SCHEDULE 5 continued PART 3 continued
(3) Sub-paragraphs (4) to (6) explain what is meant by a controlling interest in a business for the purposes of sub-paragraph (2)(b).
(4) In the case of a business carried on by a company, a person (“P”) has a controlling interest in the business if—
(a) P controls the company,
(b) the company is a close company and P, or an associate of P's, is a director of the company and either—
(i) is the beneficial owner of more than 30% of the ordinary share capital of the company, or
(ii) is able (directly or through the medium of other companies or by any other indirect means) to control more than 30% of that share capital, or
(c) not less than half of the business could, in accordance with section 344(2) of ICTA (company reconstructions: supplemental), be regarded as belonging to him for the purposes of section 343 of that Act (company reconstructions without a change of ownership).
(5) In any other case, a person has a controlling interest in a business if that person is entitled to not less than half—
(a) of the assets used for the business, or
(b) of the income arising from it.
(6) For the purposes of sub-paragraph (4)(a) the question whether a person controls a company is to be determined in accordance with section 416(2) to (6) of ICTA (“control” in the context of close companies).
(7) For the purposes of this paragraph any rights or powers of a person who is an associate of another person are to be attributed to that other person.
(8) In this paragraph—
“associate” has the meaning given in section 417(3) and (4) of ICTA (expressions relating to close companies), except that in those subsections as they apply for the purposes of this paragraph “relative” does not include a brother or sister;
“business” includes any trade, profession or vocation;
“director” is to be construed in accordance with section 417(5) of ICTA (expressions relating to close companies).
24 An individual is an “eligible employee” in relation to the relevant company if the requirements of this Part of this Schedule as to the following are met at the appropriate time—
employment (see paragraph 25),
commitment of working time (see paragraphs 26 and 27), and
having no material interest (see paragraphs 28 to 33).
25 To be an eligible employee in relation to the relevant company an individual must be an employee—
(a) of that company, or
(b) if that company is a parent company, of that company or a qualifying subsidiary of that company.
26 (1) For an individual (“the employee”) to be an eligible employee in relation to the relevant company the average amount per week of the employee’s committed time must equal or exceed the statutory threshold, that is—
(a) 25 hours a week, or
(b) if less, 75% of the employee’s working time (see paragraph 27).
(2) The employee’s “committed time” means the time that the employee is required, as an employee in relevant employment, to spend—
(a) on the business of the relevant company, or
(b) if the relevant company is a parent company, on the business of the group.
(3) It includes any time which the employee would have been required to spend as mentioned in sub-paragraph (2) but for—
(a) injury, ill-health or disability,
(b) pregnancy, childbirth, maternity or paternity leave or parental leave,
(c) reasonable holiday entitlement, or
(d) not being required to work during a period of notice of termination of employment.
(4) In this paragraph “relevant employment” means employment—
(a) by the relevant company, or
(b) where the relevant company is a parent company, by any member of the group.
27 (1) In paragraph 26 “working time” means—
(a) time spent on remunerative work as an employee or self-employed person, or
(b) time which would have been so spent but for any of the reasons set out in paragraph 26(3)(a) to (d).
(2) In sub-paragraph (1)(a) “remunerative work”, in the context of work undertaken as an employee, means work the earnings from which—
(a) are general earnings to which section 15 or 21 applies (earnings for year when employee resident or ordinarily resident in the United Kingdom), or
(b) would be general earnings within paragraph (a) if the employee were resident and ordinarily resident in the United Kingdom.
(3) In sub-paragraph (1)(a) “remunerative work”, in the context of work undertaken as a self-employed person, means work which is undertaken with a view to profit and the profits (if any) from which—
(a) are (or would be) chargeable to tax under Case I or II of Schedule D, or
(b) would be so chargeable if the employee were resident and ordinarily resident in the United Kingdom.
28 (1) An individual is not an eligible employee in relation to the relevant company if the individual has a material interest—
(a) in that company, or
(b) if that company is a parent company, in any member of the group.
(2) For the purposes of this paragraph an individual is to be regarded as having a material interest in a company if—
(a) the individual,
(b) the individual together with one or more of the individual’s associates, or
(c) any such associate, with or without any other such associates,
has a material interest in the company.
