Finance Act 2000

• (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

• (1) The amount applied by the trustees in acquiring dividend shares on behalf of a participant is not treated as income of the participant for any tax purposes.

• (2) The participant has no entitlement to a tax credit in respect of the amounts of dividends so applied.

• (3) Sub-paragraphs (1) and (2) do not affect—

• (a) any charge under paragraph 93(1) (charge on dividend shares ceasing to be subject to plan), or

• (b) any entitlement to a tax credit in respect of the amount so charged.

• (4) Section 234A(4) of the Taxes Act 1988 (information relating to distributions to be provided by nominee) shall not apply in relation to any amount applied by the trustees in acquiring dividend shares on behalf of a participant.

This is subject to paragraph 93(4).

Repayment of excess cash dividend

90

Section 234A(4) to (11) of the Taxes Act 1988 (information relating to distributions to be provided by nominee) shall apply in relation to the balance of any cash dividend paid over to the participant under paragraph 54(3) as if it were a payment to which subsection (4)(b) of that section applies.

Treatment of cash dividend retained for reinvestment

91

• (1) An amount retained under paragraph 58(1) (amount of cash dividend not reinvested) shall not be treated as income of the participant for any tax purposes.

• (2) The participant has no entitlement to a tax credit in respect of any such amount.

• (3) This paragraph does not affect any charge—

• (a) under paragraph 92 (treatment of cash dividend retained and then later paid out), or

• (b) paragraph 93 (charge on dividend shares ceasing to be subject to plan),

or any tax credit in respect of an amount so charged.

Treatment of cash dividend retained and then later paid out

92

• (1) Where a cash dividend is paid over to a participant under paragraph 58(2) (cash dividend paid over if not reinvested), the participant is chargeable to tax on that amount—

• (a) under Schedule F, or

• (b) to the extent that the dividend is a foreign cash dividend, under Case V of Schedule D,

for the tax year in which the dividend is paid over to him.

• (2) For the purposes of determining the tax credit (if any) to which the participant is entitled under section 231 of the Taxes Act 1988 (tax credits for certain recipients of qualifying distributions), the reference in subsection (1) of that section to the tax credit fraction in force when the distribution is made shall be read as a reference to the fraction in force when the dividend is paid over to him.

• (3) Section 234A(4) to (11) of the Taxes Act 1988 (information relating to distributions to be provided by nominee) shall apply in relation to an amount paid under paragraph 58(2) as if—

• (a) it were a payment to which subsection (4)(b) of that section applies, and

• (b) the cash dividend had been paid when the payment was paid over to the participant under paragraph 58(2).

Charge on dividend shares ceasing to be subject to plan

93

• (1) If dividend shares cease to be subject to the plan before the end of the period of three years beginning with the date on which the shares were acquired on his behalf, the participant is chargeable to tax on the amount of the relevant dividend—

• (a) under Schedule F, or

• (b) to the extent that the amount represents a foreign cash dividend, under Case V of Schedule D,

for the tax year in which the shares cease to be subject to the plan.

For this purpose “the relevant dividend" is the cash dividend applied to acquire those shares on the participant’s behalf.

• (2) For the purposes of determining the tax credit (if any) to which the participant is entitled under section 231 of the Taxes Act 1988 (tax credits for certain recipients of qualifying distributions), the reference in subsection (1) of that section to the tax credit fraction in force when the distribution is made shall be read as a reference to the fraction in force[when the shares cease to be subject to the plan].

• (3) Where the participant is charged to tax under this paragraph 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.

For this purpose “the tax due” means the amount of tax due after deduction of the tax credit determined under sub-paragraph (2).

• (4) Section 234A(4) to (11) of the Taxes Act 1988 (information relating to distributions to be provided by nominee) shall apply in relation to the relevant dividend as if it were a payment to which subsection (4)(b) of that section applies.

• (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 tax on dividend shares ceasing to be subject to the plan.

