
3478.This paragraph derives from paragraph 15 of Schedule 14 to FA 2000.
3479.This paragraph sets out the conditions that must be met if a company is to be a qualifying subsidiary of the company that controls it. The parent company cannot have ownership of less than 75% of a subsidiary.
3480.Sub-paragraph (3) extends the reference to “holding company” in sub-paragraph (2). See Change 174 in Annex 1.
3481.The paragraph also sets out how this requirement applies to particular circumstances such as when a subsidiary company is being wound up.
Paragraph 12: The gross assets requirement
3482.This paragraph sets out the gross assets test that a company must satisfy in order to qualify under EMI. It derives from paragraph 16 of Schedule 14 to FA 2000.
3483.The wording of this gross assets test is very brief. Inland Revenue Statement of Practice 2/00 expands upon it, explaining that gross assets are all the assets shown in a company’s balance sheet without any deductions for liabilities, and providing information about the application of United Kingdom accounting practice and which balance sheets should be used.
3484.The test in sub-paragraph (3) makes it clear that the computation requires the addition of the value of the gross assets of each member of the group.
Paragraph 13: The trading activities requirement: single company
3485.This paragraph specifies that a single company can only qualify under EMI if it is carrying on (or preparing to carry on) a qualifying trade, and that must be the only purpose for the company’s existence, aside from any incidental purpose. The paragraph also makes it clear that the holding and managing of property for the purposes of a qualifying trade may be disregarded. Sub-paragraph (3) includes signposts to the definition of “qualifying trade” in paragraph 15 of this Schedule and to the provisions regarding excluded activities in paragraphs 16 to 23 of this Schedule.
3486.The paragraph derives from paragraph 17(1), (4) and (7) of Schedule 14 to FA 2000.
Paragraph 14: The trading activities requirement: parent company
3487.This paragraph derives from the remainder of paragraph 17 of Schedule 14 to FA 2000. It contains the detail of the trading activities requirement for a parent company, which looks at the business of the whole group.
3488.The way “non-qualifying activities” is defined in paragraph 14(5)(c) has enabled the provisions in paragraphs 18 and 19 of this Schedule to be expressed in a positive way.
Paragraph 15: Meaning of “qualifying trade”
3489.This paragraph provides the definition of a qualifying trade as:
being carried on wholly or mainly in the United Kingdom;
being carried on with a view to making profits; and
not including (to any substantial degree) any excluded activities.
3490.The paragraph also explains to what extent research and development activities may be included.
3491.The material derives from paragraph 18 of Schedule 14 to FA 2000.
Paragraph 16: Excluded activities
3492.This paragraph lists the various activities that are excluded activities for the purposes of EMI. Some of these activities are described more fully in subsequent paragraphs of this Schedule, and this paragraph includes signposts to those subsequent explanatory provisions. It derives from paragraph 19 of Schedule 14 to FA 2000.
Paragraph 17: Excluded activities: wholesale and retail distribution
3493.This is an interpretative paragraph which draws the boundary around what may be considered as a wholesale or retail distribution activity. It derives from paragraph 20 of Schedule 14 to FA 2000.
Paragraph 18: Excluded activities: leasing of certain ships
3494.This derives from paragraph 21 of Schedule 14 to FA 2000.
3495.One of the excluded activities listed in paragraph 16 of this Schedule is leasing (including letting ships on charter). This paragraph relaxes this exclusion in specified circumstances. This material derives from paragraph 21 of Schedule 14 to FA 2000. A qualifying trade can include certain kinds of short-term ship leasing, provided that the conditions set out in this paragraph are met. This relaxation does not apply to oil rigs or pleasure craft, the leasing of which remains an excluded activity.
3496.The additional material in sub-paragraph (2) makes it clear that the requirements of sub-paragraph (4) do not have to be met in relation to oil rigs and pleasure craft.
3497.An error in sub-paragraph (4) of paragraph 21 of Schedule 14 to FA 2000 has been corrected. This part of the rule in Schedule 14 is unworkable in that it is not possible for both the owner and the charterer to be subsidiaries of the company carrying on the trade, which has necessarily to be the owner of the ship.
3498.Sub-paragraph (6) is modelled on the approach taken in section 297(7) of ICTA (the Enterprise Investment Scheme). See Change 175 in Annex 1.
