Income Tax (Earnings and Pensions) Act 2003 (c. 1)

(The document as of February, 2008)

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Part 1 Introduction

Approval of share incentive plans (SIPs)

1 (1) This Schedule makes provision for--

(a) the approval of share incentive plans ("SIPs") by the Inland Revenue, and

(b) the administration and operation of such plans.

(2) Parts 2 to 9 of this Schedule contain requirements that have to be met in order for plans to be approved under this Schedule.

(3) The requirements consist of general requirements (see Part 2) and requirements as to--

the eligibility of individuals (see Part 3),
the types of shares that may be awarded (see Part 4),
free shares (see Part 5),
partnership shares (see Part 6),
matching shares (see Part 7),
cash dividends and dividend shares (see Part 8), and
the trustees (see Part 9).

(4) Part 10 of this Schedule deals with the approval of plans and the withdrawal of approval.

SIPs: free shares and partnership shares

2 (1) In the SIP code a "share incentive plan" (or "SIP" for short) means (in accordance with section 488(4)) a plan established by a company providing--

(a) for shares to be appropriated to employees without payment ("free shares"), or

(b) for shares to be acquired on behalf of employees out of sums deducted from their salary ("partnership shares").

(2) In the SIP code, in relation to a SIP--

"the company" means the company which established the plan;
"plan requirements" means requirements applying to the plan;
"the trustees" means the body of persons established under Part 9 to exercise functions in connection with the plan.

Matching shares

3 (1) A SIP that provides for partnership shares may also provide for shares to be appropriated without payment to employees in proportion to the partnership shares acquired by them ("matching shares").

(2) If a SIP contains provision for all, or more than one, of the following--

free shares,
partnership shares, and
matching shares,

the plan may provide for the company to decide when the provisions relating to each kind of share are to have effect.

Group plans

4 (1) A SIP established by a company that controls other companies (a "parent company") may extend to all or any of those other companies.

(2) In the SIP code a SIP established by a parent company which so extends is referred to as a "group plan".

(3) In relation to a group plan a "constituent company" means--

(a) the parent company, or

(b) any other company to which for the time being the plan is expressed to extend.

(4) Paragraph 91 deals with jointly owned companies and companies controlled by them.

Meaning of "award of shares", "participant" etc.

5 (1) For the purposes of the SIP code an "award of shares" is made under a SIP on each occasion when in accordance with the plan--

(a) free or matching shares are appropriated to employees, or

(b) partnership shares are acquired on behalf of employees.

(2) Accordingly, references to shares awarded to an individual under a SIP are to--

(a) free or matching shares appropriated to the individual, or

(b) partnership shares acquired on the individual's behalf,

under the plan.

(3) For the purposes of the SIP code an individual participates in an award of free, matching or partnership shares under a SIP if shares included in that award are--

(a) in the case of an award of free or matching shares, appropriated to the individual, or

(b) in the case of an award of partnership shares, acquired on the individual's behalf.

(4) In the SIP code, in relation to a SIP, "participant" means an individual to whom shares have been awarded under the plan.

Part 2 General requirements

General requirements for approval: introduction

6 A SIP must meet the plan requirements contained in--

paragraph 7 (the purpose of the plan),
paragraph 8 (all-employee nature of plan),
paragraph 9 (participation on same terms),
paragraph 10 (no preferential treatment for directors and senior employees),
paragraph 11 (no further conditions), and
paragraph 12 (no loan arrangements).

The purpose of the plan

7 (1) The purpose of the plan must be to provide benefits to employees in the nature of shares in a company which give them a continuing stake in that company.

(2) The plan must not contain, and the operation of the plan must not involve, features which are neither essential nor reasonably incidental to that purpose.

All-employee nature of plan

8 (1) The plan must provide that every employee who--

(a) meets the requirements of Part 3 of this Schedule (eligibility of individuals) in relation to an award of shares under the plan, and

(b) is a UK resident taxpayer,

is eligible to participate in the award, and is invited to do so.

(2) An employee is a UK resident taxpayer if the employee's earnings from the employment by reference to which the employee meets the employment requirement are (or would be if there were any) general earnings to which section 15 or 21 applies (earnings for year when employee resident and ordinarily resident in the UK).

