EXPLANATORY NOTE

This clause amends the provisions at Section 140A of the Taxes Act (conditional acquisition of shares). This amendment removes the tax charge that can arise under this section when an employee receives shares subject to the risk of forfeiture more than five years after they are received. A tax charge can still arise under normal tax rules but, as a result of this amendment, it will no longer be possible for a double charge to income tax to arise.

2. Without this change a double charge might arise where, for example, an employee exercises options over shares which can still be subject to the risk of forfeiture more than five years after exercise.

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Subsection (1) amends Section 140A of the Taxes Act as follows.

Subsection (2) deletes subsection 140A(2). Under subsection 140A(2) tax is chargeable when an employee (or director) acquires a beneficial interest in shares on terms which make that interest conditional (often referred to as the employee acquiring "shares subject to the risk of forfeiture") and where the interest may still be conditional more than five years later. A tax charge on the acquisition of such shares can also arise under normal tax rules, resulting in the possibility of a double charge. Deleting subsection 140A(2) means that there can now only ever be a single charge to income tax on the acquisition of such shares.

Subsection (3) amends the wording of subsection 140A(3) to take account of the deletion of subsection 140A(2), but does not change its effect.

Subsection (4) amends the wording of subsection 140A(4) to take account of the deletion of subsection 140A(2), but does not change its effect.

Subsection (5) applies this Section in relation to shares acquired on or after Royal Assent.

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The provisions at Sections 140A to 140C apply where an employee receives shares in the company for which he works, but on terms which means that he may forfeit the shares at a later date. This happens, for example, in some long-term incentive plans, where an employee becomes the owner of shares but, if certain pre-set performance criteria are not met, the employee forfeits the shares.

The main effect of these provisions is to tax such shares when the risk of forfeiture is lifted and the employee’s ownership of the shares becomes absolute or, if earlier, when they are sold. At such times the shares’ monetary worth can normally be more readily ascertained, and the employee can often realise at least some of their value. The provisions are also intended to remove any tax charge on the acquisition of the shares if the risk of forfeiture must be determined within five years - as is normally the case with most long-term incentive plans - but to retain a tax charge on acquisition in other cases.

Section 140A is currently constructed as follows. If the shares can still be subject to forfeiture more than five years after acquisition, tax is specifically chargeable on the acquisition of the shares on the basis that they are emoluments. That is the case even if the circumstances of the acquisition would not normally give rise to an emoluments charge. Where the risk of forfeiture must be determined within five years the charge as an emolument is set aside.

This construction means that, if an employee acquires shares that can still be subject to the risk of forfeiture more than five years later in such a way that the shares would not, but for this section, constitute emoluments, the emoluments charge created by S140A(2) will be in addition to any other income tax charge which arises. This might arise, for example, where an employee exercises an option over shares which can still be subject to a risk of forfeiture more than five years after exercise. In this instance there would be a charge under Section 135 of the Taxes Act on the gain from the exercise of the share option and also a charge under Section 140A.