Finance Act 2000

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Finance Act 1996 (c. 8)

6

In section 197(2) of the Finance Act 1996 (enactments for which interest rates are set under section 197), after paragraph (f) there shall be inserted—

(g) the following provisions of Schedule 6 to the Finance Act 2000 (interest payable to or by the Commissioners in connection with climate change levy), that is to say, paragraphs 41(2)(f), 62(3)(f), 66, 70(1)(b) and 81(3).

Finance Act 1997 (c. 16)

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• (1) The Finance Act 1997 is amended as follows.

• (2) In section 51(5) (indirect taxes in respect of which the Commissioners may make regulations about enforcement by distress), after paragraph (e) insert—

(f) climate change levy.

• (3) In section 52(5) (enforcement in Scotland of indirect taxes by diligence), after paragraph (e) insert—

(f) climate change levy.

• (4) Sub-paragraph (3) extends only to Scotland.

SCHEDULE 8

Part I — Introductory

Employee share ownership plans

1

• (1) In this Schedule an “employee share ownership plan” means a plan established by a company providing—

• (a) for shares (“free shares”) to be appropriated to employees without payment, or

• (b) for shares (“partnership shares”) to be acquired on behalf of employees out of sums deducted from their salary.

• (2) A plan that provides for partnership shares may also provide for shares (“matching shares”) to be appropriated without payment to employees in proportion to the partnership shares acquired by them.

• (3) Where a plan contains provision for all, or more than one, of the kinds of shares mentioned in sub-paragraphs (1) and (2), it may leave it for the company to decide when the provisions relating to each kind of share are to have effect.

• (4) In this Schedule, in relation to an employee share ownership plan “the company” means the company which established the plan.

Group plans

2

• (1) An employee share ownership plan established by a company that controls other companies (a “parent company”) may extend to all or any of those other companies.

In this Schedule a plan established by a parent company which so extends is referred to as a “group plan".

• (2) In relation to a group plan a “participating company” means the parent company or any other company to which for the time being the plan is expressed to extend.

Meaning of “award of shares", “participant" etc.

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• (1) For the purposes of this Schedule an award of shares is made under a plan on each occasion when in accordance with the plan—

• (a) matching or free shares are appropriated to employees, or

• (b) partnership shares are acquired on behalf of employees.

• (2) For the purposes of this Schedule an individual participates in an award of free, matching or partnership shares under the plan if shares (“the individual award”) included in that award are—

• (a) in the case of an award of free or matching shares, appropriated to him, or

• (b) in the case of an award of partnership shares, acquired on his behalf,

and references to shares awarded to an individual are to free or matching shares appropriated to him, or partnership shares acquired on his behalf, under the plan.

• (3) In this Schedule “participant”, in relation to a plan, means an individual to whom shares have been awarded under the plan.

Application for approval

4

• (1) Where an employee share ownership plan has been established, on the application of the company the Inland Revenue shall approve the plan if they are satisfied that it meets the requirements of this Schedule.

• (2) An application for approval must contain such particulars and be supported by such evidence as the Inland Revenue may require.

Appeal against refusal of approval

5

• (1) If the Inland Revenue refuse to approve the plan, the company may appeal to the Special Commissioners.

• (2) Notice of appeal must be given to the Inland Revenue within 30 days after their decision was notified to the company.

• (3) If the Special Commissioners allow the appeal they may direct the Inland Revenue to approve the plan with effect from such date (but not earlier than the application for approval) as the Commissioners may specify.

Part II — General requirements

Introduction

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The plan must meet the requirements of—

The purpose of the plan

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• (1) The purpose of the plan must be to provide benefits to employees in the nature of shares in a company which give them a continuing stake in that company.

• (2) The plan must not contain, and the operation of the plan must not involve, features which are neither essential nor reasonably incidental to that purpose.

All-employee nature of plan

8

• (1) The plan must provide that every employee who—

• (a) meets the requirements mentioned in Part III (eligibility of individuals) in relation to an award of shares under the plan, and

• (b) is chargeable to tax under Case I of Schedule E in respect of the employment by reference to which he satisfies the condition in paragraph 14 (the employment requirement),

is eligible to participate in the award, and invited to do so.

• (2) The plan must not contain any feature which has or would have the effect of discouraging any description of employees within sub-paragraph (1) from participating in an award of shares under the plan.

This does not apply to any provision required or authorised by this Schedule.

• (3) The plan may provide that an employee who—

• (a) meets the requirements mentioned in Part III (eligibility of individuals) in relation to an award of shares under the plan, but

• (b) is not chargeable to tax as mentioned in sub-paragraph (1)(b),

is eligible to participate in the award, and may be invited to do so.

• (4) For the purposes of this Schedule an individual is a “qualifying employee”, in relation to an award of shares, if—

• (a) he is eligible to participate in the award, and

• (b) either—

• (i) he must be invited to participate in the award (see sub-paragraph (1)), or

• (ii) under the plan he may be invited to participate in the award (see sub-paragraph (3)) and has been so invited.

Participation on same terms

9

• (1) The requirement of this paragraph is—

• (a) that every employee who is invited to participate in an award must be invited to participate on the same terms, and

• (b) that those who do participate must actually do so on the same terms.

• (2) The requirement of this paragraph is infringed by the awarding of free shares by reference to factors other than those mentioned in sub-paragraph (3).

• (3) The requirement of this paragraph is not infringed by the awarding of free shares by reference to an employee’s—

• (a) remuneration,

• (b) length of service, or

• (c) hours worked.

This is subject to sub-paragraph (4).

• (4) Where the awarding of free shares is by reference to more than one of the factors mentioned in sub-paragraph (3) the requirement of this paragraph is infringed unless—

• (a) each factor gives rise to a separate entitlement related to the level of remuneration, length of service or (as the case may be) hours worked, and

• (b) the total entitlement is the sum of those separate entitlements.

• (5) In the case of an award of free shares which provides for performance allowances, this paragraph has effect as provided in paragraph 29 (performance allowances: method one) or, as the case may be, paragraph 30 (performance allowances: method two).

For this purpose “performance allowance” has the meaning given in paragraph 25(1).

No preferential treatment for directors etc.

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• (1) The first requirement of this paragraph is that no feature of the plan must have or be likely to have the effect of conferring benefits wholly or mainly—

• (a) on directors, or

• (b) on employees receiving higher levels of remuneration.

• (2) The second requirement of this paragraph is that in the case of a plan established by a company that is a member of a group, the identity of the company (or, if it is a group plan, the participating companies) must not be such that the plan has or is likely to have the effect of conferring benefits wholly or mainly—

• (a) on employees of companies that are members of the group who receive higher levels of remuneration, or

• (b) on directors of such companies.

• (3) This paragraph is subject to paragraph 9(3) (award of shares by reference to remuneration etc.).

No further conditions

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No conditions, other than those required or permitted by this Schedule, may be imposed on an employee’s participation in an award of shares under the plan.

No loan arrangements

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• (1) The arrangements for the plan must not make any provision, or be in any way associated with any provision made, for loans to some or all of the employees of—

• (a) the company, or

• (b) in the case of a group plan, any participating company,

and the operation of the plan must not be in any way associated with such loans.

• (2) For the purposes of sub-paragraph (1) “arrangements” includes any scheme, agreement, undertaking or understanding, whether or not legally enforceable.

