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CLAUSE 61 EMPLOYEE SHARE OWNERSHIP PLANS: AMENDMENTS

SUMMARY

This Clause and Schedule introduce amendments to the All-Employee Share Ownership plan (“AESOP”) to make it easier for companies to administer .

DETAILS OF THE CLAUSE

Clause 61

1.      Clause 61 introduces Schedule 13.

Schedule 13

2.      Paragraph (1) introduces amendments to Schedule 8 to the Finance Act 2000.

3.      Paragraph (2) relaxes the rules for qualifying periods. Companies may set a qualifying period of up to eighteen months before employees can participate in a plan. The amendment will mean that an employee will satisfy a qualifying period of employment for AESOP by having worked throughout that period in an associated company of the company where the employee is employed at the end of the period. Currently some people who have been employed over the period by a group are excluded from participating in an AESOP because they have moved around within the group. This amendment comes into effect on or after the passing of the Act.

4.      Paragraph (3) removes the possibility of any incidental expense of operating a plan met by an AESOP trust or an employer being charged to income tax on employees as a benefit or pecuniary liability. This takes effect for tax year 2001-2002 onwards.

5.      Paragraph (4) repeals sub-paragraph 82(2) of Schedule 8. This makes it clear that any tax previously paid on capital receipts is not deducted from the tax payable when shares cease to be subject to the plan during a holding period. The tax charge should not be reduced because it is calculated on the market value of the shares when they cease to be subject to the plan – and that value reflects any fall in value that can result from the pay out of the capital receipts. The change is deemed always to have had effect.

6.      Paragraph (5) amends paragraph 88 of Schedule 8, that provides tax relief to trustees of AESOP trusts who hold shares that have not been awarded to employees. Once any of the shares in a company become readily convertible assets, trustees can hold onto shares without allocating them to employees for two years without paying the Schedule F trust rate.  The amendment provides clarity. It has effect for shares acquired by the trustees of an AESOP after the passing of the Finance Act 2001.

7.      Paragraph (6) provides for a technical change that amends paragraph 93(2) of Schedule 8 to make it clear that a tax credit arises when an employee takes dividend shares out of an AESOP early. When shares are held in an AESOP, it is possible to use dividends received on those shares to purchase further shares to be held in the plan, called dividend shares. If an employee takes dividend shares out of an AESOP early, a tax charge arises on the dividend that was used to buy the dividend shares. There is an entitlement to a tax credit in the usual way . The amendment clarifies this, and that the rate is that in place when the shares are taken out of the plan. This change is deemed always to have had effect.

8.      Paragraph (7) amends paragraph 98. Paragraph 98 provides trustees with relief from capital gains tax on shares that have not been awarded to employees. If any of the shares in a company become readily convertible assets, the trustees can enjoy this relief for two years from that date as opposed to five years when none of the shares in the company are readily convertible assets.

BACKGROUND NOTE

The AESOP was designed to help meet the Government’s aim of doubling the number of companies offering all their employees the chance to become shareholders. It was introduced in the Finance Act 2000 after extensive consultation.  It provides greater flexibility than existing tax-favoured share schemes, and contains features to help smaller companies to implement the plan.

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