(3) This paragraph is supplemented—
(a) as regards the meaning of “material interest”, by paragraphs 29 and 30; and
(b) as regards the meaning of “associate” by paragraph 31 (read with paragraphs 32 and 33).
29 (1) In paragraph 28 (the “no material interest” requirement) references to a “material interest” in a company are to—
(a) a material interest in the share capital of the company, or
(b) where it is a close company, a material interest in its assets.
(2) A material interest in the share capital of a company means—
(a) beneficial ownership of, or
(b) the ability to control (directly or through the medium of other companies or by any other indirect means),
more than 30% of the ordinary share capital of the company.
(3) A material interest in the assets of a close company means—
(a) possession of, or
(b) an entitlement to acquire,
such rights as would, in the event of the winding up of the company or in any other circumstances, give an entitlement to receive more than 30% of the assets that would then be available for distribution among the participators.
(4) In this paragraph—
“close company” includes a company that would be a close company but for—
section 414(1)(a) of ICTA (exclusion of companies not resident in the United Kingdom), or
section 415 of ICTA (exclusion of certain quoted companies);
“participator” has the meaning given by section 417(1) of ICTA (expressions relating to close companies).
(5) This paragraph is supplemented by paragraph 30 (options and interests in SIPs).
30 (1) This paragraph applies for the purposes of paragraph 29 (meaning of “material interest”).
(2) A right to acquire shares (however arising) is to be treated as a right to control them.
(3) However, shares that an individual may acquire under a qualifying option are to be left out of account until such time as they are actually acquired.
(4) Sub-paragraph (5) applies in a case where—
(a) the shares to be attributed to an individual consist of or include shares which the individual or another person has a right to acquire, and
(b) the circumstances are such that, if that right were to be exercised, the shares acquired would be shares which were previously unissued and which the company would be contractually bound to issue in the event of the exercise of the right.
(5) In determining at any time prior to the exercise of the right whether the number of shares to be attributed to the individual exceeds 30% of the ordinary share capital of the company, that ordinary share capital is to be treated as increased by the number of unissued shares referred to in sub-paragraph (4)(b).
(6) The references in sub-paragraphs (4) and (5) to the shares to be attributed to an individual are to the shares which—
(a) for the purposes of paragraph 29(2) (material interest in share capital), and
(b) in accordance with paragraph 28(2) (material interest can consist of or include that of individual’s associates),
fall to be brought into account in the individual’s case so that it can be determined whether their number exceeds 30% of the company’s ordinary share capital.
(7) In applying paragraph 29 the following are to be disregarded—
(a) the interest of the trustees of any share incentive plan approved under Schedule 2 (SIPs) in any shares which are held by them in accordance with the plan but which have not been appropriated to, or acquired on behalf of, an individual, and
(b) any rights exercisable by the trustees as a result of that interest.
31 (1) In paragraph 28(2) (the “no material interest” requirement) “associate”, in relation to an individual, means—
(a) any relative or partner of that individual,
(b) the trustee or trustees of any settlement in relation to which that individual, or any of that individual’s relatives (living or dead), is or was a settlor, and
(c) where that individual is interested in any shares or obligations of the company mentioned in paragraph 28(2) which are subject to any trust, or are part of the estate of a deceased person—
(i) the trustee or trustees of the settlement concerned, or
(ii) the personal representatives of the deceased,
as the case may be.
(2) Sub-paragraph (1)(c) needs to be read with paragraphs 32 and 33 (which relate to employee benefit trusts and discretionary trusts).
(3) In this paragraph—
“relative” means—
spouse, or
parent, child or remoter relation in the direct line;
“settlor” and “settlement” have the same meaning as in Chapter 1A of Part 15 of ICTA (see section 660G(1) and (2)).
32 (1) This paragraph applies for the purposes of paragraph 31(1)(c) (meaning of “associate”: trustees of settlement) where the individual is interested as a beneficiary of an employee benefit trust in shares or obligations of the company mentioned in paragraph 28(2).
(2) The trustees of the employee benefit trust are not to be regarded as associates of the beneficiary by reason only of the individual’s being so interested if neither—
(a) the individual, nor
(b) the individual together with one or more of the individual’s associates, nor
(c) any such associate, with or without any other such associates,
has at any time after 13th March 1989 been the beneficial owner of, or able (directly or through the medium of other companies or by any other indirect means) to control, more than 30% of the ordinary share capital of the company.
