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

(The document as of February, 2008)

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(3) In sub-paragraph (1) "associate" has the meaning given by paragraph 12(1) but with the omission of paragraph (c).

Part 4 Shares to which schemes can apply

Requirements relating to shares that may be subject to share options: introduction

15 (1) A CSOP scheme must meet the requirements of--

paragraph 16 (shares must be ordinary shares of certain companies),
paragraph 17 (requirements as to listing),
paragraph 18 (shares must be fully paid up and not redeemable),
paragraph 19 (only certain kinds of restrictions allowed), and
paragraph 20 (requirements as to other shareholdings).

(2) In this Part "eligible shares" means shares which may be acquired by the exercise of share options under the scheme.

Shares must be ordinary shares of certain companies

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

(a) the scheme organiser,

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

(c) a company which either is, or has control of, a company which is a member of a consortium owning either the scheme organiser or a company having control of the scheme organiser.

Requirements as to listing

17 (1) Eligible shares must be --

(a) shares of a class listed on a recognised stock exchange,

(b) shares in a company which is not under the control of another company, or

(2) A "listed company" is a company whose shares are listed on a recognised stock exchange, other than--

(a) a close company, or

(b) a company that would be a close company if resident in the United Kingdom.

Shares must be fully paid up and not redeemable

18 Eligible shares must be--

(a) fully paid up, and

(b) not redeemable.

Only certain kinds of restriction allowed

19 (1) Eligible shares must not be subject to any restrictions (see sub-paragraph (4)) other than--

(a) those attaching to all shares of the same class, or

(b) those permitted by sub-paragraph (2).

(2) If the conditions of sub-paragraph (3) are met, eligible shares may be subject to a restriction imposed by the company's articles of association--

(a) requiring all shares held by directors or employees--

(i) of the company, or

(ii) of any other company of which it has control,

to be disposed of, or offered for sale, on ceasing to be so held, and

(b) requiring all shares acquired, as a result of rights or interests obtained by such directors or employees, by persons who--

(i) are not such directors or employees, or

(ii) have ceased to be such directors or employees,

to be disposed of, or offered for sale, when they are acquired.

(3) The conditions of this sub-paragraph are--

(a) that a disposal required by the restriction will be by way of sale for a consideration in money on terms specified in the articles of association, and

(b) that under general conditions contained in the articles of association anyone disposing of shares of the same class (whether or not held or acquired as mentioned in sub-paragraph (2)) may be required to sell them on terms which are the same as those mentioned in paragraph (a).

(4) For the purposes of this paragraph shares are subject to a restriction if there is any contract, agreement, arrangement or condition--

(a) by which a person's freedom to dispose of the shares or of any interest in them or of the proceeds of their sale, or to exercise any right conferred by them, is restricted, or

(b) by which such a disposal or exercise may result in any disadvantage to the person or to a person connected with the person.

This is subject to sub-paragraphs (5) to (7).

(5) Sub-paragraph (4) does not extend to so much of any contract, agreement, arrangement or condition as contains provisions similar in purpose and effect to any of the provisions of the Model Code as (for the time being) set out in the listing rules issued by the competent authority for listing in the United Kingdom under section 74(4) of the Financial Services and Markets Act 2000 (c. 8).

(6) Sub-paragraph (4) also does not apply to any terms of a loan making provision about how it is to be repaid or the security to be given for it.

(7) Any discretion of the directors under the articles of association of the company to refuse to accept the transfer of shares is to be disregarded for the purposes of this paragraph if the directors--

(a) have undertaken to the Inland Revenue not to exercise it in such a way as to discriminate against persons participating in the scheme, and

(b) have notified all those who are eligible to do so of the existence of the undertaking.

(8) In this paragraph "articles of association" includes, in the case of a company incorporated under the law of a country outside the United Kingdom, any equivalent document relating to the company.

Requirements as to other shareholdings

20 (1) The majority of the issued shares of the same class as the eligible shares must be--

(a) employee-control shares, or

(b) open market shares,

unless the eligible shares are shares in a company whose ordinary share capital consists of shares of one class only.

(2) Shares in a company are "employee-control shares" if--

(a) the persons holding the shares are, by virtue of their holding, together able to control the company, and

(b) those persons are or have been employees or directors of the company or of another company which is under the control of the company.

(3) Shares in a company are "open market shares" if the persons holding the shares are not--

(a) persons who acquired their shares as a result of a right conferred on them or an opportunity afforded to them as a director or employee of the scheme organiser or any other company, and not as a result of an offer to the public, or

(b) trustees holding shares on behalf of persons who acquired their beneficial interests in the shares as mentioned in paragraph (a), or

(i) are not of a class listed on a recognised stock exchange, and

(ii) are in a company which is under the control of a listed company (as defined by paragraph 17(2)),

companies which have control of the company whose shares are in question or of which that company is an associated company.