Paragraph 19: Excluded activities: receipt of royalties or licence fees
3499.Another excluded activity listed in paragraph 16 of this Schedule is the receipt of royalties or licence fees. Paragraph 19, which derives from paragraph 22 of Schedule 14 to FA 2000, relaxes this line somewhat and allows a qualifying trade to include the receipt of royalties or licence fees in respect of certain intangible assets as described in this paragraph.
3500.Alterations to paragraph 14 of this Schedule have enabled this provision to be expressed positively.
3501.The reference to “normal accounting practice” has been replaced by “generally accepted accounting practice” in sub-paragraph (7). This is in line with the definition in section 103(1) of FA 2002.
Paragraph 20: Excluded activities: property development
3502.This is an interpretative paragraph, which draws the boundary around what may be considered as property development, one of the excluded activities listed in paragraph 16 of this Schedule. It derives from paragraph 23 of Schedule 14 to FA 2000.
Paragraph 21: Excluded activities: hotels and comparable establishments
3503.One of the excluded activities listed in paragraph 16 of this Schedule is the operation or management of a hotel or comparable establishment (or the management of property used as such). Paragraph 21,which derives from paragraph 24 of Schedule 14 to FA 2000, supplements the rule in paragraph 16.
Paragraph 22: Excluded activities: nursing homes and residential care homes
3504.Another excluded activity listed in paragraph 16 of this Schedule is the operation of a nursing home or a residential care home establishment (or the management of property used as such). Paragraph 22, which derives from paragraph 25 of Schedule 14 to FA 2000, supplements the rule in paragraph 16.
Paragraph 23: Excluded activities: provision of facilities for another business
3505.This paragraph adds to the list of excluded activities given in paragraph 16 of this Schedule, the provision of services to a business carried on by someone else. The exclusion applies if the business receiving the services consists largely of excluded activities (from the paragraph 16 list) and the person with a controlling interest in that business also has a controlling interest in the company providing the services. This material derives from paragraph 26 of Schedule 14 to FA 2000.
3506.To achieve the connection with excluded activities, in paragraph 26(1)(a) of Schedule 14 to FA 2000 there is a reference back to the term in paragraph 19(1) of Schedule 14. A problem with this is that in theory this could encompass activities, described as such in paragraph 19(1), but then “carved out” of this general exclusion (eg certain leasing of ships). It has been made clear that the excluded activities referred to in sub-paragraph (2)(a) are those activities after the “carve out” of those which can qualify (such as the leasing of ships in paragraph 18).
Part 4: Eligible employees
Paragraph 24: Eligible employees: introduction
3507.This paragraph is introductory and derives from paragraph 27 of Schedule 14 to FA 2000.
Paragraph 25: The employment requirement
3508.This paragraph derives from paragraph 28 of Schedule 14 to FA 2000 and explains that eligible employees must be employees of the relevant company or of a qualifying subsidiary company (if the relevant company is a parent company).
Paragraph 26: The requirement as to commitment of working time
3509.This paragraph sets out that eligible employees must spend at least 25 hours a week (or at least 75% of their working time, if less) on the business of the relevant company (or of the group if the relevant company is a parent company). Time off for illness and other types of leave are disregarded for the purposes of this test. This paragraph derives from paragraph 29(1) to (4) of Schedule 14 to FA 2000.
3510.One change from the material in paragraph 29 of Schedule 14 to FA 2000 is the reference to the employee as an “individual”, in both this and paragraph 27 of this Schedule. It is not possible for anyone other than an individual to be a qualifying employee.
3511.There is also no mention in this paragraph of the closing words of paragraph 29(4) of Schedule 14 to FA 2000, about an employee ceasing to be in relevant employment. These words have been rewritten in section 535(1)(a), with a cross-reference to paragraph 25 of this Schedule.
3512.There is a change to the wording of the “statutory threshold” in sub-paragraph (1), in the reference to the average amount per week of the employee’s committed time. See Change 176 in Annex 1 and the parallel change to section 535, Change 130.
3513.Another minor change to the law concerns the 75% element of the “statutory threshold”. The wording of paragraph 29(1) of Schedule 14 to FA 2000 did not make it clear that the reference to 75% is a minimum. See Change 176 in Annex 1.
Paragraph 27: Meaning of “working time”
3514.This paragraph derives from paragraph 29(5) and (6) of Schedule 14 to FA 2000. It sets out what is meant by “working time” for the purposes of paragraph 26 of this Schedule.
