This clause prevents the use in approved profit
sharing schemes of shares in a company which provides the services
of its employees to businesses, including partnerships, which
control that company. It also prevents the use in approved profit
sharing schemes of shares carrying certain restrictions, unless
those restrictions apply to all ordinary shares of the company.
These two new rules apply from 21 March 2000 (Budget day) but
shares already held by approved profit sharing scheme trustees
on that date will continue to get the benefit of tax relief.(*Rev3)
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DETAILS OF THE CLAUSE
Subsections (1) & (2) introduce the
amendment to the profit sharing legislation in Schedule 9 of the
Taxes Act, and ensure that it does not apply to share option schemes
approved under that Schedule.
Subsection (3) explains that shares in
"employer companies" cannot be used for the purposes of an approved
profit sharing scheme. Employer companies are those whose business
is substantially the provision of the services of its employees
to businesses, including partnerships, which control the company,
or to associated companies.
Subsection (4) adds two new types of share
restriction to those not allowable for shares used in profit sharing
schemes - restrictions affecting rights attaching to dividends,
and restrictions affecting rights to assets on a winding up of
the company. This applies unless those restrictions attach to
all other ordinary shares in the company.
Subsection (5) applies the new rules from
21 March 2000 (Budget day).
Subsection (6) ensures that the new rules
do not apply to shares already in the approved profit sharing
scheme trust on 21 March 2000 (Budget day).
BACKGROUND NOTE
Recently companies have been setting up arrangements
to replicate the effects of the Profit Related Pay (PRP). Tax
free PRP is no longer available for any PRP profit periods starting
on or after 1 January 2000. These arrangements typically seek
to provide employers with tax free cash, sometimes through the
use of shares with unusually restricted rights, which may be shares
in companies - "employer companies" - where the employees
perform services for a business carried on by a third party.
In these cases the main function of the "employer
company" is to provide the services of its employees to those
controlling the company. The employer company sets up an approved
profit sharing scheme using its own shares, the value of which
can be manipulated by those controlling the company. The shares
will benefit from income tax relief if passed out through an approved
profit sharing scheme.
Companies also seek to replicate the effects of
PRP by providing shares with unusually restricted rights in companies
other than "employer companies".
The effect of clause 52 will be to prevent the
use in approved profit sharing schemes of shares in companies
where the employees perform services for a business carried on
by a third party unless the employer company is an independent
business. Companies will also not normally be able to use shares
with more limited rights than those which apply to all ordinary
shares of the company.
Clause 53 prevents an alternative way of replicating
the effect of PRP relief by the use of loan arrangements.