Part III — Eligibility of individuals

Introduction

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• (1) The plan must provide that an individual may only participate in an award of shares if—

• (a) in the case of free shares, he is eligible to participate in the award at the time it is made, and

• (b) in the case of partnership or matching shares—

• (i) if there is no accumulation period, he is eligible to participate in the award at the time the partnership share money relating to the award is deducted, and

• (ii) if there is an accumulation period, he is eligible to participate in the award at the time of the first deduction of partnership share money relating to the award.

• (2) For the purposes of sub-paragraph (1), in the case of an award of matching shares the deduction of partnership share money “relating” to the award is the deduction relating to the award of partnership shares to which the matching shares relate.

• (3) An individual is eligible to participate in an award of shares under the plan if and only if—

• (a) the requirements of the plan are met as to—

• (i) employment (see paragraph 14),

• (ii) no material interest (see paragraph 15), and

• (iii) not participating in other schemes (see paragraph 16), and

• (b) in a case where the individual is not within paragraph 8(1) (employees who must be invited to participate in the award), any further eligibility requirements of the plan are met.

The employment requirement

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• (1) The plan must provide that an individual is not eligible to participate in an award of shares unless—

• (a) he is an employee of the company or, in the case of a group plan, of a participating company, and

• (b) where the plan provides for a qualifying period, he has at all times during that period been an employee of a qualifying company

• (1A) Except in the case of a group plan, a qualifying company means—

• (a) the company, or

• (b) a company that when the individual was employed by it was an associated company—

• (i) of the company, or

• (ii) of another company qualifying under this paragraph.

• (1B) In the case of a group plan, a qualifying company means—

• (a) a company that is a participating company at the end of the qualifying period, or

• (b) a company that when the individual was employed by it was a participating company, or

• (c) a company that when the individual was employed by it was an associated company of—

• (i) a company qualifying under paragraph (a) or (b), or

• (ii) another company qualifying under this paragraph.

• (2) If the plan provides for a qualifying period, that period must be—

• (a) in the case of free shares, a period of not more than 18 months ending with the date on which the award is made,

• (b) in the case of partnership or matching shares—

• (i) if the plan does not provide for an accumulation period, a period of not more than 18 months ending with the deduction of partnership share money relating to the award, and

• (ii) if the plan provides for an accumulation period, a period of not more than six months ending with the start of the accumulation period relating to the award.

• (3) For the purposes of sub-paragraph (2), in the case of an award of matching shares the deduction of partnership share money or accumulation period “relating” to the award is the deduction or period relating to the award of partnership shares to which the matching shares relate.

• (4) In relation to an award, the same qualifying period must apply in relation to all employees of the company or, in the case of a group plan, of the participating companies.

• (5) Subject to sub-paragraphs (2) and (4), the plan may authorise the company to specify different qualifying periods in respect of different awards of shares.

The “no material interest" requirement

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• (1) The plan must provide that an individual is not eligible to participate in an award of shares if he has, or has within the preceding twelve months had, a material interest in—

• (a) a close company whose shares may be awarded under the plan, or

• (b) a company which has control of such a company or is a member of a consortium which owns such a 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) This paragraph is supplemented—

• (a) as regards the meaning of “material interest”, by paragraphs 17 to 19, and

• (b) as regards the meaning of “associate”, by paragraph 20 (read with paragraphs 21 and 22).

The requirement of non-participation in other relevant share schemes

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• (1) The plan must provide that an individual is not to participate in an award of free shares under the plan in a tax year if in that year—

• (a) shares have been (or are at the same time to be) appropriated to him in accordance with an approved profit sharing scheme established by the company or a connected company, or

• (b) he has participated (or is at the same time to participate) in another employee share ownership plan established by the company or a connected company and approved under this Schedule.

• (2) The plan must provide that an individual is not eligible to participate in an award of partnership or matching shares under the plan in any tax year if, in that year, he has participated (or at the same time participates) in an award of shares under another employee share ownership plan established by the company or a connected company and approved under this Schedule.

• (3) For the purposes of this paragraph an individual is treated as having participated in an award of free shares under an employee share ownership plan if he would have participated in that award but for his failure to obtain a performance allowance (see paragraph 25).

• (4) In this paragraph “connected company” means—

• (a) a company which controls or is controlled by the company or which is controlled by a company which also controls the company, or

• (b) a company which is a member of a consortium owning the company or which is owned in part by the company as a member of a consortium.

Meaning of “material interest"

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• (1) For the purposes of paragraph 15 (the “no material interest” requirement) 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 25% 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 25% 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—section 414(1)(a) of the Taxes Act 1988 (exclusion of companies not resident in the United Kingdom), orsection 415 of that Act (exclusion of certain quoted companies); and

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

• (3) This paragraph is supplemented by paragraph 18 (options etc.) and paragraph 19 (shares held by trustees of approved profit sharing scheme etc.).

Material interest: options etc.

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• (1) For the purposes of paragraph 17(1) (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 17(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.

19

In applying paragraph 17(1) (meaning of material interest) there shall be disregarded—

• (a) the interest of the trustees of—

• (i) any approved profit sharing scheme, or

• (ii) an approved employee share ownership plan,

in any shares 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"

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• (1) In paragraph 15 (the “no material interest” requirement) “associate”, in relation to a person, means—

• (a) any relative or partner of that person,

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

• (c) where that person 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, child or remoter issue, or brother or sister.

• (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

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• (1) This paragraph applies for the purposes of paragraph 20(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 relevant 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 25% 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

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• (1) This paragraph applies for the purposes of paragraph 20(1)(c) (meaning of “associate”: trustees of settlement) where—

• (a) the person in question (“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 relevant company”) in relation to which it falls to be determined whether that person 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 relevant company which were subject to the trust, and

• (c) during the period of twelve months ending with the date when the beneficiary ceased 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 relevant company at any time during the period of twelve months mentioned in paragraph (c).

• (3) In sub-paragraph (2) “associate” has the meaning given by paragraph 20, but with the omission of sub-paragraph (1)(c) of that paragraph (trusts and estates).

Part IV — Free shares

Introduction

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If the plan provides for free shares it must comply with the requirements of this Part of this Schedule.

Maximum annual award

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• (1) The plan must provide that the initial market value of the free shares awarded to a participant in any tax year cannot exceed £3,000.

• (2) For this purpose the “initial market value” of shares means their market value on the date on which they are awarded.

• (3) 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.

Performance allowances

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• (1) Sub-paragraph (2) applies if the plan provides for performance allowances, that is for—

• (a) whether or not free shares will be awarded to an individual, or

• (b) the number or value of free shares awarded,

to be conditional on performance targets being met.

• (2) Where this sub-paragraph applies—

• (a) the requirements of—

paragraph 26 (performance allowances: general application),

paragraph 27 (performance measures and targets), and

paragraph 28 (performance allowances: information to be given to employees), and

• (b) the requirements of either paragraph 29 (method one) or paragraph 30 (method two),

must be complied with.

Performance allowances: general application

26

If the plan provides for performance allowances in relation to an award it must make provision for such allowances for all qualifying employees in relation to that award.

Performance allowances: measures and targets

27

• (1) If the plan provides for performance allowances the following requirements must be met with respect to performance measures and performance targets.

• (2) The performance measures used must—

• (a) be based on business results or other objective criteria, and

• (b) be fair and objective measures of the performance of the units to which they are or may be applied.

• (3) The performance targets must be set for performance units comprising one or more employees.