Paragraph 28: The “no material interest” requirement
3515.This paragraph sets out that to be “eligible” under EMI, employees cannot have a material interest in the relevant company (or any group company if the relevant company is a parent company). Nor may any associate of the employee have such a material interest if the employee is to be an “eligible employee”. This paragraph derives from paragraph 30(1), (2) and (4) of Schedule 14 to FA 2000.
Paragraph 29: Meaning of “material interest”
3516.This paragraph derives from paragraph 31 of Schedule 14 to FA 2000. It sets out what is meant by “material interest” for the purposes of paragraph 28 of this Schedule.
Paragraph 30: Material interest: options and interests in SIPs
3517.This paragraph explains what rights to acquire shares should be taken into consideration in deciding whether an employee has a material interest, and how and when such rights should be counted. It derives from paragraphs 30(3), 32 and 33 of Schedule 14 to FA 2000.
3518.This paragraph includes the part of paragraph 33 of Schedule 14 to FA 2000, which relates to SIPs. The rest of that paragraph that refers to APS (the profit sharing schemes approved under Schedule 9 to ICTA) has not been reproduced in this Schedule. It is contained in Part 8 of Schedule 7 to this Act (Transitionals and savings).
Paragraph 31: Meaning of “associate”
3519.This paragraph derives from paragraph 34 of Schedule 14 to FA 2000. It sets out what is meant by “associate” for the purposes of paragraph 28. The same definition is used for the different share schemes, and has been rewritten in the same way in each of Schedules 2, 3, 4 and 5 to this Act.
3520.The company in sub-paragraph (1)(c) is identified as the company mentioned in paragraph 28(2) of this Schedule. This is also copied in later paragraphs to which it is relevant. This makes explicit both interpretation and practice, thereby limiting the scope of the definition of “associate” in the case of a trust or estate.
3521.Sub-paragraph (2) is new. It links this paragraph with the two that follow.
3522.The definition of “relative” in sub-paragraph (3) reflects the meaning given to this term in paragraph 26(7) of Schedule 14 to FA 2000.
Paragraph 32: Meaning of “associate”: trustees of employee benefit trust
3523.The material interest test in paragraph 28 of this Schedule applies to a wide range of associates. Where an employee has an interest in shares subject to a trust, this includes the trustees of that settlement. If that settlement is an employment benefit trust, paragraph 32 ensures the trustees of that employment benefit trust do not count as associates (unless they do so because of some other link). This paragraph derives from paragraph 35 of Schedule 14 to FA 2000.
3524.Chapter 11 of Part 7 defines the expression “employee benefit trust”, and deals with further matters arising when payments from employee benefit trusts are made.
Paragraph 33: Meaning of “associate”: trustees of discretionary trust
3525.The material interest test in paragraph 28 of this Schedule is applied to a wide range of associates including, potentially, the trustees of a settlement. This paragraph applies where the company shares are held in a discretionary trust (ordinary meaning) of which the employee is a beneficiary but with only a very remote expectation of receiving anything from the trust. In such a case the trustees of that discretionary trust do not count as associates (unless they do so because of some other link). This paragraph derives from paragraph 36 of Schedule 14 to FA 2000.
Part 5: Requirements relating to options
Paragraph 34: Requirements relating to options: introduction
3526.This paragraph is introductory and derives from paragraph 37 of Schedule 14 to FA 2000.
Paragraph 35: Type of shares that may be acquired
3527.This paragraph sets out the requirement that, to qualify, an option may only be capable of being exercised to acquire shares that are:
part of the ordinary share capital of the company in question;
fully paid-up; and
not redeemable.
3528.This paragraph derives from paragraph 38 of Schedule 14 to FA 2000.
Paragraph 36: Option to be capable of exercise within 10 years
3529.This paragraph sets out the requirement that, in order to qualify under EMI, the option must be capable of being exercised within ten years. There is no minimum exercise period. This paragraph derives from paragraph 39 of Schedule 14 to FA 2000.
Paragraph 37: Terms of option to be agreed in writing
3530.This paragraph sets out the requirement that the option must take the form of a written agreement between the grantor of the option and the employee. It goes on to elaborate on the specific types of terms that have to be covered in that agreement. It derives from paragraph 40 of Schedule 14 to FA 2000.
Paragraph 38: Non-assignability of rights
3531.This paragraph explains that in order to qualify under EMI an option must not include any transferable rights. If the option includes a right for it to be exercised after the employee’s death, the right may not extend for more than one year after the employee’s death. It is not clear from the source legislation whether the one-year period includes any part or indeed the whole of the day on which the employee died. Sub-paragraph (b) clarifies this by referring to “one year after the date of the death” so if, for example, the employee dies at 2 pm on 1 May 2003, the option must be exercised before 2 May 2004.
