CLAUSE 62 AND SCHEDULE 14: ENTERPRISE MANAGEMENT INCENTIVES:  AMENDMENTS

SUMMARY

This Clause and Schedule introduce amendments to Enterprise Management Incentives ("EMI").  These double the amount of share options that can be granted under EMI to £3 million and remove the limit on the number of employees in each company who can hold qualifying EMI options.  They also introduce other changes which make EMI easier to operate.

DETAILS OF CLAUSE 62 AND SCHEDULE 14[MGMR1] 

Clause  62  

1.         Clause 62 introduces Schedule 14.

Schedule 14   

2.                  Paragraph 1 provides that Schedule 14 to the Finance Act 2000

(enterprise management incentives) is amended in accordance

with this Schedule 14.

3.                  Paragraph 2 amends the notice requirement in sub-paragraph (1) of paragraph 2 of Schedule 14 that must be met for the option to qualify.  It substitutes a new time limit of 92 days for the notice of option to be given to the Inland Revenue (presently 30 days) after the grant of the option.

4.                  Paragraph 3 amends the period within which the Inland Revenue must give notice if it wishes to make an enquiry into an option that has been notified under paragraph 2 of Schedule 14. It provides that the 12 month period during which a notice of enquiry may be given begins with the end of the period of 92 days (presently 30 days) after the grant of the option.

5.                  Paragraph 4 substitutes a new condition at paragraph 8(c) of Schedule 14 for the general requirement that an option is not a qualifying option.  It replaces the requirement regarding the maximum number of employees who can hold qualifying options with a requirement regarding the maximum value of the company's shares in respect of which unexercised options can exist. 

6.                  Paragraph 5 amends paragraph 9 of Schedule 14 which provides that an option qualifies under Schedule 14 only if it is granted for commercial reasons in order to recruit or retain a key employee in a company.  Paragraph 5 removes the requirement that the employee be "a key" one.

7.                  Paragraph 6 substitutes for paragraph 11 of Schedule 14 (number of employees who may hold qualifying options) a new general requirement as to the maximum value of unexercised qualifying options which may exist.  This provides that the total value of shares in the relevant company in respect of which unexercised qualifying options exist must not exceed £3 million.  An option will not be a qualifying option if the limit is already exceeded at the time it is granted. If the grant of an option causes that limit to be exceeded, it will not be a qualifying option so far as it relates to the excess.  In addition, where the grant of two or more options at the same time causes that limit to be exceeded, then, for determining which part of each option relates to that excess, the amount of the excess will be divided pro-rata among the options according to the value of the shares in respect of which each option was granted.

8.                  Paragraph 7 amends paragraph 45 of Schedule 14. This alters the calculation of the income tax charge on exercise of option to acquire shares at less than market value. It ensures that any price paid on the grant of the option is taken into account in calculating the tax arising.

9.                  Paragraph 8 amends paragraph 46 of Schedule 14. This alters the calculation of the income tax charge on exercise of option to acquire shares at nil cost at the time the option is exercised.  It ensures that any price paid on the grant of the option will be taken into account in calculating the tax arising.

10.             Paragraph 9 amends paragraph 47 of Schedule 14 (main disqualifying events) by substituting a new sub-paragraph (1)(e). It removes the current requirement that prior approval must be given by the Inland Revenue for an alteration of share capital not to be treated as a disqualifying event in relation to a qualifying option.

11.             New sub-paragraph (1)(e) in paragraph 47 includes an alteration to the share capital of the relevant company as a disqualifying event if it is within paragraph 49, where the effect of the alteration is:

• that the requirements of Schedule 14 would no longer be met in relation to the option, or
  
  
• to increase the market value of the shares that are the subject of the qualifying option and paragraph 49(2) (as substituted by paragraph 10) applies to the alteration.

12.             Paragraph 10 amends paragraph 49 of Schedule 14 (disqualifying events: alterations of share capital) by substituting for sub-paragraphs (2) to (5) a new sub-paragraph (2). This has the effect that  an alteration of share capital will be a disqualifying event if:

• it is not made by the relevant company for commercial reasons, or
  
  
• the main purpose or one of the main purposes for making the alteration is to increase the market value of the shares which are the subject of the qualifying option.
  
  

13.             Paragraph 11 amends paragraph 53 of Schedule 14, which sets out the effect of a disqualifying event in relation to a qualifying option for the purposes of an income tax charge under section 135.  Sub-paragraph (2) is replaced by new sub-paragraphs (2), (2A), (2B), (2C) and (2D) in relation to calculating the amount chargeable under section 135 where each of paragraphs 44, 45 or 46 apply. The effect of these changes is to ensure that any option price paid on grant is taken into account in calculating the tax arising on the exercise of an option after a disqualifying event.

14.             For the purposes of paragraph 44, new sub-paragraph (2) defines the amount of the gain charged on exercise of the option as the post-event gain (if any) less the consideration given for the grant of the option.  (The post-event gain is defined at sub-paragraph (2C) as the amount by which the market value of the shares when the option is exercised exceeds their market value immediately before the disqualifying event).

15.             For the purposes of paragraph 45, new sub-paragraph (2A) defines the amount of the gain charged on exercise of the option to be:

• the aggregate of the chargeable market value (as defined in paragraph 45 of Schedule 14 (as amended)) and the post-event gain (as defined at sub-paragraph 2C), less
  
  
• the aggregate of the consideration given for the grant of the option and the amount for which the shares are acquired.

16.             For the purposes of paragraph 46, new sub-paragraph (2B) defines the amount of the gain charged on exercise of the option to be:

• the aggregate of the chargeable market value (as defined in paragraph 45 of Schedule 14 (as amended)) and the post-event gain (as defined at sub-paragraph 2C), less
  
  
• the consideration given for the grant of the option.

17.             Where the market value of the shares at the time of option exercise does not exceed the consideration given for the grant of the option and/or the amount for which the shares are acquired, new sub-paragraph (2D) provides that there is no charge on the option exercise under section 135.

18.             Paragraph 12 makes consequential changes to sub-paragraph (b)(ii) of paragraph 63 of Schedule 14 (qualifying requirements for replacement option) following the amendment to paragraph 8 of Schedule 14 by paragraph 4 of this Schedule.

19.             Paragraph 13 sets out the commencement of the amendments made under this Schedule. 

• The amendments made by paragraphs 2 to 6 and 12 have effect in relation to any right to acquire shares granted after the passing of this Act. 
  
  
• The amendments made by paragraphs 7, 8 and 11 have effect in relation to any right to acquire shares exercised after the passing of this Act. 
  
  
• The amendments made by paragraphs 9 and 10 have effect in relation to any alteration made to share capital of a company after the passing of this Act.

BACKGROUND NOTE

EMIs were introduced by Finance Act 2000 to help small, higher risk companies recruit and retain skilled employees by offering them tax-advantaged share options.  The relief is designed to allow companies to tailor options to suit their business needs.  Growth in the value of the shares over the option period is tax-relieved, as long as the company and the individual continue to meet the conditions for the relief.

The improvements to EMI will simplify the operation of the legislation and assist companies granting EMIs.  By removing the limit on the number of employees in each company who can hold EMI options and replacing it with a limit on the total value of shares under EMI option of £3 million, will double the amount of share options that small, growing companies will be able to grant under EMI.