• (4) For the purposes of an award of free shares under the plan an employee must not be a member of more than one performance unit.

Performance allowances: information to be given to employees

28

• (1) If the plan provides for performance allowances in relation to an award of shares, the plan must require the company—

• (a) to notify each employee participating in the award of the performance targets and measures which, under the plan, will be used to determine the number or value of free shares awarded to him; and

• (b) to notify all qualifying employees of the company or, in the case of a group plan, of any participating company, in general terms, of the performance measures to be used to determine the number or value of free shares to be awarded to each employee participating in the award.

• (2) The notices must be given as soon as reasonably practicable.

• (3) The company may exclude from the notice mentioned in sub-paragraph (1)(b) any information the disclosure of which the company reasonably considers would prejudice commercial confidentiality.

Performance allowances: method one

29

• (1) The requirements of this paragraph are that if the plan provides for performance allowances in relation to an award of shares—

• (a) at least 20% of the shares in the award must be awarded without reference to performance in accordance with the requirement of paragraph 9 (participation on same terms),

• (b) the remaining shares must be awarded by reference to performance, and

• (c) the highest number of shares within paragraph (b) awarded to an individual must be not more than four times the highest number of shares within paragraph (a) awarded to an individual.

• (2) In determining for the purposes of sub-paragraph (1)(a) whether the requirement of paragraph 9 (participation on same terms) is met the shares to which sub-paragraph (1)(a) above applies are treated as a separate award of free shares.

• (3) Where the plan meets the requirements of sub-paragraph (1), the requirement of paragraph 9 (participation on same terms) does not apply to any provision of the plan relating to the awarding of shares within sub-paragraph (1)(b).

• (4) If free shares of different classes are awarded, the requirements of sub-paragraph (1) apply separately in relation to each class.

Performance allowances: method two

30

• (1) The requirements of this paragraph are that in relation to an award of free shares under the plan—

• (a) some or all of the shares must be awarded by reference to performance; and

• (b) the awarding of the shares to qualifying employees who are members of the same performance unit must meet the requirement of paragraph 9 (participation on same terms).

• (2) In determining for the purposes of sub-paragraph (1)(b) whether the requirement of paragraph 9 (participation on same terms) is met the free shares awarded in respect of each performance unit are treated as a separate award of free shares.

• (3) If this method is used nothing in paragraph 9 (participation on same terms) requires the awarding of shares to members of different performance units to be on the same terms.

The holding period

31

• (1) The plan must require the company in respect of each award of free shares to specify a period (“the holding period”) during which a participant is bound by contract with the company—

• (a) to permit his free shares to remain in the hands of the trustees, and

• (b) not to assign, charge or otherwise dispose of his beneficial interest in the shares.

• (2) The holding period—

• (a) must be a period of at least three years but not more than five years, beginning with the date on which the shares in question are awarded to the participant, and

• (b) must be the same in respect of all shares in the same award.

• (3) The plan may authorise the company to specify different holding periods from time to time.

But it must prevent the company from increasing the holding period specified in respect of free shares that have been awarded under the plan.

• (4) The participant’s obligations with respect to the holding period—

• (a) come to an end if during the period he ceases to be in relevant employment, and

• (b) are subject to—

paragraph 32 (power to authorise trustees to accept general offers etc.);

paragraph 73 (meeting PAYE obligations); and

paragraph 121(5) (termination of plan: early removal of shares with participant’s consent).

Holding period: power to authorise trustees to accept general offers etc.

32

A participant may direct the trustees to do any of the following during the holding period—

• (a) to accept an offer for any of his free shares (“the original shares”) if the acceptance or agreement will result in a new holding being equated with the original shares for the purposes of capital gains tax; or

• (b) to accept an offer of a qualifying corporate bond (whether alone or with other assets or cash or both) for his free shares if the offer forms part of such a general offer as is mentioned in paragraph (c); or

• (c) to accept an offer of cash, with or without other assets, for his free shares if the offer forms part of a general offer which is made to holders of shares of the same class as his or of shares in the same company and which is made in the first instance on a condition such that if it is satisfied the person making the offer will have control of that company, within the meaning of section 416 of the Taxes Act 1988; or

• (d) to agree to a transaction affecting his free shares or such of them as are of a particular class, if the transaction would be entered into pursuant to a compromise, arrangement or scheme applicable to or affecting—

• (i) all the ordinary share capital of the company or, as the case may be, all the shares of the class in question, or

• (ii) all the shares, or all the shares of the class in question, which are held by a class of shareholders identified otherwise than by reference to their employment or their participation in an approved employee share ownership plan.

Part V — Partnership shares

Introduction

33

If the plan provides for partnership shares it must comply with the requirements of this Part of this Schedule.

Partnership share agreements

34

The plan must provide for qualifying employees to enter into agreements with the company (“partnership share agreements”) under which—

• (a) the employee authorises the company to deduct part of his salary for the purchase of partnership shares, and

• (b) the company undertakes to arrange for partnership shares to be awarded to the employee in accordance with the plan.

Deductions from salary

35

• (1) The plan must provide for a partnership share agreement to be given effect by deductions from the employee’s salary.

Amounts so deducted are referred to in this Part of this Schedule as “partnership share money".

• (2) The partnership share agreement must specify—

• (a) what amounts are to be deducted, and

• (b) at what intervals.

This does not prevent the employee and the company agreeing to vary those amounts or intervals.

• (3) For the purposes of sub-paragraph (2)(a) the agreement may specify a percentage of the employee’s salary.

• (4) The plan must require the employer company to calculate the amounts and intervals having regard to the provisions of paragraph 36 (maximum amount of deductions from salary).

For this purpose “the employer company" is the company by reference to which the employee meets the requirement of paragraph 14 (the employment requirement) in relation to the plan.

Maximum amount of deductions

36

• (1) The amount of partnership share money deducted from an employee’s salary must not exceed—

• (a) £125 in any month, or

• (b) where the salary is not paid at monthly intervals, such amount as bears to £125 the same proportion as the pay interval in question bears to one month.

• (2) The amount of partnership share money deducted from an employee’s salary must not exceed 10% of the employee’s salary.

This means—

• (a) if the plan does not provide for an accumulation period, 10% of the salary payment from which the deduction is made;

• (b) if the plan provides for an accumulation period, 10% of the total of the employee’s salary payments over that period.

• (3) The plan may authorise the company to specify lower limits than those specified in sub-paragraphs (1) and (2).

Different limits may be specified in relation to different awards of shares.

• (4) Any amount deducted in excess of that allowed by sub-paragraph (1) or (2), or any lower limit in the plan, must be paid over to the employee as soon as practicable.

Minimum amount of deductions

37

• (1) The plan may provide that the amount to be deducted in pursuance of a partnership share agreement in any month must not be less than a minimum amount specified in the plan.

• (2) The specified minimum amount must not be greater than £10.

• (3) Sub-paragraphs (1) and (2) apply whatever the intervals at which the employee is paid.

Notice of possible effect of deductions on benefit entitlement

38

• (1) The plan must provide that the company may not enter into a partnership share agreement with an employee unless the agreement contains a notice under this paragraph.

• (2) A notice under this paragraph is a notice in a prescribed form containing prescribed information as to the possible effect of deductions on an employee’s entitlement to social security benefits, statutory sick pay and statutory maternity pay.