(3) In sub-paragraph (2)(b) and (c) “associate” has the meaning given by paragraph 31(1), but does not include the trustees of an employee benefit trust as a result only of the individual’s having an interest in shares or obligations of the trust.
(4) Chapter 11 of Part 7 of this Act (which deals with the attribution of interests in companies to beneficiaries of employee benefit trusts) applies for the purposes of sub-paragraph (2).
(5) In this paragraph “employee benefit trust” has the same meaning as in that Chapter (see sections 550 and 551).
33 (1) This paragraph applies for the purposes of paragraph 31(1)(c) (meaning of “associate”: trustees of settlement) where—
(a) the individual (“the beneficiary”) is one of the objects of a discretionary trust,
(b) the property subject to the trust has at any time consisted of or included shares or obligations of the company mentioned in paragraph 28(2),
(c) the beneficiary has ceased to be eligible to benefit under the trust as a result of—
(i) an irrevocable disclaimer or release executed by the beneficiary, or
(ii) the irrevocable exercise by the trustees of a power to exclude the beneficiary from the objects of the trust,
(d) immediately after the beneficiary ceased to be so eligible, no associate of the beneficiary was interested in the shares or obligations of the company which were subject to the trust, and
(e) during the period of 12 months ending with the date on which the beneficiary ceased to be so eligible, neither the beneficiary nor any associate of the beneficiary received any benefit under the trust.
(2) The beneficiary is not, as a result only of the matters mentioned in sub-paragraph (1)(a) and (b), to be regarded as having been interested in the shares or obligations of the company at any time during that period of 12 months.
(3) In sub-paragraph (1) “associate” has the meaning given by paragraph 31, but with the omission of sub-paragraph (1)(c) of that paragraph (trusts and estates).
34 A share option is not a qualifying option unless the requirements of this Part of this Schedule as to the following are met at the appropriate time—
the type of shares that may be acquired (see paragraph 35),
when the option is capable of being exercised (see paragraph 36),
the terms being agreed in writing (see paragraph 37), and
the non-assignability of rights (see paragraph 38).
35 (1) The option must confer a right to acquire shares that—
(a) form part of the ordinary share capital of the relevant company,
(b) are fully paid up, and
(c) are not redeemable.
(2) Shares are not fully paid up for the purposes of sub-paragraph (1)(b) if there is any undertaking to pay cash to the relevant company at a future date.
(3) For the purposes of sub-paragraph (1)(c) “redeemable” shares include shares that may become redeemable at a future date.
36 (1) The option must be capable of being exercised within the period of 10 years beginning with the date on which it is granted.
(2) Where the exercise of the option is dependent on the fulfilment of conditions, the option is to be taken to be capable of being exercised within the period mentioned in sub-paragraph (1) if the conditions may be fulfilled within that period.
37 (1) The option must take the form of a written agreement between the person granting the option and the employee which meets the following requirements.
(2) The agreement must state—
(a) the date on which the option is granted;
(b) that it is granted under the provisions of this Schedule;
(c) the number, or maximum number, of shares that may be acquired;
(d) the price (if any) payable by the employee to acquire them, or the method by which that price is to be determined; and
(e) when and how the option may be exercised.
(3) The agreement must set out any conditions, such as performance conditions, affecting the terms or extent of the employee’s entitlement.
(4) The agreement must contain details of any restrictions attaching to the shares.
(5) Where the shares that may be acquired by the employee are subject to risk of forfeiture, the agreement must contain details of the conditions.
(6) For the purposes of sub-paragraph (5) shares are “subject to risk of forfeiture” if the interest that may be acquired is only conditional within the meaning of section 424 (conditional interests in shares).
38 The terms on which the option is granted—
(a) must prohibit the person to whom it is granted from transferring any of that person’s rights under it, and
(b) if they permit it to be exercised after that person’s death, must not permit it to be exercised more than one year after the date of the death.
39 (1) This Part applies in connection with company reorganisations.