PAYE: shares ceasing to be subject to plan

94

Where as a result of shares ceasing to be subject to the plan a participant is chargeable to tax under this Part of this Schedule

• (a) section 203F of the Taxes Act 1988 (PAYE: readily convertible assets) shall have effect as if the participant were being provided with assessable income in the form of those shares—

• (i) at the time the shares cease to be subject to the plan, and

• (ii) in respect of the relevant employment in which the participant is employed at that time (or, if he is not employed in relevant employment at that time, the relevant employment in which he was last employed before that time), and

• (b) subsection (3) of that section

shall have effect as if the reference in that subsection to the amount of income likely to be chargeable to tax under Schedule E in respect of the provision of the asset were a reference to the amount on which tax is likely to be chargeable under this Part of this Schedule by virtue of the shares ceasing to be subject to the plan.

PAYE: shares ceasing to be subject to the plan

95

• (1) Sub-paragraphs (2) to (5) apply where as a result of any shares (“the relevant shares”) ceasing to be subject to the plan—

• (a) a participant is chargeable to income tax under Schedule E in accordance with this Part of this Schedule, and

• (b) an obligation to make a PAYE deduction arises in respect of that charge.

• (2) The trustees must pay to the employer company a sum which is sufficient to enable the employer company to discharge that obligation.

This is subject to sub-paragraphs (3) and (7).

• (3) Sub-paragraph (2) only applies where, or to the extent that, the plan does not require the participant to pay the employer company a sum that is sufficient to discharge the obligation mentioned in sub-paragraph (1)(b).

• (4) Section 203J(1) of the Taxes Act 1988 (sections 203B to 203I: accounting for tax) shall have effect as if it required the deduction of income tax to be made from any sum or sums received by the employer—

• (a) from the trustees under sub-paragraph (2), or

• (b) from the participant in accordance with the plan, as mentioned in sub-paragraph (3).

• (5) After making the necessary PAYE deduction from the sum or sums received as mentioned in sub-paragraph (4), the employer company shall pay any remaining amounts to the participant.

• (6) For the purposes of this paragraph “the employer company” means the company which employs the participant in relevant employment at the time when the shares cease to be subject to the plan (or, if the participant is not employed in relevant employment at that time, the company which last employed him in relevant employment before that time), provided that that company is one to whom the PAYE regulations (within the meaning of section 203L(3) of the Taxes Act 1988) at that time apply.

• (7) Where, as a result of any shares ceasing to be subject to the plan, a participant is chargeable to income tax under Schedule E in accordance with this Part and either—

• (a) there is no company which falls within sub-paragraph (6), or

• (b) the Inland Revenue are of the opinion that it is impracticable for the company which falls within that sub-paragraph to make a PAYE deduction and accordingly direct that this sub-paragraph shall apply,

then sub-paragraph (2) shall not apply and the trustees shall make a PAYE deduction in respect of an amount equal to that on which income tax is payable as if the participant were a former employee of the trustees.

• (8) In a case where sub-paragraph (7) applies, section 203C of the Taxes Act 1988 (PAYE: employee of non-UK employer) does not apply.

• (9) Where—

• (a) a participant disposes of his beneficial interest in any of his plan shares to the trustees, and

• (b) the trustees are deemed by virtue of paragraph 74 to have disposed of the shares in question,

this paragraph shall apply as if the consideration payable by the trustees to the participant on the disposal had been received by the trustees as the proceeds of disposal of plan shares.

• (10) For the purposes of this paragraph “PAYE deduction” means a deduction required by regulations under section 203 of the Taxes Act 1988.

PAYE: capital receipts

96

• (1) Where the trustees receive a sum of money which constitutes (or forms part of) a capital receipt in respect of which a participant is chargeable to income tax under Schedule E, in accordance with this Part of this Schedule, when it is received by him—

• (a) the trustees shall pay out of that sum of money to the employer company an amount equal to that on which income tax is so payable, and

• (b) the employer company shall then pay over that amount to the participant, but in so doing shall make a PAYE deduction.

This is subject to sub-paragraph (3).

