Commentary on Sections Overview Overview Section 1009: Conditions relating to employee’s income tax position
2600.This section gives the conditions that must be met in relation to the employee’s income tax position. It is based on paragraphs 7 and 20 of Schedule 23 to FA 2003.
2601.The “employee” is the person defined in section 1007(1)(a) as the person in respect of whose employment the shares are acquired.
2602.Subsection (1) deals with the acquisition of shares other than restricted shares. So it applies to the acquisition of convertible shares. The acquisition of the shares has to result in an income tax charge on the employee.
2603.Relief is not given if section 446UA of ITEPA applies to the shares. That provision applies to shares acquired for less than their market value under arrangements that seek to avoid the income tax charge or the national insurance contribution on the employment income.
2604.Subsection (2) applies if the shares are restricted shares.
2605.Relief will be available in two circumstances.
2606.First, if as a result of the acquisition there is an employment income tax charge on earnings as defined in Chapter 1 of Part 3 of ITEPA. This is a charge on the money’s worth of the shares. The test is met at the time of acquisition.
2607.Second, if on acquisition there is no immediate employment income tax charge, but there will be such a charge if there occurs later a chargeable event in respect of the shares. The test is met at the time of acquisition. The company does not have to suspend its claim until that later event actually occurs. It is sufficient that on acquisition the circumstances are such that it appears that the employee will become subject to a charge under section 426 of ITEPA. One reason why there may be no immediate income tax charge is if the shares are forfeitable and the exemption in section 425(2) of ITEPA applies.
2608.The events that trigger a later charge are listed in section 427(3) of ITEPA. They include, for example, a lifting of the restrictions at a time when the recipient of the shares or an associated person still owns the shares. (The definition of associated person for the purposes of section 427 of ITEPA is in section 421C(1) of ITEPA and includes the person who acquired the shares.)
2609.This section does not rewrite paragraph 20(3) of Schedule 23 to FA 2003. Paragraph 20(3) provides that the test in paragraph 20(2)(a)(ii) of Schedule 23 to FA 2003 is applied on the assumption that section 426 of ITEPA continues to apply after the employee dies. Paragraph 20(2)(a)(ii) of Schedule 23 to FA 2003 is rewritten as subsection (2)(b).
2610.Paragraph 20(3) of Schedule 23 to FA 2003 is not necessary where the employee dies after acquiring shares but before becoming subject to a charge. This is because the test in paragraph 20(2)(a)(ii) of Schedule 23 to FA 2003 is applied to the circumstances existing on acquisition. It does not apply on the subsequent chargeable event (for example, the lifting of the restriction). Since the test has already been met on acquisition, it is not necessary to rely on paragraph 20(3) to provide for the case in which section 426 of ITEPA ceases to apply because of some future event. The fact that the employee dies before the restriction is lifted and the section 426 charge does not materialise is irrelevant for the purposes of the test in paragraph 20(2)(a)(ii).
2611.Paragraph 20(3) of Schedule 23 to FA 2003 cannot be relevant to a company’s entitlement to relief under this Part where the employee dies before acquiring shares. If while alive the employee possesses a right to acquire shares then the employee possesses an option and corporation tax relief will be available under Chapter 3 of this Part. If while alive the employee does not enjoy a right to acquire shares and no shares are acquired by a person before the employee’s death, but after the employee’s death shares are acquired by a person, then for both practical and technical reasons corporation tax relief under this Part is not available. See also the commentary on section 1025.