• (3) In this paragraph “prescribed” means prescribed by regulations made by the Board.

Partnership share money held for employee

39

• (1) The plan must provide that partnership share money deducted in accordance with a partnership share agreement is—

• (a) paid to the trustees as soon as practicable, and

• (b) held by them on behalf of the employee until such time as it is applied by them in acquiring partnership shares on the employee’s behalf.

This is subject to paragraphs 40(4)(b) and 42(5)(b) and (6) (obligations to pay money to employee).

• (2) References in this Schedule to the trustees acquiring partnership shares on behalf of an employee include their appropriating to an employee shares already held by them.

• (3) The plan must provide for the trustees to keep any money required to be held by them under this paragraph in an account (interest bearing or otherwise) with—

• (a) a person falling within section 840A(1)(b) of the Taxes Act 1988,

• (b) a building society, or

• (c) a firm falling within section 840A(1)(c) of that Act,

• (4) If the partnership share money held on behalf of an employee is held in an interest bearing account the plan must provide for the trustees to account to the employee for the interest.

Plan with no accumulation period

40

• (1) If the plan does not provide for an accumulation period, it must provide for partnership share money to be applied by the trustees in acquiring partnership shares on behalf of the employee on the acquisition date.

• (2) For this purpose “the acquisition date” means the date set by the trustees in relation to the award of partnership shares, being a date within 30 days after the last date on which the partnership share money to be applied in acquiring the shares was deducted.

• (3) The number of shares awarded to each employee must be determined in accordance with the market value of the shares on the acquisition date.

• (4) Any surplus partnership share money remaining after the acquisition of shares by the trustees—

• (a) may with the agreement of the employee be carried forward and added to the amount of the next deduction, and

• (b) in any other case must be paid over to the employee as soon as practicable.

• (5) This paragraph is subject to paragraph 43 (restriction imposed on number of shares awarded).

Plan with accumulation period

41

• (1) The plan may provide for accumulation periods not exceeding twelve months.

• (2) Where it does so—

• (a) the partnership share agreement must specify when each accumulation period begins and ends (the beginning of the first period being not later than the date on which the first deduction is made), and

• (b) the accumulation period which applies in relation to each award of partnership shares must be the same for all individuals who are eligible to participate in the award.

• (3) The partnership share agreement may specify that an accumulation period comes to an end on the occurrence of a specified event.

This is subject to sub-paragraph (2)(b).

• (4) Where the plan provides for accumulation periods, it may also provide that if—

• (a) during an accumulation period, a transaction occurs in relation to any of the shares (“the original holding”) to be acquired under a partnership share agreement which results in a new holding of shares being equated with the original holding for the purposes of capital gains tax, and

• (b) the employee gives his consent for the purposes of this sub-paragraph,

the partnership share agreement shall have effect after the time of that transaction as if it were an agreement for the purchase of shares comprised in the new holding.

Application of money deducted in accumulation period

42

• (1) This paragraph applies if the plan provides for one or more accumulation periods.

• (2) The plan must provide for the partnership share money deducted in each period to be applied by the trustees in acquiring partnership shares on behalf of the employee on the acquisition date.

This is subject to sub-paragraphs (6) and (7).

• (3) In sub-paragraph (2) “the acquisition date” means the date set by the trustees in relation to the award of partnership shares, being a date within 30 days after the end of the accumulation period which applies in relation to the award.

• (4) The number of shares awarded to each employee must be determined in accordance with the lower of—

• (a) the market value of the shares at the beginning of the accumulation period, and

• (b) the market value of the shares on the acquisition date.

• (5) Any surplus partnership share money remaining after the acquisition of shares by the trustees—

• (a) may with the agreement of the employee be carried forward to the next accumulation period, and

• (b) in any other case must be paid over to the employee as soon as practicable.

• (6) The plan must provide that where—

• (a) partnership share money has been deducted in an accumulation period, and

• (b) the employee ceases to be in relevant employment during that period,

the partnership share money is paid over to the individual as soon as practicable.

• (7) The partnership share agreement may provide that, where an accumulation period comes to an end on the occurrence of a specified event, the partnership share money deducted in that period must be paid over to the individual as soon as practicable instead of being applied in acquiring shares.

• (8) This paragraph is subject to paragraph 43 (restriction imposed on number of shares awarded).

Restriction imposed on number of shares awarded

43

• (1) The plan may authorise the company to specify the maximum number of shares (“the award maximum”) to be included in an award of partnership shares.

A different number may be specified in relation to different awards.

• (2) If the plan so authorises the company, it must require partnership share agreements to contain an undertaking by the company to notify the employee of any restriction on the number of shares to be included in an award.

• (3) The plan must require the notice to be given—

• (a) if there is no accumulation period, before the deduction of the partnership share money relating to the award, and

• (b) if there is an accumulation period, before the beginning of the accumulation period relating to the award.

• (4) The plan must provide that where the award maximum in respect of an award of partnership shares is smaller than the number of shares which would otherwise be included in the award, the number of partnership shares included in each individual award under paragraph 40(1) or 42(2) shall be reduced proportionately.

Stopping and re-starting deductions

44

• (1) The plan must provide that an employee may at any time give notice in writing to the company to stop deductions in pursuance of a partnership share agreement.

• (2) The plan must also provide that an employee who has stopped deductions may subsequently give notice in writing to the company to re-start deductions in pursuance of the agreement, but may not make up deductions that have been missed.

• (3) If the plan makes provision for one or more accumulation periods, it may prevent an employee re-starting deductions more than once in any accumulation period.

• (4) The plan must provide that unless a later date is specified in the notice—

• (a) the company must within 30 days of receiving a notice within sub-paragraph (1), ensure that no further deductions are made by it under the partnership share agreement;

• (b) the company must on receiving a notice within sub-paragraph (2) re-start deductions under the partnership share agreement not later than the re-start date.

• (5) For the purposes of sub-paragraph (4)(b) “the re-start date” is the date of the first deduction due under the partnership share agreement more than 30 days after receipt of the notice within sub-paragraph (2).

Withdrawal from partnership share agreement

45

• (1) The plan must provide that an employee may withdraw from a partnership share agreement at any time by notice in writing to the company.

• (2) The plan must provide that, unless a later date is specified in the notice, a notice of withdrawal takes effect 30 days after it is received by the company.

• (3) The plan must provide that where an employee withdraws from a partnership share agreement, any partnership share money held on his behalf is to be paid over to him as soon as practicable.

Repayment of partnership share money on withdrawal of approval or termination

46

• (1) The plan must provide that where—

• (a) the approval of the plan is withdrawn (see paragraph 118), or

• (b) a plan termination notice is issued in respect of the plan (see paragraph 120),

any partnership share money held on behalf of an employee is paid over to him.

• (2) The plan must require the payment to be made—

• (a) in a case within sub-paragraph (1)(a), as soon as practicable after notice of the withdrawal is given to the company, and

• (b) in a case within sub-paragraph (1)(b), as soon as practicable after the plan termination notice is notified to the trustees under paragraph 120(2).

Access to partnership shares

47

• (1) The plan must provide that when partnership shares have been awarded to an employee, the employee may at any time withdraw any or all of the partnership shares from the plan.

• (2) There may be a charge to tax under paragraph 86 (charge on partnership shares ceasing to be subject to plan).