3532.This paragraph derives from paragraph 41 of Schedule 14 to FA 2000.
Part 6: Company reorganisations
Paragraph 39: Company reorganisations: introduction
3533.This paragraph introduces the provisions in the rest of this Part of this Schedule and explains the term “company reorganisation”. In this context a “company reorganisation” is broadly where a company acquires control of another company whose shares are subject to an unexercised qualifying share option. This paragraph derives from paragraph 59 of Schedule 14 to FA 2000.
Paragraph 40: Meaning of “qualifying exchange of shares”
3534.Among the ways listed in paragraph 39 of this Schedule for a company to acquire control of another company is by a “qualifying exchange of shares”. Paragraph 40 sets out that a “qualifying exchange of shares” is an arrangement under which the new company issues shares in itself in exchange for acquiring all the shares in the old company, subject to certain conditions laid down in this paragraph. This paragraph derives from paragraph 60 of Schedule 14 to FA 2000.
Paragraph 41: Grant of replacement option
3535.Paragraph 41 derives from paragraph 61 of Schedule 14 to FA 2000. It sets out how, if a company reorganisation meets the required criteria set out in the preceding paragraph, a qualifying share option in the old company (“the old option”) is exchanged for an equivalent share option in the new company, “the new option”, to form a “replacement option”. The replacement option must meet certain conditions and must be granted within the time limit outlined in paragraph 42 of this Schedule.
3536.The new sub-paragraph (6) makes it clear that when valuing the shares that are subject to the replacement option, for the purpose of the tests in paragraphs 5 to 7 of this Schedule, the value of the shares in the acquired company, at the time when the old option was granted, is the measure of the valuation of the shares subject to the new option. See Change 177 in Annex 1.
Paragraph 42: Period within which replacement option must be granted
3537.This paragraph outlines the time limit on granting the replacement option mentioned in the preceding paragraph. That time limit depends on the circumstances under which the new company acquires control of the old company. The various possibilities are covered in sub-paragraphs (2) to (4).
3538.In sub-paragraphs (2) and (3) there is a six-month period time limit. The wording in the source legislation does not make it clear whether or not the six months start running on the day that the change in control occurs, or on the day after. Sub-paragraphs (2) and (3) clarify this by referring to “6 months after the date on which…”. So if, for example, the new company acquires control of the old company at 2pm on 1 January 2004, the replacement option must be granted before 2 July 2004.
3539.This paragraph derives from paragraph 62 of Schedule 14 to FA 2000.
Paragraph 43: Further requirements to be met as to replacement option
3540.This paragraph sets out various other conditions that must be met if the new option is to qualify as a replacement option for the purposes of EMI. This paragraph derives from paragraph 63 of Schedule 14 to FA 2000.
3541.As noted above, in relation to paragraphs 5 and 41 of this Schedule, the test in sub-paragraph (3)(b) (the maximum value of options under paragraph 7) should be applied to the new option and the acquiring company but the shares to be valued are those in the acquired company at the date of the grant of the old option. This is made clear in sub-paragraph (4). See Change 177 in Annex 1.
Part 7: Notification of option to Inland Revenue
Paragraph 44: Notice of option to be given to Inland Revenue
3542.A further requirement for an option to be a qualifying option is that its grant must be notified to the Inland Revenue within 92 days. This paragraph sets out this requirement, along with particulars of what information has to be included in that notification and who must make it. The wording in the source legislation does not make it clear whether the day upon which the option is granted is counted in the period of 92 days. Sub-paragraph (1) clarifies that the 92-day period only starts running the day after the date upon which the option is granted.
3543.This paragraph derives from paragraph 2 of Schedule 14 to FA 2000.
3544.In sub-paragraph (7) there is a cross- reference to the term “appropriate time”. This is a new definition in paragraph 1 of this Schedule and is helpful in this Part with, for example, the application of paragraph 46(3).
Paragraph 45: Correction of notice by Inland Revenue
3545.This paragraph gives the Inland Revenue authority to amend a notice given to it under the preceding paragraph. This paragraph also sets out how and when such a correction may be made. It derives from paragraph 3 of Schedule 14 to FA 2000.
