What is the purpose of paragraph 22 of Schedule 3 ITEPA 2003?

Paragraph 22 ensures that shares used in a Share Incentive Plan are from a genuinely established and widely held class, rather than a specially created class with no real commercial purpose beyond the plan. It requires the majority of same-class shares to be employee-control shares or open market shares when multiple ordinary share classes exist.

What are employee-control shares under ITEPA 2003 Schedule 3 paragraph 22?

Employee-control shares are shares in a company where the holders are collectively able to control the company by virtue of their shareholdings, and where those holders are or have been employees or directors of the company itself or of another company under its control. This recognises situations where the workforce effectively owns the business.

What qualifies as open market shares for Share Incentive Plan purposes?

Open market shares are shares held by persons who acquired them through normal commercial means, not through a right or opportunity connected with their employment or directorship. Shares acquired through employment-related rights or held by trustees on behalf of such individuals are excluded, as are unlisted shares held by a controlling parent company.

When does the shareholding requirement in paragraph 22 not apply?

The requirement does not apply when the company's ordinary share capital consists of only a single class of shares. Since there is no question of a specially created class in that situation, there is no need to demonstrate that the majority of same-class shares are employee-control shares or open market shares.

Income Tax (Earnings and Pensions) Act 2003 Schedule 3 paragraph 22

Requirements as to other shareholdings

Paragraph 22 of Schedule 3 sets out the conditions that must be met regarding the wider shareholding structure of a company whose shares are used in a Share Incentive Plan (SIP), to ensure the eligible shares are not an isolated or specially created class designed solely for tax-advantaged purposes.

The majority of issued shares of the same class as the eligible SIP shares must be either employee-control shares or open market shares, unless the company has only one class of ordinary share capital.
Employee-control shares are shares held by current or former employees or directors who, collectively through their holdings, are able to control the company.
Open market shares are shares held by persons who did not acquire them through a right or opportunity arising from employment or directorship, nor through trustees acting on behalf of such persons.
For unlisted shares in a company controlled by a listed company, shares held by the controlling company or an associated company are excluded from being treated as open market shares.

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