Meaning of “salary"

48

References in this Part of this Schedule to an employee’s “salary" are to such of the emoluments of the employment by reference to which he is eligible to participate in the plan as are liable to be paid under deduction of tax pursuant to section 203 of the Taxes Act 1988 (PAYE)[or which would be if that individual were within the scope of Schedule E], after deducting amounts included by virtue of Chapter II of Part V of that Act (expenses and benefits in kind) or which would have been had the individual been within the scope of Schedule E, or would be so liable apart from this Schedule.

Part VI — Matching shares

Introduction

49

If the plan provides for matching shares it must comply with the requirements of this Part of this Schedule.

General requirements for matching shares

50

• (1) The plan must provide for the matching shares—

• (a) to be shares of the same class and carrying the same rights as the partnership shares to which they relate;

• (b) to be awarded on the same day as the partnership shares to which they relate are awarded; and

• (c) to be awarded to all employees who participate in the award on exactly the same basis.

• (2) Sub-paragraph (1) is subject to paragraph 65 (permitted restrictions: provision for forfeiture).

Ratio of matching shares to partnership shares

51

• (1) The partnership share agreement must specify—

• (a) the ratio of matching shares to partnership shares for the time being offered by the company, and

• (b) the circumstances and manner in which the ratio may be changed by the company.

• (2) The ratio must not exceed 2:1 and must be applied by reference to the number of shares.

• (3) A partnership share agreement must provide for the employee to be informed by the company if the ratio offered by the company changes before partnership shares are awarded to him under the agreement.

Application of provisions relating to holding period etc.

52

The provisions of paragraphs 31 and 32 as to the holding period and related matters apply in relation to matching shares as they apply to free shares.

Part VII — Reinvestment of cash dividends

Reinvestment

53

• (1) The plan may provide that where the company so directs—

• (a) all cash dividends in respect of plan shares held on behalf of participants must be applied in acquiring further shares on their behalf, or

• (b) all cash dividends in respect of plan shares held on behalf of participants who elect to reinvest their dividends must be applied in acquiring further shares on their behalf.

This is referred to in this Part of this Schedule as “reinvestment" and the further plan shares acquired are referred to in this Schedule as “dividend shares".

• (2) The company may revoke a direction.

• (3) Where cash dividends in respect of plan shares held on behalf of a participant are not required to be reinvested under the plan, the plan must require the dividends to be paid over to the participant as soon as practicable.

• (4) This paragraph is subject to paragraph 54 (limit on amount reinvested).

Limit on amount reinvested

54

• (1) The plan must provide that the total dividend reinvestment in respect of any participant cannot exceed £1,500 in any tax year.

• (2) For this purpose “the total dividend reinvestment" in respect of a participant is the sum of—

• (a) the amount applied by the trustees in acquiring dividend shares on behalf of the participant under the plan, and

• (b) the amount applied by the trustees of other employee share ownership plans that are—

• (i) established by the company or an associated company, and

• (ii) approved under this Schedule,

in acquiring dividend shares on his behalf.

• (3) If the amounts received by the trustees exceed the limit in sub-paragraph (1), the plan must provide for the balance to be paid over to the participant as soon as practicable.

General requirements for dividend shares

55

The plan must provide that dividend shares are shares—

• (a) of the same class and carrying the same rights as the shares in respect of which the dividend is paid, and

• (b) which are not subject to any provision for forfeiture.

Acquisition of dividend shares

56

• (1) The plan must provide that in exercising their powers in relation to the acquisition of dividend shares the trustees must treat participants fairly and equally.

• (2) The plan must provide for the trustees to apply a cash dividend in acquiring further shares on behalf of participants on the acquisition date.

This does not affect the carrying forward under paragraph 58 of any such amount as is mentioned in sub-paragraph (1) of that paragraph (amounts remaining after acquisition of shares).

• (3) For this purpose “the acquisition date” means the date set by the trustees in relation to the acquisition of dividend shares, being a date within 30 days after the dividend is received by them.

• (4) The number of dividend shares acquired on behalf of each participant must be determined in accordance with the market value of the shares on the acquisition date.

• (5) References in this Part of this Schedule to the trustees acquiring dividend shares on behalf of a participant include their appropriating to a participant shares already held by them.

Holding period for dividend shares

57

The provisions of paragraphs 31 and 32 (holding period and related matters) apply in relation to dividend shares as they apply to free shares, except that the holding period must be three years.

Certain amounts not reinvested to be carried forward

58

• (1) Any amount that is not reinvested—

• (a) because the amount of the cash dividend to which the participant is entitled is not sufficient to acquire a share, or

• (b) because there is an amount remaining after acquiring one or more dividend shares on the participant’s behalf,

may be retained by the trustees and carried forward to be added to the amount of the next cash dividend to be reinvested, but shall be held by them so as to be separately identifiable for the purposes of sub-paragraphs (2) and (3).

• (2) An amount retained under this paragraph shall be paid over to the participant—

• (a) if or to the extent that it is not reinvested within the period of three years beginning with the date on which the dividend was paid, or

• (b) if during that period the participant ceases to be in relevant employment, or

• (c) if during that period a plan termination notice is issued in respect of the plan.

• (3) An amount required to be paid over to the participant under sub-paragraph (2) shall be paid over as soon as practicable.

• (4) For the purposes of this paragraph an amount carried forward under this paragraph derived from an earlier cash dividend is treated as reinvested before an amount derived from a later cash dividend.

Part VIII — Types of share that may be used

Introduction

59

The requirements of the following paragraphs must be met with respect to any shares that may be awarded under the plan (“eligible shares”)—

Must be ordinary share capital

60

Eligible shares must form part of the ordinary share capital of—

• (a) the company; or

• (b) a company which has control of the company; or

• (c) a company which either is, or has control of, a company which is a member of a consortium owning either the company or a company having control of the company.

Requirement as to listing etc.

61

Eligible shares must be—

• (a) shares of a class listed on a recognised stock exchange; or

• (b) shares in a company which is not under the control of another company; or

• (c) shares in a company which is under the control of a company (other than a company which is, or would if resident in the United Kingdom be, a close company) whose shares are listed on a recognised stock exchange.

Shares must be fully paid up and not redeemable

62

• (1) Eligible shares must be—

• (a) fully paid up, and

• (b) not redeemable.

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

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

• (4) Sub-paragraph (1)(b) does not apply in relation to shares in a co-operative.

• (5) In sub-paragraph (4) “co-operative” means a registered industrial and provident society which is a co-operative society.

For this purpose—

• “registered industrial and provident society” means a society registered or deemed to be registered under the Industrial and Provident Societies Act 1965 or the Industrial and Provident Societies Act (Northern Ireland) 1969; and

• “co-operative society” has the same meaning as in section 1 of the 1965 Act or, as the case may be, the 1969 Act.

Only certain kinds of restriction allowed

63

• (1) Eligible shares must not be subject to any restrictions other than—

• (a) those involved in there being a holding period (see paragraphs 31, 52 and 57); or

• (b) those affecting all ordinary shares in the company; or

• (c) those permitted by—

paragraph 64 (voting rights),

paragraph 65 (provision for forfeiture), or

paragraph 66 (pre-emption conditions).

• (2) For this purpose there is a restriction if there is any contract, agreement, arrangement or condition—

• (a) by which a person’s freedom to dispose of the shares or of any interest in them or of the proceeds of their sale or to exercise any right conferred by them is restricted, or

• (b) by which such a disposal or exercise may result in any disadvantage to him or to a person connected with him,

subject to sub-paragraphs (3) and (4).