3546.This paragraph sets out the time within which the Inland Revenue may amend a notice and the time within which the employer company may reject such a correction. The source legislation gives these time limits as “nine months after the day on which the notice…was given” and “three months from the date of issue of the notice of correction”. The time limit in each case starts running from the day after the day mentioned. Sub-paragraph (4) make this clearer for the time limit for the employer company by referring to “3 months after the date of issue of the notice”.
3547.The wording in sub-paragraph (4) of paragraph 3 of Schedule 14 to FA 2000 states that the employer company can give notice rejecting a correction without saying to whom the notice should be given. A reference to the Inland Revenue has been added in sub-paragraph (4). See Change 178 in Annex 1.
Paragraph 46: Notice of enquiry
3548.This paragraph gives the Inland Revenue authority to enquire whether an option is qualifying or not after a notice has been given under paragraph 44 of this Schedule. The paragraph describes the procedure that should be followed by the Inland Revenue in opening such an enquiry and the time limits for doing so. This paragraph derives from paragraph 4 of Schedule 14 to FA 2000.
3549.Sub-paragraph (5) of paragraph 46 of this Schedule makes it clear that a notice of enquiry can be given before the end of the 92-day notification period if the option is notified to the Inland Revenue before then. The closing date remains 12 months after the end of the 92-day period. See Change 178 in Annex 1.
Paragraph 47: Completion of enquiry: closure notices
3550.This paragraph sets out what happens when an enquiry as described in the preceding paragraph is completed. It provides for the issue of a closure notice, which must include details of the Inland Revenue’s decision as to whether the option in question qualifies under EMI. It also sets out how, to whom and when such a closure notice should be issued. This paragraph derives from paragraph 5(1) to (5) of Schedule 14 to FA 2000.
Paragraph 48: Completion of enquiry: application for closure notice to be given
3551.This paragraph derives from paragraph 5(6) to (9) of Schedule 14 to FA 2000. It sets out that the employer company (or in certain circumstances the individual concerned) has a right to apply to the Commissioners for a direction requiring the Inland Revenue to issue a closure notice as described in paragraph 47 of this Schedule.
Paragraph 49: Effect of enquiry
3552.This paragraph sets out how an enquiry impacts on the qualification of an option under EMI. The Inland Revenue’s decision given in the closure notice determines whether an option qualifies, although that decision may be subject to an appeal under paragraph 50 of this Schedule. The paragraph also explains the procedure if there is no enquiry. In this circumstance the option is taken as being a qualifying option under EMI. This paragraph derives from paragraph 6 of Schedule 14 to FA 2000.
Paragraph 50: Appeals
3553.This paragraph sets out that there is a right of appeal to the Commissioners against a decision by the Inland Revenue that either the grant of an option was not properly notified in accordance with paragraph 44 of this Schedule or that the option does not qualify under EMI. The right of appeal lies with the employer company, although if the decision concerns the “commitment of working time” test in paragraph 26 of this Schedule, it is also open to the individual concerned to appeal. This paragraph derives from paragraph 7 of Schedule 14 to FA 2000.
3554.The replacement of employer company or individual in sub-paragraph (3) with “appellant” makes it clear that only the appellant has the right to elect that the appeal is heard by the Special Commissioners.
3555.The appeal must be made within a 30 day time limit. The source legislation does not make it clear whether or not the 30 day period starts running on the day that the closure notice is given to the employer company or on the day after. Sub-paragraph (3) clarifies this by referring to “within 30 days after the date when the closure notice is given”. So if, for example, the closure notice is given during the course of the day on 1 March 2004 any appeal must be made before 1 April 2004.
Part 8: Supplementary provisions
Paragraph 51: Power to require information
3556.In order to carry out an enquiry as described in paragraph 46 of this Schedule, the Inland Revenue may require further information. This paragraph provides the Inland Revenue with the authority to issue a notice to a person requiring that person to provide such information.
3557.In sub-paragraph (2)(b), the authority also extends to cover information required to determine the tax liability of a person who has been granted a qualifying option. This covers liability to capital gains tax.
3558.There is a penalty for non-compliance with a notice issued under this paragraph. The consequential amendment to section 98 of TMA 1970 is contained in Schedule 6 to this Act.
3559.In sub-paragraph (1)(a) the words “reasonably require” replace the words “think necessary” in sub-paragraph (1)(a) of paragraph 64 of Schedule 14 to FA 2000. This change brings the terminology into line with SIPs (and with comparable provisions in Corporation Tax Self Assessment, known as CTSA). See Change 179 in Annex 1.