(3) The plan must not contain any feature which has or is likely to have the effect of discouraging any description of employees within sub-paragraph (1) from participating in an award of shares under the plan.

(4) Sub-paragraph (3) does not apply to any provision required or authorised by this Schedule.

(5) The plan may provide that an employee who--

(a) meets the requirements of Part 3 of this Schedule (eligibility of individuals) in relation to an award of shares under the plan, but

(b) is not a UK resident taxpayer (see sub-paragraph (2)),

is eligible to participate in the award, and may be invited to do so.

(6) For the purposes of the SIP code an individual is a "qualifying employee", in relation to an award of shares, if the individual--

(a) is eligible to participate in it under sub-paragraph (1), or

(b) is eligible to participate in it under sub-paragraph (5) and has been invited to do so.

Participation on same terms

9 (1) The requirement of this paragraph is that--

(a) every employee who is invited to participate in an award must be invited to participate on the same terms, and

(b) those who do participate must actually do so on the same terms.

(2) The requirement of this paragraph is infringed by the awarding of free shares by reference to factors other than those mentioned in sub-paragraph (3).

(3) The requirement of this paragraph is not infringed by the awarding of free shares by reference to--

(a) an employee's remuneration,

(b) an employee's length of service, or

but this is subject to sub-paragraph (4).

(4) If the awarding of free shares is by reference to more than one of the factors mentioned in sub-paragraph (3), the requirement of this paragraph is infringed unless--

(a) each factor gives rise to a separate entitlement related to the level of remuneration, length of service or (as the case may be) hours worked, and

(b) the total entitlement is the sum of those separate entitlements.

(5) In the case of an award of free shares which provides for performance allowances, this paragraph has effect as provided in--

(a) paragraph 41 (performance allowances: method one), or

(b) paragraph 42 (performance allowances: method two).

(6) In sub-paragraph (5) "performance allowances" has the meaning given in paragraph 34(4).

(7) In the case of an award of partnership shares, the requirement of this paragraph is not infringed by the operation of any percentage limit specified in or under paragraph 46(2) or (3) (maximum amount of deductions) so far as the application of that limit to employees with different levels of remuneration results in deductions of different amounts or in the award of different numbers of shares.

No preferential treatment for directors and senior employees

10 (1) The first requirement of this paragraph is that no feature of the plan has or is likely to have the effect of conferring benefits wholly or mainly--

(a) on directors, or

(b) on employees receiving the higher or highest levels of remuneration.

(2) The second requirement of this paragraph applies only if the plan is established by a company that is a member of a group.

(3) The requirement is that the identity of the company (or, if it is a group plan, the constituent companies) must not be such that the plan has or is likely to have the effect of conferring benefits wholly or mainly--

(a) on employees of companies that are members of the group who receive the higher or highest levels of remuneration, or

(b) on directors of such companies.

(4) The requirements of this paragraph are not infringed by the awarding of free shares in circumstances where (as a result of paragraph 9(3) and (4)) that would not constitute an infringement of the requirements of paragraph 9.

No further conditions

11 No conditions apart from those required or authorised by this Schedule may be imposed on an employee's participation in an award of shares under the plan.

No loan arrangements

12 (1) The arrangements for the plan must not make any provision, or be associated in any way with any provision made, for loans to some or all of the employees of--

(a) the company, or

(b) in the case of a group plan, of any constituent company.

(2) The operation of the plan must not be associated in any way with such loans.

(3) In sub-paragraph (1) "arrangements" includes any scheme, agreement, undertaking or understanding, whether or not legally enforceable.

Part 3 Eligibility of individuals

Eligibility of individuals: introduction

13 A SIP must meet the plan requirements contained in--

paragraph 14 (time of eligibility to participate),
paragraph 15 (the employment requirement),
paragraph 18 (requirement not to participate in other SIPs), and
paragraph 19 (the "no material interest" requirement).

Time of eligibility to participate

14 (1) The plan must provide that an individual may only participate in an award of shares if the individual is eligible to participate in the award at the appropriate time mentioned below.

(2) In the case of an award of free shares, the appropriate time is the time when the award is made.

(3) In the case of an award of partnership shares where the plan does not provide for an accumulation period, the appropriate time is the time of the deduction of the partnership share money relating to the award.