• (3) Any discretion of the directors under the articles of association of the company to refuse to accept the transfer of shares shall be disregarded for the purposes of this paragraph if the directors—

• (a) have undertaken to the Inland Revenue not to exercise it in such a way as to discriminate against participants, and

• (b) have notified all qualifying employees of the existence of the undertaking.

• (4) There shall also be disregarded for the purposes of this paragraph so much of any contract, agreement, arrangement or condition as contains provisions similar in purpose and effect to any of the provisions of the Model Code as (for the time being) set out in the listing rules issued by the competent authority for listing in the United Kingdom under section 74(4) of the Financial Services and Markets Act 2000.

Permitted restrictions: voting rights

64

Eligible shares may be shares carrying no voting rights or limited voting rights.

Permitted restrictions: provision for forfeiture

65

• (1) Free or matching shares may be subject to provision for forfeiture in the following circumstances.

• (2) Provision may be made for forfeiture—

• (a) on the participant ceasing to be in relevant employment at any time in the forfeiture period,

• (b) on the participant withdrawing the shares from the plan in that period, or

• (c) in the case of matching shares, on the participant withdrawing the partnership shares in respect of which those shares were awarded from the plan within that period,

otherwise than by reason of an event within paragraph 87(2) (circumstances in which there is no charge to tax on shares ceasing to be subject to plan).

• (3) In sub-paragraph (2) “the forfeiture period” means the forfeiture period specified in the plan being a period of not more than three years beginning with the date on which the shares were awarded to the participant.

• (4) Forfeiture may not be linked to the performance of any person or persons.

• (5) The same provision for forfeiture must apply in relation to all free or matching shares included in the same award under the plan.

• (6) In this Schedule “provision for forfeiture” means any provision to the effect that a participant shall cease to be beneficially entitled to the shares on the occurrence of certain events, and references to forfeiture shall be construed accordingly.

Permitted restrictions: pre-emption conditions

66

• (1) If the requirements of this paragraph are met, eligible shares may be subject to provision requiring shares—

• (a) that were awarded to an employee under the plan, and

• (b) that are held by an employee or a permitted transferee,

to be offered for sale on the employee ceasing to be in relevant employment.

• (2) For the purposes of sub-paragraph (1)(b) a “permitted transferee” means a person to whom, under the articles of association of the company, the employee is permitted to transfer the shares.

• (3) The requirements of this paragraph are that under the articles of association of the company—

• (a) the same provision applies to all employees of the company or, in the case of a parent company, to all employees of that company or any company of which that company has control;

• (b) the shares are required to be offered for sale at a specified consideration; and

• (c) anyone disposing of shares of the same class (whether or not as an employee) is required to offer the shares for sale on no better terms.

Prohibited companies

67

• (1) Eligible shares must not be shares—

• (a) in an employer company, or

• (b) in a company that—

• (i) has control of an employer company, and

• (ii) is under the control of a person or persons within sub-paragraph (2)(b)(i) in relation to an employer company.

• (2) For the purposes of this paragraph a company is “an employer company” if—

• (a) the business carried on by it consists substantially in the provision of the services of persons employed by it, and

• (b) the majority of those services are provided to—

• (i) a person who has, or two or more persons who together have, control of the company, or

• (ii) a company associated with the company.

• (3) For the purposes of sub-paragraph (2)(b)(ii) a company shall be treated as associated with another company if both companies are under the control of the same person or persons.

• (4) For the purposes of sub-paragraphs (1) to (3)—

• (a) references to a person include a partnership, and

• (b) where a partner, alone or together with others, has control of a company, the partnership shall be treated as having like control of that company.

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

Part IX — The trustees

Establishment of trustees

68

• (1) The plan must provide for the establishment of a body of persons resident in the United Kingdom (“the trustees”) who are required by the plan—

• (a) in the case of free or matching shares, to acquire shares and appropriate them to employees in accordance with the plan;

• (b) in the case of partnership shares, to apply partnership share money in acquiring shares on behalf of employees in accordance with the plan; and

• (c) in the case of dividend shares, to apply cash dividends in acquiring shares on behalf of participants in accordance with the plan.

• (2) The functions of the trustees with respect to shares held by them must be regulated by a trust (“the plan trust”)—

• (a) which is constituted under the law of a part of the United Kingdom, and

• (b) the terms of which are embodied in an instrument which complies with the requirements of this Part of this Schedule.

• (3) The instrument must not contain any terms which are neither essential nor reasonably incidental to complying with the requirements of this Part of this Schedule.

Power of trustees to borrow

69

The trust instrument may provide that the trustees have power to borrow—

• (a) to acquire shares for the purposes of the plan, and

• (b) for such other purposes as may be specified in the trust instrument.

Duty to give notice of award of shares etc.

70

• (1) The trust instrument must make the following provision regarding notices.

• (2) It must provide that, as soon as practicable after any free or matching shares have been awarded to an employee, the trustees shall give him notice of the award—

• (a) specifying the number and description of those shares,

• (b) stating their market value on the date on which they were awarded to him, and

• (c) stating the holding period applicable to them.

• (3) It must provide that, as soon as practicable after any partnership shares have been awarded to an employee, the trustees shall give him notice of the award—

• (a) specifying the number and description of those shares, and

• (b) stating—

• (i) the amount of partnership share money applied by the trustees in acquiring the shares on his behalf, and

• (ii) their market value on the acquisition date (within the meaning of paragraph 40(2) or, if there is an accumulation period, paragraph 42(3)).

• (4) It must provide that, as soon as practicable after any dividend shares have been acquired on behalf of a participant, the trustees shall give him notice of the acquisition—

• (a) specifying the number and description of those shares,

• (b) stating their market value on the acquisition date (within the meaning of paragraph 56(3)),

• (c) stating the holding period applicable to them, and

• (d) informing him of any amount carried forward under paragraph 58 (certain amounts not reinvested).

• (5) It must provide that, where any foreign cash dividend is received in respect of plan shares held on behalf of a participant, the trustees shall give him notice of the amount of any foreign tax deducted from the dividend before it was paid.

General duties of trustees

71

• (1) The trust instrument must require the trustees—

• (a) to dispose of a participant’s plan shares, and

• (b) to deal with any right conferred in respect of any of his plan shares to be allotted other shares, securities or rights of any description,

only pursuant to a direction given by or on behalf of the participant.

This is subject to sub-paragraph (3) and to any provision made in the plan in accordance with paragraph 73 (meeting PAYE obligations).

• (2) The plan may provide for participants to give such general directions, to such effect and in such terms, as are specified in the plan.

• (3) The trust instrument must, in the case of a participant’s plan shares that are free, matching or dividend shares, prohibit the trustees from disposing of any of those shares (whether to the participant or otherwise) at any time during the holding period, unless the participant has at that time ceased to be in relevant employment.

This is subject to—

paragraph 32 (holding period: power to authorise trustees to accept general offers etc.);

paragraph 72 (power of trustees to raise funds to subscribe for rights issue);

paragraph 73 (meeting PAYE obligations);

paragraph 121(5) (termination of plan: early removal of shares with participant’s consent).

• (4) The trust instrument must require the trustees to pay over to the participant as soon as practicable any money or money’s worth received by them in respect of or by reference to any of his shares, other than money’s worth consisting of new shares within the meaning of paragraph 115 (company reconstructions).