(2) For the purposes of this Part there is a “company reorganisation” where a company (“the acquiring company”)—
(a) obtains control of a company whose shares are subject to an outstanding qualifying option—
(i) as a result of making a general offer to acquire the whole of the issued share capital of that company which is made on a condition such that, if it is met, the person making the offer will have control of the company, or
(ii) as a result of making a general offer to acquire all the shares in the company which are of the same class as those to which the option relates;
(b) obtains control of such a company as a result of a compromise or arrangement sanctioned by the court under—
(i) section 425 of the Companies Act 1985 (c. 6) (power to compromise with creditors and members), or
(ii) Article 418 of the Companies (Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6)) (corresponding provision for Northern Ireland);
(c) becomes bound or entitled under—
(i) sections 428 to 430 of that Act (power to acquire shares of shareholders dissenting from schemes or contract approved by majority), or
(ii) Articles 421 to 423 of that Order (corresponding provision for Northern Ireland),
to acquire shares of the same class as shares that are subject to an outstanding qualifying option; or
(d) obtains all the shares of a company whose shares are subject to an outstanding qualifying option as a result of a qualifying exchange of shares (see paragraph 40).
(3) In sub-paragraph (2) “outstanding qualifying option” means a qualifying option that has yet to be exercised.
40 (1) For the purposes of the EMI code there is a “qualifying exchange of shares” where—
(a) arrangements are made in accordance with which a company (“the new company”) acquires all the shares (“old shares”) in another company (“the old company”), and
(b) the following conditions are met.
(2) The conditions are that—
(a) the consideration for the old shares consists wholly of the issue of shares (“new shares”) in the new company;
(b) new shares are issued in consideration of old shares only at times when there are no issued shares in the new company other than—
(i) subscriber shares, and
(ii) new shares previously issued in consideration of old shares;
(c) the consideration for new shares of each description consists wholly of old shares of the corresponding description;
(d) new shares of each description are issued to holders of old shares of the corresponding description in respect of, and in proportion to, their holdings; and
(e) by virtue of the CGT capital reorganisation provisions, the exchange of shares is not treated as involving a disposal of the old shares or an acquisition of the new shares.
(3) For the purposes of this paragraph old shares and new shares are of a corresponding description if, on the assumption that they were shares in the same company, they would be of the same class and carry the same rights.
(4) In this paragraph—
(a) references to “shares”, except in the expression “subscriber shares”, include securities; and
(b) “the CGT capital reorganisation provisions” means section 127 of TCGA 1992, as applied by section 135(3) of that Act (exchange of securities).
41 (1) This paragraph applies if both of the following conditions are met in connection with a company reorganisation.
(2) The first condition is that the holder of a qualifying option, by agreement with the acquiring company, releases the holder’s rights under that option (“the old option”) in consideration of the granting to him of rights (“the new option”) which are equivalent but relate to shares in the acquiring company.
(3) The second condition is that the requirements of the following paragraphs are met—
paragraph 42 (period within which replacement option must be granted), and
paragraph 43 (further requirements to be met as to replacement option).
(4) If this paragraph applies, the new option is to be treated for the purposes of the EMI code as a “replacement option”.
(5) Except where the contrary is indicated—
(a) references in the EMI code to a qualifying option include a replacement option, and
(b) a replacement option is to be treated for the purposes of the EMI code as if it had been granted on the date on which the old option was granted.
(6) For the purposes of any of paragraphs 5 to 7 or section 536(1)(e), the total value of the shares in the acquiring company that are subject to the replacement option is to be taken to be equal to—
(a) the total value (as calculated in accordance with paragraph 5(6) to (8)) of the shares that were subject to the old option immediately before the release of rights under that option, or
(b) if the replacement option has been partially exercised, the proportion of that total value which corresponds to the proportion which the number of shares that remain subject to the option bears to the number of shares that were subject to it at the time when it was granted as a new option (see sub-paragraph (2) above).
(7) In the EMI code references to “the old option” or “the new option” are to be construed in accordance with this paragraph.
42 (1) To qualify as a replacement option the new option must be granted within the required period (see sub-paragraphs (2) to (4)).
(2) If the company reorganisation falls within paragraph 39(2)(a), the required period is the period of 6 months after the date on which—
(a) the person making the offer has obtained control of the company, and
(b) any condition subject to which the offer is made is met.
(3) If the company reorganisation falls within paragraph 39(2)(b) or (d), the required period is the period of 6 months after the date on which the acquiring company obtains control of the company whose shares are subject to the old option.
