Finance Act 2000 (c. 17)

(The document as of February, 2008)

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(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) a declaration by a director, or the secretary, of the employer company--

(i) that in his opinion the requirements of this Schedule are met in relation to the option, and

(ii) that the information provided is to the best of his knowledge correct and complete, and

(b) a declaration by the individual to whom the option was granted that he meets the requirement of paragraph 29 (commitment of working time) in relation to the option.

Correction of notice by Revenue

3 (1) The Inland Revenue may amend a notice given under paragraph 2 so as to correct obvious errors or omissions in the notice.

(2) A correction under this paragraph is made by notice to the employer company.

(3) No such correction may be made more than nine months after the day on which the notice under paragraph 2 was given to the Inland Revenue.

(4) A correction under this paragraph is of no effect if the employer company within three months from the date of issue of the notice of correction gives notice rejecting the correction.

Notice of enquiry

4 (1) The Inland Revenue may enquire into an option of which notice is given under paragraph 2 if they give notice to the employer company of their intention to do so in accordance with this paragraph.

(2) Where notice is given under paragraph 2, the Inland Revenue may enquire into whether paragraph 29 (commitment of working time) is met by the individual to whom the option was granted if they give him notice of their intention to do so in accordance with this paragraph.

(3) The Inland Revenue shall give a copy of any notice under sub-paragraph (2) to the employer company.

(4) Notice of enquiry may be given at any time within the period of 12 months beginning with the end of the period of 30 days mentioned in paragraph 2(1) (the period within which notice under that paragraph must be given).

(5) 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 2 was false or misleading in a material particular.

(6) An option that has been the subject of one notice of enquiry under sub-paragraph (1) or (2) may not be the subject of another notice under the same sub-paragraph, unless it is given by virtue of sub-paragraph (5).

Completion of enquiry

5 (1) An enquiry under paragraph 4(1) is completed when the Inland Revenue by notice inform the employer company that they have completed their enquiry and state their decision whether the requirements of this Schedule are met in relation to the option.

(2) If the Inland Revenue conclude that the requirements of this Schedule are not met, they must also give notice of that decision to the individual to whom the option was granted.

(3) An enquiry under paragraph 4(2) is completed when the Inland Revenue by notice inform the individual concerned and the employer company that they have completed their enquiry and state their decision whether the requirement of paragraph 29 (commitment of working time) is met by that individual in relation to the option.

(4) References in this Part to a "closure notice" are to a notice under sub-paragraph (1) or (3).

(5) A closure notice takes effect when it is issued.

(6) An application may be made by--

(a) the employer company, or

(b) in a case within paragraph 4(2), the individual concerned,

for a direction that the Inland Revenue give a closure notice within a specified period.

(7) An application under sub-paragraph (6) must be made to the General Commissioners or, if the applicant so elects (in accordance with section 46(1) of the [1970 c. 9.] Taxes Management Act 1970), to the Special Commissioners.

(8) Any such application shall be heard and determined in the same way as an appeal.

(9) The Commissioners hearing the application shall give a direction unless they are satisfied that the Inland Revenue have reasonable grounds for not giving a closure notice within a specified period.

Effect of enquiry

6 (1) If the Inland Revenue do not give notice of enquiry, the requirements of this Schedule are taken to be met in relation to the option.

(2) If the Inland Revenue do give notice of enquiry, their decision stated in the closure notice is conclusive as to whether the requirements of this Schedule are met in relation to the option, subject--

(a) if their decision is that the requirements are not met, to the outcome of any appeal against that decision;

(b) if their decision is that the requirements are met, to the outcome of any further enquiry under paragraph 4(5) (enquiry arising from discovery of false or misleading information).

(3) This paragraph does not affect the provisions of paragraphs 47 to 53 (which relate to disqualifying events).

Appeals

7 (1) The employer company may appeal against a decision of the Inland Revenue--

(a) that notice of the grant of the option was not given in accordance with paragraph 2, or

(b) that the requirements of this Schedule are not met in relation to the option.