This is subject to—

• (a) the provisions of Part VII (reinvestment of cash dividends);

• (b) the trustees’ obligations under paragraphs 95 and 96 (PAYE: shares ceasing to be subject to the plan and capital receipts); and

• (c) the trustees’ PAYE obligations.

Power of trustees to raise funds to subscribe for rights issue

72

• (1) The trustees may dispose of some of the rights arising under a rights issue in order to be able to obtain sufficient funds to exercise other such rights.

This power is subject to paragraph 71(1) (duty to act in accordance with participant’s directions).

• (2) In this paragraph references to rights arising under a rights issue are to rights conferred in respect of a participant’s plan shares to be allotted, on payment, other shares or securities or rights of any description in the same company.

Meeting PAYE obligations

73

• (1) The plan must make provision to ensure that, where a PAYE obligation is imposed on the trustees as a result of any of a participant’s plan shares ceasing to be subject to the plan, the trustees are able to meet that obligation—

• (a) by disposing of—

• (i) any of those shares, or

• (ii) any of the participant’s remaining plan shares (if any), or

• (b) by virtue of the participant paying to the trustees a sum equal to the amount required to discharge the obligation.

• (2) In sub-paragraph (1) the reference to a PAYE obligation includes an obligation under paragraph 95 (PAYE: shares ceasing to be subject to the plan).

• (3) In sub-paragraph (1)(a) the reference to disposing of shares includes the acquisition of the shares by the trustees for the purposes of the trust.

• (4) A disposal of any of the participant’s plan shares in accordance with provision made under sub-paragraph (1)(a)(ii) may give rise to a charge to tax under—

paragraph 81 (charge on free or matching shares ceasing to be subject to plan);

paragraph 86 (charge on partnership shares ceasing to be subject to plan); or

paragraph 93 (charge on dividend shares ceasing to be subject to plan).

Deemed disposal by trustees on disposal of beneficial interest

74

• (1) If at any time the participant’s beneficial interest in any of his shares is disposed of, the shares in question shall be treated for the purposes of this Schedule as having been disposed of at that time by the trustees for the like consideration as was obtained for the disposal of the beneficial interest.

• (2) For this purpose there is no disposal of the participant’s beneficial interest if and at the time when—

• (a) in England and Wales or Northern Ireland, that interest becomes vested in any person on the insolvency of the participant or otherwise by operation of law, or

• (b) in Scotland, that interest becomes vested in a judicial factor, in a trustee of the participant’s sequestrated estate or in a trustee for the benefit of the participant’s creditors.

• (3) If a disposal of shares falling within this paragraph is not at arm’s length, the proceeds of the disposal shall be taken for the purposes of this Schedule to be equal to the market value of the shares at the time of the disposal.

Duties of trustees in relation to tax liabilities

75

• (1) The trust instrument must require the trustees—

• (a) to maintain such records as may be necessary for the purposes of—

• (i) their own PAYE obligations, or

• (ii) the PAYE obligations of the employer company so far as they relate to the plan,

• (b) where the participant becomes liable to income tax under Case V of Schedule D, Schedule E or Schedule F by reason of the occurrence of any event, to inform him of any facts relevant to determining that liability.

• (2) For the purposes of this paragraph—

• “employer company” has the same meaning as in paragraph 95 (PAYE: shares ceasing to be subject to the plan); and

• “PAYE obligations” includes obligations conferred on the trustees by paragraphs 95 and 96 (PAYE: shares ceasing to be subject to plan and capital receipts).

Acquisition by trustees of shares from employee share ownership trust

76

• (1) The trust instrument must provide that, where there is a qualifying transfer of shares to the trustees, those shares—

• (a) must not be awarded to participants under the plan as partnership shares, and

• (b) must be included in any award of free or matching shares made after the date of the transfer in priority to other shares available for inclusion in that award.

• (2) For the purposes of this paragraph there is a qualifying transfer of shares to the trustees if relevant shares—

• (a) are transferred to them by the trustees of an employee share ownership trust, and

• (b) the transfer is a qualifying transfer within section 69(3AA) of the Finance Act 1989 (transfer of shares in, or shares purchased from money in, an employee share ownership trust immediately before 21st March 2000).

Part X — Income tax

Introduction

77

• (1) The provisions of this Part of this Schedule apply for income tax purposes in relation to an approved employee share ownership plan.

This is subject to sub-paragraph (2).

• (2) Nothing in this Part applies to an individual if, at the time of the award in question, he is not chargeable to tax under Schedule E in respect of the employment by reference to which he meets the requirement of paragraph 14 (the employment requirement) in relation to the plan.

No charge on award of shares etc.

78

• (1) Notwithstanding that the beneficial interest in the shares passes to the employee—

• (a) on the award to him of free, matching or partnership shares under the plan, or

• (b) on the acquisition on his behalf of dividend shares under the plan,

the value of that interest at the time of the award or acquisition is not treated as income of his chargeable to tax.

• (2) An employee is not chargeable to tax under Schedule E by virtue of section 162(1) of the Taxes Act 1988 (deemed loan in case of shares acquired at an under-value) in respect of the award to him of shares under the plan.

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

• (3) Incidental expenditure of the trustees or the employer in operating the plan is not treated as giving rise to any charge to income tax on employees.

Capital receipts in respect of participant’s shares

79

• (1) Where—

• (a) a capital receipt is received by a participant in respect of or by reference to any of his plan shares, and

• (b) the plan shares in respect of or by reference to which it is received are—

• (i) free, matching or partnership shares that were awarded to the participant fewer than five years before he received the capital receipt, or

• (ii) dividend shares that were acquired on his behalf fewer than three years before he received that receipt,

the participant is chargeable to income tax under Schedule E for the tax year in which the capital receipt is received by him on the amount or value of the receipt.

• (2) For the purposes of this paragraph any money or money’s worth is a “capital receipt” subject to the following provisions.

• (3) Money or money’s worth is not a capital receipt for the purposes of this paragraph to the extent that—

• (a) it constitutes income in the hands of the recipient for the purposes of income tax (or would do so but for this Part of this Schedule), or

• (b) it consists of the proceeds of disposal of the shares, or

• (c) it consists of new shares within the meaning of paragraph 115 (company reconstructions).

• (4) If, pursuant to a direction given by or on behalf of the participant for the purposes of paragraph 72(1), the trustees—

• (a) dispose of some of the rights under a rights issue, and

• (b) use the proceeds of that disposal to exercise other such rights,

the money or money’s worth that constitutes the proceeds of that disposal is not a capital receipt for the purposes of this paragraph.

The references in this sub-paragraph to rights under a rights issue are to rights, conferred in respect of a participant’s plan shares, to be allotted, on payment, other shares or securities or rights of any description in the same company.

• (5) This paragraph does not apply in relation to a capital receipt referable to the shares of a participant if it is received by the participant’s personal representative after his death.

Exclusion of certain charges in relation to participant’s shares

80

• (1) There is no charge to tax on the participant under—

• (a) section 140A of the Taxes Act 1988 (charge on conditional acquisition of shares), or

• (b) section 78 of the Finance Act 1988 (charge on removal of restriction),

when any provision for forfeiture to which the shares are subject, in accordance with paragraph 65 (permitted restrictions: provision for forfeiture), is varied or removed.

