EXPLANATORY NOTE

This clause amends the provisions at Section 140C of the Taxes Act, which define when an employee’s interest in shares is to be treated as only conditional and hence subject to the special tax rules at Section 140A on remuneration in shares subject to the risk of forfeiture. This amendment adds a new exclusion from the definition where the employee’s interest is only conditional solely because he may be required to sell or transfer the shares for less than their full market value on leaving the company for misconduct.

2. It also extends the exclusion for interests that are only conditional because of provisions in a company’s articles of association. The exclusion will now cover the case where, for example, an employee works for one company but receives shares in another company in the group.

3. The clause also makes explicit that, where an employee receives shares which fall within more than one of the exclusions from the definition of when an employee’s interest is to be treated as only conditional, those shares will themselves be excluded from the definition and so not be subject to the special tax rules at Section 140A.

4. The reason for these changes is to remove some difficulties that some employers and employee shareholders have encountered in operating the legislation.

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

6. Subsection (2) inserts a new subsection (1A) into Section 140C which provides that, where an employee (or director) has an interest in shares which is only conditional because of one of more reasons set out at subsections 140C (2) to (4), those shares shall not be subject to the special tax rules at Section 140A on remuneration in shares subject to the risk of forfeiture.

7. Subsection (3) amends the wording of subsections 140C (2), (3) and (4) of the Taxes Act, as a consequence of the new subsection (1A), but does not change their effect.

8. Subsection (4) extends the existing exclusion in subsection 140C(3) from the definition of interests in shares that are only conditional. Currently this applies where the employee is required to transfer the shares because of pre-emption rights in the employing company’s articles of association. The exclusion is extended to the case where the employee works for one company but receives shares in a different company within the same group.

9. Subsection (5) introduces, as subsection 140C(3A), a new exclusion from the definition of interests in shares that are only conditional. This exclusion applies where the employee may be required to sell or transfer the shares if he leaves the company on the grounds of misconduct.

10. Subsection (6) defines group company for the purposes of the new exclusion introduced by subsection (5).

11. Subsection (7) applies this Section in relation to shares acquired on or after Royal Assent.

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12. The provisions at Sections 140A to 140C apply where an employee receives shares in the company for which he works, but on terms which mean 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.

13. 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.

14. Section 140C defines the circumstances under which an interest in shares will be considered conditional and so fall within the scope of the special tax rules at Section 140A. Generally speaking the definition catches any shares acquired by an employee on terms which mean he may at a later date either forfeit the shares or be required to sell them for less than their full market value.

15. However there are some circumstances in which an interest in shares is specifically excluded from this definition. As a result shares received in these circumstances are taxed in line with general tax rules, rather than under the special provisions on remuneration in shares subject to the risk of forfeiture. Taxing such shares within the normal tax rules does not create the same valuation difficulties that can arise with, say, shares that are subject to the risk of forfeiture as part of a long term incentive plan.

16. The specific exclusions are for:

shares that can only be forfeit for the non-payment of calls,

shares than can only be forfeit as a result of pre-emption rights in the employing company’s articles of association, and

shares that can only be forfeit by redemption on the payment of an amount.

17. The clause extends the pre-emption rights exclusion so it covers the circumstance where an employee works for one company, but receives shares in another company in the same group. In practice it is quite common for employees of subsidiary companies to receive shares in the controlling company.

18. The clause also introduces a new exclusion where the interest in the shares is conditional solely because the employee may be required to sell or transfer the shares if his employment ceases as a result of misconduct.