Part 5 Requirements etc. relating to share options

Requirements etc. relating to share options: introduction

21 (1) A CSOP scheme must meet the requirements of--

paragraph 22 (requirements as to price for acquisition of shares), and
paragraph 23 (share options may not be transferred).

(2) A CSOP scheme may make any provision authorised by--

paragraph 24 (exercise of options: ceasing to be director or employee), or
paragraph 25 (exercise of options: death).

Requirements as to price for acquisition of shares

22 (1) The price at which shares may be acquired by the exercise of a share option granted under the scheme--

(a) must be stated at the time when the option is granted, and

(b) must not be manifestly less than the market value of shares of the same class at that time.

This is subject to sub-paragraphs (2) and (3).

(2) The Inland Revenue and the scheme organiser may agree in writing that sub-paragraph (1)(b) is to apply as if the reference to the time when the option is granted were to an earlier time or times stated in the agreement.

(3) The scheme may provide for one or more of the following--

(a) the price at which shares may be acquired by the exercise of a share option granted under the scheme,

(b) the number of shares which may be so acquired, or

to be varied so far as necessary to take account of a variation in the share capital of which the shares form part.

(4) But the scheme must provide that no such variation is to be made without the prior approval of the Inland Revenue.

Share options must not be transferable

23 (1) The scheme must ensure that share options granted to a participant are not capable of being transferred by the participant.

(2) Paragraph 25 provides for the exercise of the options where the participant has died.

Exercise of options: ceasing to be director or employee

24 (1) The scheme may provide that an individual may exercise share options under it after ceasing to be a full-time director or qualifying employee.

(2) "Qualifying employee" has the same meaning as in paragraph 8 (the employment requirement).

Exercise of options: death

25 The scheme may provide that, if a participant dies before exercising the options, they may be exercised on or after the date of death but not later than 12 months after that date.

Part 6 Exchange of share options

Exchange of options on company reorganisation

26 (1) A CSOP scheme may provide that if--

(a) there is a company reorganisation affecting a scheme company (that is, a company whose shares may be acquired by the exercise of share options obtained under the scheme: see paragraph 16), and

(b) a participant has obtained share options under the scheme which are to acquire shares of the scheme company ("the old options"),

the participant may agree with the acquiring company to release the old options in consideration of the participant being granted new share options.

(2) For the purposes of this paragraph there is a company reorganisation affecting a scheme company if another company ("the acquiring company")--

(a) obtains control of the scheme company--

(i) as a result of making a general offer to acquire the whole of the issued ordinary share capital of the scheme company which is made on a condition such that, if it is met, the person making the offer will have control of that company, or

(ii) as a result of making a general offer to acquire all the shares in the scheme company which are of the same class as those subject to the old options;

(b) obtains control of the scheme 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); or

(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).

(3) A scheme that makes provision under sub-paragraph (1) must require the agreement referred to in that sub-paragraph to be made--

(a) where control is obtained in the way set out in sub-paragraph (2)(a)(i) or (ii), within the period of 6 months beginning with the time when the acquiring company obtains control and any condition subject to which the offer is made is met,

(b) where control is obtained in the way set out in sub-paragraph (2)(b), within the period of 6 months beginning with the time when the court sanctions the compromise or arrangement, and

(c) where sub-paragraph (2)(c) applies, within the period during which the acquiring company remains bound or entitled as mentioned in that provision.

Requirements about share options granted in exchange

27 (1) This paragraph applies to a scheme that makes provision under paragraph 26 (exchange of options on company reorganisation).

(2) The scheme must require the new share options to relate to shares in a company which--

(a) is different from the company whose shares are subject to the old options, and

(b) is either the acquiring company itself or some other company within sub-paragraph (b) or (c) of paragraph 16 (shares must be ordinary shares of certain companies), namely--

(i) a company which has control of the scheme organiser, or

(ii) a company which is, or has control of a company which is, a member of a consortium owning either the scheme organiser or a company having control of the scheme organiser.

For this purpose the control in question may be through the medium of the acquiring company.

(3) The scheme must also require the new share options to be equivalent to the old options.

(4) For the new options to be regarded as equivalent to the old options--

(a) the shares to which they relate must meet the conditions in paragraphs 16 to 20 (types of share that may be used),

(b) they must be exercisable in the same manner as the old options and subject to the provisions of the scheme as it had effect immediately before the release of the old options,

(c) the total market value of the shares subject to the old options immediately before the release of those options by the participant must equal the total market value, immediately after the grant of the new options to the participant, of the shares subject to those options, and

(d) the total amount payable by the participant for the acquisition of shares under the new options must be equal to the total amount that would have been so payable under the old options.