(2) An individual may appeal against a decision of the Inland Revenue that he does not meet the requirement of paragraph 29 (commitment of working time).

(3) Notice of the appeal must be given to the Inland Revenue within 30 days after the closure notice is given to the employer company or individual.

(4) The appeal lies to the General Commissioners or, if the employer company or individual so elects (in accordance with section 46(1) of the [1970 c. 9.] Taxes Management Act 1970), to the Special Commissioners.

Part II General requirements

Introduction

8 An option is not a qualifying option unless the requirements of this Part of this Schedule are met as to--

(a) the purpose for which the option is granted (see paragraph 9),

(b) the maximum entitlement of an employee (see paragraph 10), and

Purpose of granting the option

9 An option is a qualifying option only if it is granted for commercial reasons in order to recruit or retain a key employee in a company, and not as part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax.

Maximum entitlement of employee

10 (1) An employee may not hold unexercised qualifying options which--

(a) are in respect of shares with a total value of more than £100,000, and

(b) were granted by reason of his employment--

(i) with one company, or

(ii) with two or more companies which are members of the same group.

(2) An option is not a qualifying option if the limit in sub-paragraph (1) is already exceeded at the time it is granted.

(3) If the grant of an option causes that limit to be exceeded, the option is not a qualifying option so far as it relates to the excess.

(4) Where by reason of his employment with one company, an employee has been granted qualifying options in respect of shares with a total value of £100,000 (whether or not they have been exercised or released), any further option granted by reason of his employment with--

(a) that company, or

(b) if it is a member of a group, any company that is a member of that group,

within three years of the date of the grant of the last qualifying option is not a qualifying option.

(5) Where, by reason of his employment with two or more companies which are members of the same group, an employee has been granted qualifying options in respect of shares with a total value of £100,000 (whether or not they have been exercised or released), any further option granted, by reason of his employment with any member of that group, within three years of the date of the grant of the last qualifying option is not a qualifying option.

(6) Where, at the time an option is granted to an employee, he holds unexercised CSOP options granted by reason of his employment with--

(a) the employer company, or

(b) if that company is a member of a group, any member of that group,

those options shall be treated for the purposes of this paragraph as if they were unexercised qualifying options.

For this purpose a "CSOP option" is an option to acquire shares under a scheme approved under Schedule 9 to the Taxes Act 1988 by reference to the requirements of Part IV of that Schedule (non-savings-related share option schemes).

(7) For the purposes of this paragraph--

(a) the value of shares means the market value at the time the option is granted of shares of the same class as those that may be acquired by exercise of the option; and

(b) an option is treated as granted in respect of the maximum number of shares that may be acquired under it.

(8) For the purposes of this paragraph the market value of shares subject to restrictions or risk of forfeiture shall be determined as if there were no such restriction or risk.

For this purpose shares are "subject to risk of forfeiture" if the interest that may be acquired is only conditional within the meaning of section 140C of the Taxes Act 1988.

Number of employees who may hold qualifying options

11 Not more than 15 employees may hold qualifying options in respect of shares in the relevant company at the same time.

Part III Qualifying companies

Introduction

12 A qualifying company is a company in relation to which the requirements of this Part of this Schedule are met as to--

(a) independence (see paragraph 13),

(b) having only qualifying subsidiaries (see paragraph 14),

(d) trading activities (see paragraph 17).

The independence requirement

13 (1) The independence requirement is that the company is not--

(a) a 51% subsidiary of another company, or

(b) under the control of another company (or of another company and any other person connected with that other company), without being a 51% subsidiary of that other company,

and that no arrangements are in existence by virtue of which the company could become such a subsidiary or fall under such control.

(2) For the purposes of this requirement arrangements with a view to a qualifying exchange of shares (within the meaning of paragraph 60) shall be disregarded.

(3) In this paragraph "control" has the meaning given by section 840 of the Taxes Act 1988.