(4) In the case of an award of partnership shares where the plan does provide for an accumulation period, the appropriate time is the time of the first deduction of partnership share money relating to the award.

(5) In the case of an award of matching shares where the plan does not provide for an accumulation period, the appropriate time is the time of the deduction of the partnership share money relating to the award of partnership shares to which the matching shares relate.

(6) In the case of an award of matching shares where the plan does provide for an accumulation period, the appropriate time is the time of the first deduction of partnership share money relating to the award of partnership shares to which the matching shares relate.

(7) For the purposes of this paragraph an individual is eligible to participate in an award of shares under the plan if and only if the requirements of the plan are met as to--

(a) employment (see paragraph 15),

(b) not participating in other SIPs (see paragraph 18), and

(8) In the case of an individual within paragraph 8(5) (all-employee nature of plan: non-UK resident taxpayer), the individual is not eligible to participate in an award of shares under the plan unless (in addition to the requirements mentioned in sub-paragraph (7)) any further eligibility requirements of the plan are met.

The employment requirement

15 (1) The plan must provide that an individual is not eligible to participate in an award of shares unless the individual meets the requirement in sub-paragraph (2).

(2) The requirement is that the individual--

(a) is an employee of--

(i) the company, or

(ii) in the case of a group plan, a constituent company, and

(b) if the plan provides for a qualifying period, has at all times during that period been an employee of a qualifying company.

(3) In the SIP code "the employment requirement" means the requirement in sub-paragraph (2).

(4) This paragraph is supplemented--

(a) as regards qualifying periods, by paragraph 16, and

(b) as regards the meaning of "qualifying company", by paragraph 17.

Qualifying periods

16 (1) This paragraph applies if the plan provides for a qualifying period in relation to an award.

(2) In the case of an award of free shares, the qualifying period must be a period of not more than 18 months ending with the date on which the award is made.

(3) In the case of an award of partnership shares where the plan does not provide for an accumulation period, the qualifying period must be a period of not more than 18 months ending with the deduction of partnership share money relating to the award.

(4) In the case of an award of partnership shares where the plan does provide for an accumulation period, the qualifying period must be a period of not more than 6 months ending with the start of the accumulation period relating to the award.

(5) In the case of an award of matching shares where the plan does not provide for an accumulation period, the qualifying period must be a period of not more than 18 months ending with the deduction of partnership share money relating to the award of partnership shares to which the matching shares relate.

(6) In the case of an award of matching shares where the plan does provide for an accumulation period, the qualifying period must be a period of not more than 6 months ending with the start of the accumulation period relating to the award of partnership shares to which the matching shares relate.

(7) In relation to an award, the same qualifying period must apply in relation to all employees--

(a) of the company, or

(b) in the case of a group plan, of the constituent companies.

(8) The plan may authorise the company to specify different qualifying periods in respect of different awards of shares, but the requirements in sub-paragraphs (2) to (7) apply to periods so specified.

Meaning of "qualifying company"

17 (1) For the purposes of paragraph 15(2) "qualifying company" has the meaning given by this paragraph.

(2) Except in the case of a group plan, "qualifying company" means--

(a) the company, or

(b) a company that, when the individual was employed by it, was an associated company--

(i) of the company, or

(ii) of another company qualifying under this paragraph.

(3) In the case of a group plan, "qualifying company" means--

(a) a company that is a constituent company at the end of the qualifying period mentioned in paragraph 15(2),

(b) a company that, when the individual was employed by it, was a constituent company, or

(i) a company qualifying under paragraph (a) or (b), or

(ii) another company qualifying under this paragraph.

Requirement not to participate in other SIPs

18 (1) The plan must provide that an individual is not eligible to participate in an award of free, matching or partnership shares under the plan in a tax year if the individual--

(a) has in that year already participated, or

(b) is at the same time to participate,

in an award of shares under another approved SIP established by the company or a connected company.

(2) For the purposes of this paragraph an individual is to be treated as having participated in an award of free shares under a SIP if the individual would have participated in that award but for the individual's failure to obtain a performance allowance (see paragraph 34).