(5) For the purposes of the CSOP code, new share options granted under the terms of a provision included in a scheme under paragraph 26 are to be treated as having been granted at the time when the corresponding old options were granted.

(6) This also applies for the purposes of the provisions of the scheme in their operation, after the grant of the new options, by virtue of a condition complying with sub-paragraph (4)(b).

Part 7 Approval of schemes

Application for approval

28 (1) Where--

(a) a CSOP scheme has been established, and

(b) the scheme organiser makes an application to the Inland Revenue for approval of the scheme,

the Inland Revenue must approve the scheme if they are satisfied that it meets the requirements of Parts 2 to 6 of this Schedule.

(2) An application for approval--

(a) must be in writing, and

(b) must contain such particulars and be supported by such evidence as the Inland Revenue may require.

(3) Once the Inland Revenue have decided whether or not to approve the scheme, they must give notice of their decision to the scheme organiser.

Appeal against refusal of approval

29 (1) If the Inland Revenue refuse to approve the scheme, the scheme organiser may appeal to the Special Commissioners.

(2) The notice of appeal must be given to the Inland Revenue within 30 days after the date on which notice of their decision was given to the scheme organiser.

(3) If the Special Commissioners allow the appeal, they may direct the Inland Revenue to approve the scheme with effect from a date specified by the Commissioners.

(4) The date so specified must not be earlier than that of the application for approval.

Withdrawal of approval

30 (1) If any disqualifying event occurs in connection with an approved CSOP scheme, the Inland Revenue may by a notice given to the scheme organiser withdraw the approval with effect from--

(a) the time at which the disqualifying event occurred, or

(b) a later time specified by the Inland Revenue in the notice.

(2) A "disqualifying event" occurs in connection with a scheme if--

(a) any of the requirements of Parts 2 to 6 of this Schedule ceases to be met; or

(b) the scheme organiser fails to provide information requested by the Inland Revenue under paragraph 33.

Approval ineffective after unapproved alteration

31 (1) If--

(a) an alteration is made in a CSOP scheme that has been approved, and

(b) the alteration has not been approved by the Inland Revenue,

the approval of the scheme is ineffective after the date of the alteration.

(2) Where the Inland Revenue--

(a) have been requested to approve any alteration in such a scheme, and

(b) have decided whether or not to approve the alteration,

they must give notice of their decision to the scheme organiser.

Appeal against withdrawal of approval etc.

32 (1) This paragraph applies if a CSOP scheme has been approved by the Inland Revenue and they--

(a) decide to withdraw approval of the scheme under paragraph 30, or

(b) decide not to approve an alteration in the scheme under paragraph 31.

(2) The scheme organiser may appeal against the decision to the Special Commissioners.

(3) The notice of appeal must be given to the Inland Revenue within 30 days after the date on which notice of their decision was given to the scheme organiser.

Part 8 Supplementary provisions

Power to require information

33 (1) The Inland Revenue may by notice require any person to provide them with any information--

(a) which they reasonably require for the performance of their functions under the CSOP code, and

(b) which the person to whom the notice is addressed has or can reasonably obtain.

(2) The power conferred by this paragraph extends, in particular, to--

(a) information to enable the Inland Revenue--

(i) to decide whether to approve a CSOP scheme or to withdraw an approval already given, or

(ii) to determine the liability to tax, including capital gains tax, of any person who has participated in a scheme, and

(b) information about the administration of a scheme and any alteration of the terms of a scheme.

(3) The notice must require the information to be provided within a specified time, which must not end earlier than 3 months after the date when the notice is given.

Jointly owned companies

34 (1) This paragraph applies for the purposes of the provisions of the CSOP code relating to group schemes.

(2) Each joint owner of a jointly owned company is to be treated as controlling every company within sub-paragraph (3).

(3) The companies within this sub-paragraph are--

(a) the jointly owned company, and

(b) any company controlled by that company.

(4) However, no company within sub-paragraph (3) may be--

(a) a constituent company in more than one group scheme, or

(b) a constituent company in a particular group scheme if another company within that sub-paragraph is a constituent company in a different group scheme.

(5) In this paragraph a "jointly owned company" means a company which (apart from sub-paragraph (2)) is not controlled by any one person and--

(a) of which 50% of the issued share capital is owned by one person and 50% by another, or

(b) which is otherwise controlled by two persons taken together.