The qualifying subsidiaries requirement

14 (1) A company that has one or more subsidiaries is not a qualifying company unless every subsidiary of the company is a qualifying subsidiary.

(2) For this purpose--

(a) "subsidiary" means any company which the company controls, either on its own or together with any person connected with it, and

(b) the question whether a person controls a company shall be determined in accordance with section 416(2) to (6) of the Taxes Act 1988.

Meaning of "qualifying subsidiary"

15 (1) A company ("the subsidiary") is a qualifying subsidiary of another company ("the company") if the following conditions are met.

(2) The conditions are--

(a) that the company or another of its subsidiaries possesses not less than 75% of the issued share capital of, and not less than 75% of the voting power in, the subsidiary;

(b) that the company or another of its subsidiaries would--

(i) in the event of a winding up of the subsidiary, or

(ii) in any other circumstances,

be beneficially entitled to receive not less than 75% of the assets of the subsidiary which would then be available for distribution to the shareholders of the subsidiary;

(c) that the company or another of its subsidiaries is beneficially entitled to not less than 75% of any profits of the subsidiary which are available for distribution to the shareholders of the subsidiary;

(d) that no person other than the company or another of its subsidiaries has control of the subsidiary within the meaning of section 840 of the Taxes Act 1988; and

(e) that no arrangements are in existence by virtue of which the conditions in paragraphs (a) to (d) would cease to be met.

(3) The subsidiary shall not be regarded, at a time when it or another company is being wound up, as having ceased on that account to be a company in relation to which the conditions in sub-paragraph (2) are met if--

(a) the conditions in that sub-paragraph would be met apart from the winding up, and

(b) the winding up is for commercial reasons and is not part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax.

(4) The subsidiary shall not be regarded, at any time when arrangements are in existence for the disposal by the company or (as the case may be) by another subsidiary of the company of all its interest in the subsidiary in question, as having ceased on that account to be a qualifying subsidiary if the disposal is to be for commercial reasons and not part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax.

The gross assets requirement

16 (1) The gross assets requirement in the case of a single company is that the value of the company's gross assets does not exceed £15 million.

(2) The gross assets requirement in the case of a parent company is that the consolidated value of the group assets does not exceed £15 million.

(3) The consolidated value of the group assets means the aggregate value of the gross assets of the group, disregarding any that consist in rights against, or shares in or securities of, another company in the group.

The trading activities requirement

17 (1) The trading activities requirement in the case of a single company is that the company--

(a) disregarding any incidental purposes, exists wholly for the purpose of carrying on one or more qualifying trades, and

(b) is carrying on a qualifying trade or preparing to do so.

(2) The trading activities requirement in the case of a parent company is that--

(a) the business of the group does not consist wholly or as to a substantial part in the carrying on of non-qualifying activities, and

(b) at least one group company--

(i) disregarding any incidental purposes, exists wholly for the purpose of carrying on one or more qualifying trades, and

(ii) is carrying on a qualifying trade or preparing to do so.

(3) The business of the group means what would be the business of the group if the activities of the group companies taken together were regarded as one business.

(4) For the purposes of determining whether a company falls within sub-paragraph (1)(a) or (2)(b)(i), the purposes for which it exists shall be disregarded to the extent that they consist in the carrying on of the following activities--

(a) in the case of a single company, the holding and managing of property used by the company for one or more qualifying trades carried on by it, and

(b) in the case of a group company, any activities within sub-paragraph (5).

(5) For the purposes of determining the business of a group, activities of a group company shall be disregarded to the extent that they consist in--

(a) the holding of shares in or securities of, or the making of loans to, another group company; or

(b) the holding and managing of property used by a group company for the purposes of one or more qualifying trades carried on by a group company; or

(6) In sub-paragraph (2)(a) "non-qualifying activities" means--

(a) excluded activities other than--

(i) the letting of ships to which paragraph 21 applies (ships other than oil rigs or pleasure craft) in circumstances where the requirements of sub-paragraph (2) of that paragraph are met; or

(ii) the receiving of royalties or licence fees within paragraph 22 in circumstances where the requirements mentioned in sub-paragraph (2) of that paragraph are met; or

(b) activities carried on otherwise than in the course of a trade.