• (2) For the purposes of this paragraph “the employer company” means the company which employs the participant in relevant employment at the time the trustees receive the sum of money referred to in sub-paragraph (1) (or, if the participant is not employed in relevant employment at that time, the company which last employed him in relevant employment before that time), provided that that company is one to whom the PAYE regulations (within the meaning of section 203L(3) of the Taxes Act 1988) at that time apply

• (3) Where the trustees receive a sum of money to which sub-paragraph (1) applies but—

• (a) there is no company which falls within sub-paragraph (2), or

• (b) the Inland Revenue are of the opinion that it is impracticable for the company which falls within that sub-paragraph to make a PAYE deduction and accordingly direct that this sub-paragraph shall apply,

then, in paying over to the participant the capital receipt, the trustees shall make a PAYE deduction in respect of an amount equal to that on which income tax is payable as mentioned in sub-paragraph (1) as if the participant were a former employee of the trustees.

• (4) In a case where sub-paragraph (3) applies, section 203C of the Taxes Act 1988 (PAYE: employee of non-UK employer) does not apply.

• (5) For the purposes of this paragraph “PAYE deduction” means a deduction required by regulations under section 203 of the Taxes Act 1988.

Part XI — Capital gains tax

Introduction

97

The provisions of this Part apply for capital gains tax purposes in relation to an approved employee share ownership plan.

Gains accruing to trustees

98

• (1) Any gain accruing to the trustees is not a chargeable gain if the shares—

• (a) are shares in relation to which the requirements of Part VIII are met, and

• (b) are awarded to employees, or acquired on their behalf as dividend shares, in accordance with the plan within the relevant period.

• (2) If the shares are readily convertible assets at the time they are acquired by the trustees, the relevant period is the period of two years beginning with the date on which the shares are acquired by the trustees.

• (3) If at the time of their acquisition by the trustees the shares are not readily convertible assets, the relevant period is—

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

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

whichever ends first.

• (4) For the purposes of determining whether shares are awarded to employees within the relevant period, shares acquired by the trustees at an earlier time are taken to be awarded to employees before shares of the same class acquired by the trustees at a later time.

This is subject to paragraph 76(1) (treatment of shares acquired from an employee share ownership trust).

Participant absolutely entitled as against trustees

99

• (1) A participant is treated for capital gains tax purposes as absolutely entitled as against the trustees to any shares awarded to him under the plan.

• (2) This applies notwithstanding anything in the plan or the trust instrument.

Different classes of shares

100

• (1) For the purposes of Chapter I of Part IV of the Taxation of Chargeable Gains Act 1992 (identification of shares etc.) a participant’s plan shares are treated, so long as they are subject to the plan, as of a different class from any shares (which would otherwise be treated as of the same class) that are not plan shares.

• (2) For the purposes of that Chapter, any shares transferred to the trustees of the plan trust by a qualifying transfer that have not been awarded to participants under the plan shall (notwithstanding that they would otherwise fall to be treated as of the same class) be treated as of a different class from any shares held by the trustees that were not transferred to them by a qualifying transfer.

• (3) In sub-paragraph (2) “qualifying transfer” has the meaning given in paragraph 76 (acquisition by trustees of shares from employee share ownership trust).

No chargeable gain on shares ceasing to be subject to the plan

101

• (1) Shares which cease to be subject to the plan are treated as having been disposed of and immediately reacquired by the participant at market value.

• (2) Any gain accruing on that disposal is not a chargeable gain.

Treatment of forfeited shares

102

• (1) If any of the participant’s plan shares are forfeited, they are treated as having been disposed of by the participant and acquired by the trustees at market value at the date of forfeiture.

• (2) Any gain accruing on that disposal is not a chargeable gain.

Acquisition by trustees of shares from profit sharing scheme

103

• (1) Where the trustees acquire shares from the trustees of an approved profit sharing scheme, the disposal and the acquisition by the trustees are treated as being made for such consideration as to secure that neither a gain nor a loss accrues on the disposal.