(3) In this paragraph "connected company" means--

(a) a company which controls or is controlled by the company or which is controlled by a company which also controls the company, or

(b) a company which is a member of a consortium owning the company or which is owned in part by the company as a member of a consortium.

The "no material interest" requirement

19 (1) The plan must provide that an individual is not eligible to participate in an award of shares on any date if the individual has on that date, or has had within the 12 months ending with that date, a material interest in--

(a) a close company whose shares may be awarded under the plan, or

(b) a company which has control of such a company or is a member of a consortium which owns such a company.

(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

has a material interest in the company.

(3) This paragraph is supplemented--

(a) as regards the meaning of "material interest", by paragraphs 20 and 21, and

(b) as regards the meaning of "associate", by paragraphs 22 to 24.

Meaning of "material interest"

20 (1) In paragraph 19 (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 25% 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 25% 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--
(a)
section 414(1)(a) of ICTA (exclusion of companies not resident in the United Kingdom), or
(b)
section 415 of ICTA (exclusion of certain quoted companies), and
"participator" has the meaning given by section 417(1) of ICTA.

(5) This paragraph is supplemented by paragraph 21 (material interest: options and interests in SIPs).

Material interest: options and interests in SIPs

21 (1) This paragraph applies for the purposes of paragraph 20 (meaning of "material interest").

(2) A right to acquire shares (however arising) is to be treated as a right to control them.

(3) Sub-paragraph (4) 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.

(4) In determining at any time prior to the exercise of the right whether the number of shares to be attributed to the individual exceeds 25% 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 (3)(b).

(5) The references in sub-paragraphs (3) and (4) to the shares to be attributed to an individual are to the shares which--

(a) for the purposes of paragraph 20(2) (material interest in share capital), and

(b) in accordance with paragraph 19(2) (material interest can consist of or include that of the individual's associates),

fall to be brought into account in the individual's case so that it can be determined whether their number exceeds 25% of the company's ordinary share capital.

(6) In applying paragraph 20 the following are to be disregarded--

(a) the interest of the trustees of any approved SIP 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.

Meaning of "associate"

22 (1) In paragraph 19(2) (the "no material interest" requirement) "associate", in relation to an individual, means--

(a) any relative or partner of the individual,

(b) the trustee or trustees of any settlement in relation to which the individual, or any of the individual's relatives (living or dead), is or was a settlor, and

(c) where the individual is interested in any shares or obligations of the company mentioned in paragraph 19(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 23 and 24 (which relate to employee benefit trusts and discretionary trusts).

(3) In this paragraph--

"relative" means--
(a)
spouse,
(b)
parent, child or remoter relation in the direct line, or
(c)
brother or sister;
"settlor" and "settlement" have the same meaning as in Chapter 1A of Part 15 of ICTA (see section 660G(1) and (2)).

Meaning of "associate": trustees of employee benefit trust

23 (1) This paragraph applies for the purposes of paragraph 22(1)(c) (meaning of "associate": trustees of settlement) where an individual is interested as a beneficiary of an employee benefit trust in shares or obligations of the company mentioned in paragraph 19(2).

(2) The trustees of the employee benefit trust are not to be regarded as associates of the individual as a result 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

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 25% of the ordinary share capital of the company.

(3) In sub-paragraph (2)(b) and (c) "associate" has the meaning given by paragraph 22(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).

Meaning of "associate": trustees of discretionary trust

24 (1) This paragraph applies for the purposes of paragraph 22(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 19(2),

(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 22(1), but with the omission of paragraph (c) (trusts and estates).

Part 4 Types of shares that may be awarded

Types of share that may be awarded: introduction

25 (1) The requirements of the following paragraphs must be met with respect to any shares that may be awarded under a SIP--

paragraph 26 (shares must be part of ordinary share capital of certain companies),
paragraph 27 (requirement as to listing etc.),
paragraph 28 (shares must be fully paid up and not redeemable),
paragraph 29 (prohibited shares), and
paragraph 30 (only certain kinds of restriction allowed).

(2) In this Part of this Schedule "eligible shares" means shares that may be awarded under the plan.

Shares must be part of ordinary share capital of certain companies

26 Eligible shares must form part of the ordinary share capital of--

(a) the company,

(b) a company which has control of the company, or

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