(7) In this paragraph--

(a) "incidental purposes" means purposes having no significant effect (other than in relation to incidental matters) on the extent of the company's activities; and

(b) "incidental activities" means activities carried on in pursuance of incidental purposes.

Meaning of "qualifying trade"

18 (1) A trade is a qualifying trade if--

(a) it is carried on wholly or mainly in the United Kingdom,

(b) it is conducted on a commercial basis and with a view to the realisation of profits, and

(2) The carrying on of activities of research and development from which it is intended that a connected qualifying trade will be derived or benefit is treated as the carrying on of a qualifying trade.

But preparing to carry on such activities does not count as preparing to carry on a qualifying trade.

(3) For the purposes of sub-paragraph (2) a "connected qualifying trade" means a qualifying trade carried on--

(a) by the company carrying on the activities of research and development, or

(b) if that company is a member of a group, by any other group company.

Excluded activities

19 (1) The following are excluded activities--

(a) dealing in land, in commodities or futures or in shares, securities or other financial instruments;

(b) dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution;

(d) leasing (including letting ships on charter or other assets on hire) or receiving royalties or licence fees;

(e) providing legal or accountancy services;

(f) property development;

(g) farming or market gardening;

(h) holding, managing or occupying woodlands, any other forestry activities or timber production;

(i) operating or managing hotels or comparable establishments, or managing property used as a hotel or comparable establishment; and

(j) operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home.

(2) Sub-paragraph (1) is supplemented by the following provisions--

paragraph 20 (wholesale and retail distribution);

paragraph 21 (leasing of ships);

paragraph 22 (receipt of royalties and licence fees);

paragraph 23 (property development);

paragraph 24 (hotels and comparable establishments);

paragraph 25 (nursing homes and residential care homes); and

paragraph 26 (provision of facilities for another business).

Excluded activities: wholesale and retail distribution

20 (1) This paragraph supplements paragraph 19(1)(b).

(2) A trade of wholesale distribution is one in which the goods are offered for sale and sold to persons for resale by them, or for processing and resale by them, to members of the general public for their use or consumption.

(3) A trade of retail distribution is one in which the goods are offered for sale and sold to members of the general public for their use or consumption.

(4) A trade is not an ordinary trade of wholesale or retail distribution if--

(a) it consists, to a substantial extent, in dealing in goods of a kind which are collected or held as an investment, or in that activity and any other excluded activity taken together, and

(b) a substantial proportion of those goods are held by the company for a period which is significantly longer than the period for which a vendor would reasonably be expected to hold them while endeavouring to dispose of them at their market value.

(5) In determining whether a trade carried on by any person is an ordinary trade of wholesale or retail distribution, regard shall be had to the extent to which it has the following features--

(a) the goods are bought by that person in quantities larger than those in which he sells them;

(b) the goods are bought and sold by that person in different markets;

(c) that person employs staff and incurs expenses in the trade in addition to the cost of the goods and, in the case of a trade carried on by a company, to any remuneration paid to any person connected with it;

(d) there are purchases or sales from or to persons who are connected with that person;

(e) purchases are matched with forward sales or vice versa;

(f) the goods are held by that person for longer than is normal for goods of the kind in question;

(g) the trade is carried on otherwise than at a place or places commonly used for wholesale or retail trade;

(h) that person does not take physical possession of the goods;

(6) The features specified in sub-paragraph (5)(a) to (c) are indications that the trade is such an ordinary trade.

Those in sub-paragraph (5)(d) to (h) are indications of the contrary.

Excluded activities: leasing of ships

21 (1) This paragraph supplements paragraph 19(1)(d) so far as it relates to the leasing of ships other than oil rigs or pleasure craft.