• (2) In such a case the relevant period for the purposes of paragraph 98 is determined as if the shares had been acquired by the trustees at the time they were acquired by the trustees of the other trust.

This does not affect the date on which the trustees are treated as acquiring the shares for the purposes of taper relief.

Disposal of rights under rights issue

104

• (1) Any gain accruing on the disposal of rights under paragraph 72 (power of trustees to raise funds to subscribe for rights issue) is not a chargeable gain.

• (2) Sub-paragraph (1) does not apply to a disposal of rights unless similar rights are conferred in respect of all ordinary shares in the company.

Part XII — Corporation tax deductions

Introduction

105

References in this Part of this Schedule to deductions are to deductions by a company in calculating for the purposes of corporation tax the profits of a trade carried on by it.

Deduction for providing free or matching shares

106

• (1) Where, under an approved employee share ownership plan, shares are awarded to employees as free or matching shares by reason of their employment with a company, a deduction is allowed under this paragraph to that company.

• (2) Any such deduction—

• (a) is of an amount equal to the market value of the shares at the time they are acquired by the trustees, and

• (b) must be made for the period of account in which the shares are awarded to employees in accordance with the plan.

• (3) Except as provided by sub-paragraph (1), no deduction may be made by that company or any associated company in respect of the provision of those shares.

This is subject to paragraphs 111 (deduction for costs of setting up the plan) and 112 (deductions for contributions to running expenses of plan).

• (4) Where the shares are awarded under a group plan, the market value of the shares at the time they are acquired by the trustees shall for the purposes of this paragraph be taken to be the relevant proportion of the total market value of the shares included in the award.

For this purpose “the relevant proportion” means the proportion that the number of shares in the award awarded to the employees of the company concerned bears to the total number of shares in the award.

• (5) In determining the market value of any shares for the purposes of this paragraph, if shares have been acquired by the trustees on different days it shall be assumed that those acquired on an earlier day are awarded to employees under the plan before those acquired by the trustees on a later day.

• (6) If a deduction is made under this paragraph by a company, no deduction may be made by any other company under this paragraph in respect of the provision of the shares.

• (7) This paragraph has effect subject to paragraph 108 (cases in which no deduction is allowed).

Deduction for additional expenses in providing partnership shares

107

• (1) Where under an approved employee share ownership plan—

• (a) partnership shares are awarded to employees by reason of their employment with a company, and

• (b) the market value of those shares at the time they are acquired by the trustees exceeds the partnership share money paid by the participants to acquire those shares,

a deduction is allowed under this paragraph to that company.

• (2) Any such deduction—

• (a) is of an amount equal to the amount of the excess referred to in sub-paragraph (1)(b), and

• (b) must be made for the period of account in which the shares are awarded to employees in accordance with the plan.

• (3) Except as provided by sub-paragraph (1), no deduction may be made by that company or any associated company in respect of the provision of those shares.

This is subject to paragraphs 111 (deduction for costs of setting up the plan) and 112 (deductions for contributions to running expenses of plan).

• (4) If a deduction is made under this paragraph by a company, no deduction may be made by any other company under this paragraph in respect of the provision of the shares.

• (5) This paragraph has effect subject to paragraph 108 (cases in which no deduction is allowed).

Cases in which no deduction is allowed

108

• (1) No deduction is allowed under paragraph 106 or 107 in the following cases.

• (2) No deduction is allowed in respect of shares awarded to an individual who is not a Schedule E taxpayer at the date the shares are awarded to him under the plan.

A “Schedule E taxpayer” means an individual who—

• (a) is chargeable to tax under Schedule E in respect of emoluments from the employment by reference to which he is eligible to participate in the award, or

• (b) would be so chargeable if any such emoluments were remitted to the United Kingdom.

• (3) No deduction is allowed in respect of shares that are liable to depreciate substantially in value for reasons that do not apply generally to shares in the company.

• (4) No deduction is allowed if a deduction has been made—

• (a) by the company, or

• (b) by an associated company of the company,

in respect of the provision of the same shares for this or another trust.