• (2) A participant is not chargeable to tax under Schedule E by virtue of section 78 of the Finance Act 1988 (charge on removal of restriction) if the chargeable event (within the meaning of that section) is the ending of the holding period in relation to his free, matching or dividend shares.

• (3) A participant is not chargeable to tax under Schedule E by virtue of section 79 of that Act (charge on chargeable increase in value) in respect of any shares of his that are subject to the plan at the end of the period for which the chargeable increase is determined for the purposes of that section.

Charge on free or matching shares ceasing to be subject to plan

81

• (1) When free or matching shares cease to be subject to the plan, income tax may be chargeable depending on the period that has elapsed between—

• (a) the date on which the shares were awarded to the participant, and

• (b) the date on which they cease to be subject to the plan.

• (2) If the period is less than three years, the participant is chargeable to tax under Schedule E on the market value of the shares when they cease to be subject to the plan.

• (3) If the period is three years or more but less than five years, the participant is chargeable to tax under Schedule E on—

• (a) the market value of the shares at the date they were awarded to him, or

• (b) the market value of the shares when they cease to be subject to the plan,

whichever is less.

• (4) Where the participant is charged to tax under sub-paragraph (3)(a) the tax due shall be reduced by the amount or aggregate amount of any tax paid on any capital receipts within paragraph 79 in respect of those shares.

• (5) There is no charge to tax under this paragraph on the forfeiture of free or matching shares.

• (6) This paragraph has effect subject to—

paragraph 82 (charge to tax on disposal of beneficial interest in shares during the holding period); and

paragraph 87 (circumstances in which there is no charge to tax on shares ceasing to be subject to plan).

• (7) Except as provided by this paragraph and paragraph 82 there is no charge to tax on free or matching shares ceasing to be subject to the plan.

Charge on disposal of beneficial interest during the holding period

82

• (1) Where free or matching shares cease to be subject to the plan by virtue of a participant, in breach of his obligations under paragraph 31(1)(b), assigning, charging or otherwise disposing of his beneficial interest in those shares—

• (a) paragraph 81 does not apply, and

• (b) the participant is chargeable to income tax under Schedule E on the market value of the shares when they cease to be subject to the plan.

• (2) Where the participant is charged to tax under sub-paragraph (1) the tax due shall be reduced by the amount or aggregate amount of any tax paid on any capital receipts within paragraph 79 in respect of those shares.

Partnership share money deducted before tax

83

• (1) Partnership share money deducted from an employee’s salary in accordance with a partnership share agreement is not regarded as income of the employee chargeable to tax under Schedule E.

• (2) The deduction of partnership share money shall be disregarded for the purpose of ascertaining the amount of—

• (a) the employee’s remuneration for the purposes of Chapter I of Part XIV of the Taxes Act 1988 (retirement benefit schemes), or

• (b) the employee’s relevant earnings for the purposes of Chapter III or IV of that Part (retirement annuities or personal pension schemes).

Charge on partnership share money paid over to employee

84

• (1) An individual is chargeable to income tax under Schedule E on any amount paid over to him under—

paragraph 36(4) (deductions in excess of permitted maximum amount);

paragraph 40(4)(b) or 42(5)(b) (surplus partnership share money remaining after acquisition of shares);

paragraph 42(6) (partnership share money paid over on individual leaving relevant employment);

paragraph 42(7) (partnership share money paid over where accumulation period brought to an end by event specified in plan);

paragraph 45(3) (partnership share money paid over on withdrawal from partnership share agreement); or

paragraph 46 (partnership share money paid over on withdrawal of plan approval or termination of plan).

• (2) A charge to tax under sub-paragraph (1) arises at the time the amount is paid over.

Charge on cancellation payments in respect of partnership share agreement

85

An individual is chargeable to tax under Schedule E on the amount or value of any money or money’s worth received by him in respect of the cancellation of a partnership share agreement entered into by him.

Charge on partnership shares ceasing to be subject to plan

86

• (1) When partnership shares cease to be subject to the plan, income tax may be chargeable depending on the period that has elapsed between—

• (a) the acquisition date in respect of those shares (as defined by paragraph 40(2) or, as the case may be, 42(3)), and

• (b) the date on which they cease to be subject to the plan.

• (2) If the period is less than three years, the employee is chargeable to income tax under Schedule E on an amount equal to the market value of the shares when they cease to be subject to the plan.

• (3) If the period is three years or more but less than five years, the employee is chargeable to income tax under Schedule E on—

• (a) the amount of partnership share money used to acquire the shares, or

• (b) the market value of the shares when they cease to be subject to the plan,

whichever is less.

• (4) Where the participant is charged to tax under sub-paragraph (3)(a) the tax due shall be reduced by the amount or aggregate amount of any tax paid on any capital receipts within paragraph 79 in respect of those shares.

• (5) This paragraph has effect subject to paragraph 87 (circumstances in which there is no charge on shares ceasing to be subject to plan).

• (6) Except as provided by this paragraph, there is no charge to income tax on the employee on partnership shares ceasing to be subject to the plan.

Circumstances in which there is no charge on shares ceasing to be subject to plan

87

• (1) There is no charge to tax on shares ceasing to be subject to the plan on the occurrence of any of the following events.

• (2) Those events are the participant ceasing to be in relevant employment—

• (a) because of injury or disability;

• (b) on being dismissed by reason of redundancy;

• (c) by reason of a transfer to which the Transfer of Undertakings (Protection of Employment) Regulations 1981 apply;

• (d) by reason of a change of control or other circumstances ending the associated company status of the company by which he is employed;

• (e) by reason of his retirement on or after he reaches retirement age; or

• (f) on his death.

• (3) In sub-paragraph (2)(b) “redundancy” has the same meaning as in the Employment Rights Act 1996 or the Employment Rights (Northern Ireland) Order 1996.

• (4) In sub-paragraph (2)(e) “retirement age” means the retirement age specified in the plan, which—

• (a) must be the same for men and women, and

• (b) must be not less than 50.

Dividends etc. in respect of unappropriated shares

88

• (1) This paragraph applies to income of the trustees consisting of dividends or other distributions in respect of shares held by them in relation to which the requirements of Part VIII are met.

• (2) Income to which this paragraph applies is income to which section 686 of the Taxes Act 1988 (accumulation and discretionary trusts: special rates of tax) applies only if and when—

• (a) the period applicable to the shares under the following provisions comes to an end without the shares being awarded to a participant in accordance with the plan, or

• (b) if earlier, the shares are disposed of by the trustees.

• (3) Subject to sub-paragraph (4), the period applicable to the shares is the period of two years beginning with the date on which the shares were acquired by the trustees.

• (4) If at the time of the acquisition of the shares by the trustees none of the shares in the company in question are readily convertible assets, the period within which the shares must be awarded is—

• (a) five years beginning with the date on which the shares were acquired by the trustees, or

• (b) if within that period the shares in question become readily convertible assets, two years beginning with the date on which they did so,

whichever ends first.

• (5) For the purposes of determining whether shares are awarded to a participant within the period applicable under the above provisions, shares acquired by the trustees at an earlier time are taken to be awarded to a participant before shares of the same class acquired by the trustees at a later time.

• (6) For the purposes of this paragraph shares which are subject to provision for forfeiture are treated as acquired by the trustees if and when the forfeiture occurs.

• (7) In this paragraph references to the shares being awarded include references to shares being acquired on behalf of a participant as dividend shares.

Reinvestment of cash dividend on behalf of participant

89