(2) A trade shall not be treated as not being a qualifying trade by reason only of its consisting in letting such ships on charter if the following requirements are met--

(a) every ship let on charter by the company carrying on the trade is beneficially owned by the company;

(b) every ship beneficially owned by the company is registered in the United Kingdom;

(d) the conditions mentioned in sub-paragraph (3) are satisfied in relation to every letting of a ship on charter by the company.

(3) The conditions are that--

(a) the letting is for a period not exceeding 12 months and no provision is made at any time (whether in the charterparty or otherwise) for extending it beyond that period otherwise than at the option of the charterer;

(b) during the period of the letting there is no provision in force (whether by virtue of being contained in the charterparty or otherwise) for the grant of a new letting to end, otherwise than at the option of the charterer, more than 12 months after that provision is made;

(c) the letting is by way of a bargain made at arm's length between the company and a person who is not connected with it;

(d) under the terms of the charter the company is responsible as principal--

(i) for taking, throughout the period of the charter, management decisions in relation to the ship, other than those of a kind generally regarded by persons engaged in trade of the kind in question as matters of husbandry; and

(ii) for defraying all expenses in connection with the ship throughout that period, or substantially all such expenses, other than those directly incidental to a particular voyage or to the employment of the ship during that period;

and

(e) no arrangements exist by virtue of which a person other than the company may be appointed to be responsible for the matters mentioned in paragraph (d) on behalf of the company.

(4) In relation to any letting between one company and another where--

(a) one of those companies is the company carrying on the trade and the other is a qualifying subsidiary of that company, or

(b) both companies are qualifying subsidiaries of the company carrying on the trade,

sub-paragraph (3) has effect with the omission of paragraph (c).

(5) Where any of the requirements in sub-paragraph (2) are not met in relation to any lettings, the trade shall not thereby be treated as not a qualifying trade if those lettings and any other excluded activities do not, taken together, amount to a substantial part of the trade.

(6) In this paragraph--

"oil rig" means any ship which is an offshore installation for the purposes of the [1971 c. 61.] Mineral Workings (Offshore Installations) Act 1971; and
"pleasure craft" means any ship of a kind primarily used for sport or recreation.

Excluded activities: receipt of royalties and licence fees

22 (1) This paragraph supplements paragraph 19(1)(d) so far as it relates to the receipt of royalties and licence fees.

(2) A trade shall not be regarded as not being a qualifying trade by reason only that it consists to a substantial extent in the receiving of royalties or licence fees if the royalties and licence fees (or all but for a part that is not a substantial part in terms of value) are attributable to the exploitation of relevant intangible assets.

(3) For this purpose an intangible asset is a "relevant intangible asset" if the whole or greater part (in terms of value) of it has been created--

(a) by the company carrying on the trade, or

(b) by a company which at all times during which it created the asset was--

(i) the parent company of the company carrying on the trade, or

(ii) a qualifying subsidiary of that parent company.

(4) In this paragraph "intangible asset" means any asset which falls to be treated as an intangible asset in accordance with normal accounting practice.

For this purpose "normal accounting practice" means normal accounting practice in relation to the accounts of companies incorporated in any part of the United Kingdom.

(5) In the case of a relevant asset that is intellectual property, references in this paragraph to the creation of the asset by a company are to its creation in circumstances in which the right to exploit it vests in the company (whether alone or jointly with others).

(6) In sub-paragraph (5) "intellectual property" means--

(a) any patent, trade mark, registered design, copyright, design right, performer's right or plant breeder's right; and

(b) any rights under the law of a country or territory outside the United Kingdom which correspond or are similar to those falling within paragraph (a).

Excluded activities: property development

23 (1) This paragraph supplements paragraph 19(1)(f).

(2) "Property development" means the development of land--

(a) by a company which has, or at any time has had, an interest in the land, and

(b) with the sole or main object of realising a gain from the disposal of an interest in the land when it is developed.

(3) For this purpose "interest in land" means, subject to sub-paragraph (4)--

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