3560.Sub-paragraph (3) clarifies the operation of the time limit for providing information by making the minimum three month period start after the date of the notice.
3561.This paragraph derives from paragraph 64 of Schedule 14 to FA 2000.
Paragraph 52: Annual returns
3562.This paragraph sets out that a company must make a return to the Inland Revenue for any year during which its shares are subject to a qualifying option, prescribes when it should make the return and that the return should contain such information as the Inland Revenue may require. It derives from paragraph 65 of Schedule 14 to FA 2000.
3563.The time limit has been changed to “before 7 July” in line with the practice in this Act where it helps to refer to an exact date following the end of the tax year.
3564.As with paragraph 64 of Schedule 14 to FA 2000, there is a penalty for non-compliance with a notice issued under this paragraph. The consequential amendment to section 98 of TMA 1970 is contained in Schedule 6 to this Act.
Paragraph 53: Compliance with time limits
3565.This paragraph allows an extension to the various time limits mentioned throughout the EMI provisions if the person failing to meet a particular time limit has a reasonable excuse for doing so. It derives from paragraph 70 of Schedule 14 to FA 2000.
Paragraph 54: Power to amend by Treasury order
3566.This paragraph allows the Treasury to make an order amending the terms of the trading activities tests for a qualifying company or amending the monetary limits on share values and on a company’s gross assets. This paragraph derives from paragraph 69 of Schedule 14 to FA 2000.
3567.The power to amend by Treasury order, as set out in paragraph 69 of Schedule 14 to FA 2000, did not include any power to amend the £100,000 limit on unexercised employee options. Employee options are defined in section 536(2). That limit, which appears in paragraph 47(1)(g) of that Schedule, has been rewritten as section 536(1)(e). The power to amend by Treasury order has been extended to include that £100,000 limit. See Change 180 in Annex 1.
3568.In practice this limit is only likely to be increased but the new sub-paragraph (2) further protects the taxpayer by explicitly matching changes in the paragraph 5 and 6 limits with that in section 536(1)(e).
Paragraph 55: Meaning of “market value” of shares
3569.This paragraph sets out that the “market value” of shares should have the same meaning as in TCGA 1992, subject to the special rule on the valuation of shares subject to restriction or risk of forfeiture in paragraph 5(7) of this Schedule.
3570.Paragraph 55 derives from paragraph 66(1) of Schedule 14 to FA 2000.
Paragraph 56: Determination of market value of shares
3571.Under this paragraph, if a market value has to be determined for the purposes of the EMI provisions, the company and the Inland Revenue may agree upon that market value and the dates by reference to which it must be determined. Alternatively the Inland Revenue have to decide what that market value is, and issue a notice to the company detailing its decision. The employer company has a right to pre-empt that decision by the Inland Revenue and refer the question instead to the Commissioners for their decision. This paragraph derives from paragraphs 66(2) and 67(1), (4) and (5) of Schedule 14 to FA 2000.
Paragraph 57: Appeal against determination of market value of shares
3572.Where the Inland Revenue have decided on a market value of shares under paragraph 56 of this Schedule, and issued a notice setting out that decision, the employer company may appeal against that decision. This paragraph sets out that right of appeal, saying to whom it must be made and when.
3573.The appeal must be made within a 30 day time limit. The wording in the source legislation does not make it clear whether or not the 30 day period starts running on the day that the notice of determination is given to the employer company or on the day after. Sub-paragraph (2) clarifies this by referring to “within 30 days after the date when notice of their determination is given”. So if, for example, the notice of determination is given during the course of the day on 1 March 2004 any appeal must be made before 1 April 2004.
3574.This paragraph derives from paragraph 67(2), (3) and (5) of Schedule 14 to FA 2000.
Paragraph 58: Minor definitions
3575.This paragraph provides a number of definitions of terms used throughout the EMI provisions. It derives from paragraph 71(1) of Schedule 14 to FA 2000.
3576.There is one new term included in this list of definitions: “group of companies”. This new term has been used in section 539(2)(b) and in paragraphs 5(1)(b)(ii) and (4)(b), and 6(2)(b) and (3) of this Schedule. See Note 69 in Annex 2.
Paragraph 59: Index of defined expressions
3577.This paragraph shows where various terms used in the EMI code are defined. The equivalent list for Schedule 14 to FA 2000 is in paragraph 72 of that Schedule.