This applies whatever the nature or purpose of the other trust and whatever the basis on which the deduction was made.

• (5) For the purposes of determining whether the same shares have been provided to more than one trust, if shares have been acquired by the trustees of the plan trust on different days it shall be assumed that those acquired on an earlier day are awarded under the plan before those acquired by the trustees on a later day.

No deduction for expenses in providing dividend shares

109

• (1) No deduction is allowed for expenses in providing shares that are acquired on behalf of individuals under an approved employee share ownership plan as dividend shares.

• (2) This is subject to paragraph 112 (deductions for contributions to running expenses of plan).

Treatment of forfeited shares

110

If any of a participant’s plan shares are forfeited—

• (a) the shares are treated for the purposes of this Part as acquired by the trustees—

• (i) when the forfeiture occurs, and

• (ii) for no consideration, and

• (b) no deduction is allowed under paragraph 106 or 107 in respect of any subsequent award of those shares under the plan.

Deduction for costs of setting up the plan

111

• (1) A deduction is allowed under this paragraph for expenses incurred by a company in establishing an employee share ownership plan which is approved by the Inland Revenue.

• (2) No deduction may be made under this paragraph if—

• (a) any employee acquires rights under the plan, or

• (b) the trustees acquire any shares for the purposes of the plan,

before the Inland Revenue approve the plan.

• (3) If Inland Revenue approval of the plan is given more than nine months after the end of that period of account in which the expenses are incurred, the expenses are treated for the purposes of this paragraph as incurred in the period in which the approval is given.

• (4) No other deduction is allowed in respect of expenses for which a deduction is allowed under this paragraph.

Deductions for contributions to running expenses of plan

112

• (1) Nothing in this Part of this Schedule affects any deduction for expenses incurred by a company in contributing to the expenses of the trustees in operating an approved employee share ownership plan.

• (2) For this purpose the expenses of the trustees in operating the plan—

• (a) do not include expenses in acquiring shares for the purposes of the trust, other than incidental acquisition costs, but

• (b) do include the payment of interest on money borrowed by them for that purpose.

• (3) In sub-paragraph (2)(a) “incidental acquisition costs” means any fees, commission, stamp duty and similar incidental costs attributable to the acquisition of the shares.

Withdrawal of deductions on withdrawal of approval

113

• (1) If approval of an employee share ownership plan is withdrawn the Inland Revenue may by notice to a company direct that the benefit of any deductions under paragraph 106 (deduction for providing free or matching shares) or 107 (deduction for contributing to additional expenses in providing partnership shares) in relation to the plan is also withdrawn.

• (2) The effect of the direction is that the aggregate amount of the deductions is treated as a trading receipt of that company for the period of account in which the Inland Revenue give notice of the withdrawal of approval.

Application of provisions to expenses of management of investment companies etc.

114

• (1) The provisions of this Part apply in relation to—

• (a) investment companies, and

• (b) companies to which section 75 of the Taxes Act 1988 (management expenses) applies by virtue of section 76 of that Act (insurance companies),

in accordance with the following provisions.

• (2) The provisions of this Part which allow a deduction in calculating the profits of a trade apply to treat amounts as disbursed as expenses of management.

• (3) Paragraph 113(2) (effect of direction as to withdrawal of deductions) applies as if the reference to a trading receipt for the period of account in which the Inland Revenue give notice of the withdrawal of approval were a reference to profits or gains chargeable to tax under Case VI of Schedule D arising when the Inland Revenue give notice of the withdrawal.

Part XIII — Supplementary provisions

Company reconstructions

115

• (1) This paragraph applies where there occurs in relation to any of the participant’s plan shares (“the original holding”)—

• (a) a transaction which results in a new holding being equated with the original holding for the purposes of capital gains tax, or

• (b) a transaction that would have that result but for the fact that what would be the new holding consists of or includes a qualifying corporate bond,

other than a transaction within sub-paragraph (2).

A transaction in relation to which this paragraph applies is referred to below as a “company reconstruction".