(4) If the company reorganisation falls within paragraph 39(2)(c), the required period is the period during which the acquiring company remains bound or entitled as mentioned in that provision.
43 (1) For the new option to qualify as a replacement option the following requirements must also be met.
(2) The new option must be granted to the holder of the old option by reason of the holder’s employment—
(a) with the acquiring company, or
(b) if that company is a parent company, with that company or another member of the group.
(3) The requirements of—
(a) paragraph 4 (purpose of granting option),
(b) paragraph 7 (maximum value of options in respect of relevant company) (as it has effect under sub-paragraph (4)), and
(c) Part 5 (requirements as to options),
must be met in relation to the new option at the time of the release of rights under the old option (“the relevant time”).
(4) For the purposes of paragraph 7 (as applied by sub-paragraph (3)(b)) the total value of the shares in the acquiring company that are subject to the new option is to be taken to be equal to the total value (as calculated in accordance with paragraph 5(6) to (8)) of the shares that were subject to the old option immediately before the relevant time.
(5) In addition to the requirements mentioned in sub-paragraph (3)—
(a) the independence requirement and the trading activities requirement must be met in relation to the acquiring company at the relevant time, and
(b) the individual to whom the new option is granted must be an eligible employee in relation to the acquiring company at that time.
(6) The total market value, immediately before the relevant time, of the shares which were subject to the old option must be equal to the total market value, immediately after the grant of the new option, of the shares in respect of which that option is granted.
(7) The total amount payable by the employee for the acquisition of the shares under the new option must be equal to the total amount that would have been payable for the acquisition of shares under the old option.
44 (1) For a share option to be a qualifying option, notice of the option must be given to the Inland Revenue within 92 days after the date of the grant of the option.
(2) The notice must—
(a) be given by the employer company, and
(b) be in a form required or authorised by the Inland Revenue.
(3) The notice must contain, or be supported by, such information as the Inland Revenue may require for the purpose of determining whether the requirements of this Schedule are met.
(4) The notice must also contain a declaration within each of sub-paragraphs (5) and (6).
(5) A declaration within this sub-paragraph is a declaration by a director, or the secretary, of the employer company—
(a) that in the opinion of that person the requirements of this Schedule are met in relation to the option, and
(b) that the information provided is, to the best of that person’s knowledge, correct and complete.
(6) A declaration within this sub-paragraph is a declaration by the individual to whom the option has been granted that the individual meets the requirement of paragraph 26 (commitment of working time) in relation to the option.
(7) Any reference in this Part of this Schedule to the requirements (or any of the requirements) of this Schedule being met in relation to a share option is a reference to the requirements or requirement being met in relation to it at the appropriate time.
45 (1) The Inland Revenue may amend a notice given under paragraph 44 so as to correct obvious errors or omissions in the notice.
(2) A correction under this paragraph must be made by a notice given to the employer company.
(3) No correction may be made under this paragraph more than 9 months after the day on which the notice under paragraph 44 was given to the Inland Revenue.
(4) A correction under this paragraph is of no effect if the employer company, within 3 months after the date of issue of the notice of correction, gives notice to the Inland Revenue rejecting the correction.
46 (1) This paragraph applies where notice of a share option is given under paragraph 44.
(2) The Inland Revenue may enquire into the option if they give notice to the employer company of their intention to do so in accordance with this paragraph.
(3) The Inland Revenue may enquire into whether the requirement of paragraph 26 (commitment of working time) is met in relation to the option by the individual to whom it has been granted if they give that individual notice of their intention to do so in accordance with this paragraph.
(4) The Inland Revenue must give a copy of a notice under sub-paragraph (3) to the employer company.
(5) Unless given by virtue of sub-paragraph (6), a notice of enquiry may not be given more than 12 months after the end of the period of 92 days mentioned in paragraph 44(1) (the period within which a notice under that paragraph must be given).
(6) A notice of enquiry may be given at any time if the Inland Revenue discover that any of the information provided in or in connection with the notice under paragraph 44 was false or misleading in a material respect.
(7) An option that has been the subject of one notice of enquiry under sub-paragraph (2) or (3) may not be the subject of another notice under that sub-paragraph, unless the notice is given by virtue of sub-paragraph (6).
(8) In this paragraph a “notice of enquiry” means a notice given under sub-paragraph (2) or (3).