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Part 5 of Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

The case of CIR v Burton Group plc (63 TC 191) (see ETASSUM47250) concerned the Board of Inland Revenue鈥檚 refusal to approve an amendment to an existing approved executive share option scheme, relating to the setting and varying of additional (performance) conditions to which options would be subject. The case concerned an approved executive share option plan, but the principle also applies to EMI options.

Burton Group鈥檚 approved executive share option scheme already included provision for the exercise of options to be subject to meeting performance conditions set at the date of grant. But the amendment to the scheme, which the Board refused to approve, provided scope for the right to exercise the options, and the number of shares over which the options could be exercised, to be subject to meeting additional performance conditions which could be set after the option had been granted, and amended after they had been set.

The Revenue鈥檚 practical concern was to ensure that 鈥渞ights鈥� could not be taken away from the employee other than in circumstances which were clearly defined when the option was granted and within the control of the employee concerned, and to an extent which was objective, quantifiable and reasonable.

The judge found in favour of the Burton Group because:

• additional conditions could only be imposed by the directors in circumstances which were clearly stated (at the date of grant of the option, or before the beginning of the financial year to which the performance target related, or at the time when the option- holder first held the relevant job),
• additional conditions which could be set were limited to specified matters, and to 鈥渂eing reasonably considered鈥� to be a fair measure of the performance of the holder of the relevant job鈥�, and
• the subsequent variation of such conditions was only permitted if the directors considered that different conditions in relation to the job would be a fairer measure of the performance of the holder of the job and would, reasonably, be less difficult to satisfy than they would have been without the amendment.

In the judge鈥檚 view, the directors did not have unlimited discretion on when and to what extent they could set or vary performance conditions. They had to act fairly and reasonably in the specified circumstances.