• (2) Where an issue of shares of any of the following descriptions (in respect of which a charge to income tax arises) is made as part of a company reconstruction, those shares shall be treated for the purposes of this paragraph as not forming part of the new holding—

• (a) redeemable shares or securities issued as mentioned in section 209(2)(c) of the Taxes Act 1988;

• (b) share capital issued in circumstances such that section 210(1) of that Act applies;

• (c) share capital to which section 249 of that Act applies.

• (3) In this paragraph—

• “corresponding shares”, in relation to any new shares, means the shares in respect of which the new shares are issued or which the new shares otherwise represent;

• “new shares” means shares comprised in the new holding which were issued in respect of, or otherwise represent, shares comprised in the original holding;

• “original holding” has the meaning given by sub-paragraph (1).

• (4) Subject to the following provisions of this paragraph, in relation to an employee share ownership plan, references in this Schedule to a participant’s plan shares shall be construed, after the time of the company reconstruction, as being or, as the case may be, as including references to any new shares.

• (5) For the purposes of this Schedule—

• (a) a company reconstruction shall be treated as not involving a disposal of shares comprised in the original holding,

• (b) the date on which any new shares are to be treated as having been awarded to the participant shall be that on which the corresponding shares were awarded,

• (c) the conditions in Part VIII shall be treated as fulfilled with respect to any new shares if they were (or were treated as) fulfilled with respect to the corresponding shares, and

• (d) the provisions of Part X (income tax) and Part XI (capital gains tax) shall apply in relation to the new shares as they would have applied to the corresponding shares.

Where the corresponding shares were dividend shares, the reference in paragraph (b) to the shares being awarded shall be read as a reference to the shares being acquired on behalf of the participant.

• (6) Sub-paragraphs (4) and (5) are subject to paragraph 116 (treatment of shares acquired under rights issue).

• (7) For the purposes of this Schedule if, as part of a company reconstruction, trustees become entitled to a capital receipt, their entitlement to the capital receipt shall be taken to arise before the new holding comes into being.

• (8) In the context of a new holding, any reference in this Schedule to shares includes securities and rights of any description which form part of the new holding for the purposes of Chapter II of Part IV of the Taxation of Chargeable Gains Act 1992.

Treatment of shares acquired under rights issue

116

• (1) Where the trustees exercise rights under a rights issue conferred in respect of a participant’s plan shares, any shares or securities or rights allotted as a result shall be treated for the purposes of this Schedule as if they were plan shares—

• (a) identical to the shares in respect of which the rights were conferred, and

• (b) appropriated to, or acquired on behalf of, the participant under the plan in the same way and at the same time as those shares.

This is subject to sub-paragraphs (2) to (4).

• (2) Where the funds used by the trustees to exercise rights under a rights issue are provided otherwise than by virtue of the exercise by the trustees of their powers under paragraph 72 (power of trustees to raise funds to subscribe for rights issue)—

• (a) any shares, securities or rights allotted are not plan shares, and

• (b) sections 127 to 130 of the Taxation of Chargeable Gains Act 1992 shall not apply in relation to them.

• (3) Sub-paragraph (1) does not apply in relation to rights arising under a rights issue unless similar rights are conferred in respect of all ordinary shares in the company.

• (4) Where sub-paragraph (1) does not apply by virtue of sub-paragraph (3)—

• (a) any shares, securities or rights allotted are not plan shares, and

• (b) sections 127 to 130 of the Taxation of Chargeable Gains Act 1992 shall not apply in relation to them.

• (5) In this paragraph references to rights arising under a rights issue are to be construed in accordance with paragraph 72(2).

Power to require information

117

• (1) The Inland Revenue may by notice require any person to provide them with such information as they reasonably require for the performance of their functions under this Schedule and as the person to whom the notice is addressed has or can reasonably obtain.

• (2) The power conferred by this paragraph extends, in particular, to—

• (a) information to enable the Inland Revenue—

• (i) to decide whether to approve an employee share ownership plan or withdraw an approval already given, or