(6) In this paragraph "joint owner" means one of the persons mentioned in sub-paragraph (5)(a) or (b).

Meaning of "associated company"

35 (1) For the purposes of the CSOP code one company is an "associated company" of another company at a given time if, at that time or at any other time within one year previously--

(a) one has control of the other, or

(b) both are under the control of the same person or persons.

(2) For the purposes of sub-paragraph (1) the question whether a person controls a company is to be determined in accordance with section 416(2) to (6) of ICTA.

Minor definitions

36 (1) In the CSOP code--

"company" means a body corporate;
"market value" has the same meaning as it has for the purposes of TCGA 1992 by virtue of Part 8 of that Act.

(2) For the purposes of the CSOP code a company is a member of a consortium owning another company if it is one of a number of companies--

(a) which between them beneficially own not less than 75% of the other company's ordinary share capital, and

(b) each of which beneficially owns not less than 5% of that capital.

Index of defined expressions

37 In the CSOP code the following expressions are defined or otherwise explained by the provisions indicated below:

approved	section 521(4)
associated company	paragraph 35(1)
child	section 832(5) of ICTA, (and see section 721(6) of this Act)
close company	section 832(1) of ICTA, (and see paragraph 9(4))
company	paragraph 36(1)
connected person	section 718
constituent company	paragraph 3(3)
control	section 719 (and see paragraph 35(2))
the CSOP code	section 521(3)
CSOP scheme	section 521(4)
distribution	section 832(1) of ICTA
eligible shares (in Part 4 of this Schedule)	paragraph 15(2)
employee and employment	section 4
group scheme	paragraph 3(2) (and see paragraph 34)
the Inland Revenue	section 720(1)
market value	paragraph 36(1)
member of a consortium	paragraph 36(2)
notice	section 832(1) of ICTA
the options (in relation to a participant)	paragraph 2(2)
ordinary share capital	section 832(1) of ICTA
participant	paragraph 2(2)
participate	paragraph 2(2)
personal representatives	section 721(1)
recognised stock exchange	section 841 of ICTA
the scheme organiser	paragraph 2(2)
share option	section 521(4)
shares	section 521(4)
Special Commissioners	section 4 of TMA 1970
United Kingdom	section 830 of ICTA

Section 527

SCHEDULE 5 Enterprise management incentives

Part 1 Introduction

Enterprise management incentives: qualifying options

1 (1) This Schedule makes provision for establishing what is a qualifying option for the purposes of the EMI code.

(2) In the EMI code a "qualifying option" means (in accordance with section 527(4)) a share option--

(a) in relation to which the requirements of this Schedule are met at the time when the option is granted, and

(b) which is notified to the Inland Revenue in accordance with Part 7.

(3) The requirements of this Schedule are--

(a) the general requirements in Part 2,

(b) that the company whose shares are the subject of the option ("the relevant company") is a qualifying company (see Part 3),

(d) that the option is granted to the employee by reason of the employee's employment--

(i) with that company, or

(ii) if that company is a parent company, with that company or another member of the group, and

(e) the requirements of Part 5 as to the terms of the option, the types of shares that may be subject to it, and other matters.

(4) In the EMI code, as it applies to a share option, "the appropriate time" means the time when the option is granted.

Meaning of "the relevant company" and "the employer company"

2 In the EMI code, in relation to a share option--

"the relevant company" means (in accordance with paragraph 1(3)(b)) the company whose shares are subject to the option;
"the employer company" means the company by reference to which the requirement in paragraph 1(3)(d) (the employment requirement) is met.

Part 2 General requirements

General requirements: introduction

3 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 purpose for which the option is granted (see paragraph 4),
the maximum entitlement of an employee (see paragraphs 5 and 6),
the maximum value of the relevant company's shares in respect of which unexercised options can exist (see paragraph 7).

Purpose of granting the option

4 To be a qualifying option a share option must be granted for commercial reasons in order to recruit or retain an 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: financial limit on unexercised options

5 (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 the employee's employment--

(i) with one company, or

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

(2) A share option cannot be a qualifying option if the limit in sub-paragraph (1) is already exceeded at the time when it is granted.

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

(4) Where, at the time when a share option is granted to an employee ("E"), E holds unexercised CSOP options granted by reason of E's employment--

(a) with the employer company, or

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

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

(5) A "CSOP option" is an option to acquire shares under a scheme approved under Schedule 4 (CSOP schemes).

(6) For the purposes of this paragraph--

(a) "the value" of shares in respect of which a particular share option is or has been granted means the market value, at the time when the option is or was granted, of issued shares of the same class as those that may be acquired by exercise of the option; and

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

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

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