12 December 2013 Finance Bill 2014 Key employee share schemes and securities developments Draft clauses for Finance Bill 2014 (FB 2014) were published on 10 December 2013. They include a number of important provisions relevant to all companies which have employee share ownership and share schemes. This alert highlights the key measures and their effective dates. Action is very likely to be required and this presents an opportunity to review your employee share plan arrangements in the light of the proposals. Why these changes? The provisions for FB 2014 include a range of measures driven by the Office of Tax Simplification s recommendations for the simplification of employee share schemes. A number of these provisions have already been announced. However, the draft of FB 2014 provides clarification on key areas under discussion, particularly the taxation of employment related securities and options for internationally mobile employees. General developments Registration and self-certification All existing and new employee share schemes (both HMRC approved and unapproved) must be registered via the Employment Related Securities section of the PAYE online service by 6 April 2015. This process of registration will commence on 6 April 2014 and employers are advised to take steps to comply with this new mandatory requirement as soon as possible. HMRC will no longer provide formal approval for any new tax advantaged share schemes from 6 April 2014. The company must instead register the scheme and self-certify that the scheme meets the legislative requirements at the end of each tax year. This change means that CSOP, SAYE and SIP approved plans will now be treated in the same way as the EMI options. As companies will need to self-certify, an understanding of the key requirements of the new regime will be critical to an informed decision on selfcertification. Companies may benefit from professional assistance in this regard.
The registration and self-certification are necessary steps in ensuring compliance and on-going tax approval. Penalties will be levied by HMRC for incomplete and/or delayed self-certification. As a whole, the new regime is welcomed as it should speed up the availability of tax advantaged employee share plans to qualifying companies. On line filing As previously announced, the filing of all information returns will need to be undertaken online from 6 April 2015 for all approved and unapproved equity plans. Late filing will attract an automatic penalty and previously approved schemes will lose their tax advantages. It is clear that more of the responsibility for equity incentive plan compliance is being passed to the employer. At the same time, HMRC is changing its information gathering in order to obtain the data it needs to check this compliance. Employers should consider reviewing their current equity incentive arrangements and reporting procedures in readiness for the new regime with effect from April 2014. Employment related securities and internationally mobile employees As anticipated, FB 2014 is intended to introduce provisions seeking to change and clarify the rules on the taxation of employment related securities and options for internationally mobile employees. This will apply to all grants and awards on and after 1 September 2014. The new provisions establish the rules for determining the relevant period over which income is assessed for each type of employment related security (for example, grant to vest ), with provisions for apportionment within these relevant periods between amounts chargeable to tax in the UK and other income. The new section also draws together the existing regulations that address the effect of the remittance basis on employment related securities income. There will be corresponding amendments to the NIC legislation in order to bring it more into line with the new income tax rules. This is a beneficial step towards providing clarity and certainty on the charging provisions for mobile employees, but the complex nature of the individual fact patterns of many mobile employees and also the types of plans they participate in means that efforts to deliver clarity may be more difficult than initially anticipated. Companies who currently offer employee share plans to internationally mobile employees may wish to review their plans to understand the impact on the new legislation and make any adaptions necessary to their systems and procedures to ensure compliance. Section 222 ITEPA 2003 The draft FB 2014 clauses include a welcome softening of the section 222 deadlines, extending the period within which the employee must make good a PAYE amount paid by his or her employer on account of tax due on a payment received by that employee. Failure to reimburse the PAYE before the deadline leads to the creation of a taxable benefit. The current deadline of 90 days from the date of the taxable event is extended to 90 days after the end of the tax year in which that event occurred. This will apply from 6 April 2014.
This change acknowledges the difficulty employers may encounter when seeking reimbursement of PAYE in situations such as equity gains for leavers and provides additional time for reimbursement of any PAYE. Accordingly, this change is welcomed. Extending the availability of corporation tax deductions Two extensions to the legislation for corporation tax relief for employee share acquisitions will provide benefit, particularly for transactions. Relief is to be extended to shares acquired by an employee by exercise of an option within 90 days following the takeover of a company by an unlisted company. Corporation tax relief will also be available for shares acquired by an overseas individual seconded to work for a UK company, even where the UK company is not the employing company, if certain conditions are met. The first of these new reliefs will be available from the date of Royal Assent to FB 2014 and the second of the new reliefs will be available from 1 September 2014. Rollover of restricted shares and partly paid shares It has been possible for some time on a transaction for an employee holding unexercised options to exchange these for new options in an acquiring company without triggering a tax charge subject to meeting statutory conditions. However, such a roll over was not available to an employee who exchanged restricted shares or partly paid shares. That is, any such exchange would generate an income tax and NIC charge at the date of the exchange. This was particularly problematic where no liquidity was being provided on the transaction. A key impact of FB 2014 will be that the exchange of restricted, partly paid or nil paid securities for new securities of the same type on certain events will no longer be a taxable event (if conditions at rollover are met). This is especially useful in transactions where, for example, the employee receives only new restricted shares in the place of existing restricted shares, which under current legislation would create a tax charge. Accordingly, this proposed change is welcomed. This relief will be effective from Royal Assent to FB 2014. Increase in de minimis threshold for notional loans A benefit in kind charge will arise on an employment related interest loan if it is interest free or the interest payable is less than HMRC s official rate (currently 4%), unless it falls within one of the available exemptions. A key exemption is if the aggregate of all such loans does not exceed 5,000. It is expected that this threshold will increase to 10,000 from 6 April 2014. This is of particular benefit to companies which offer nil or partly paid share schemes, as it increases the value of the shares which can be offered on such a basis before a notional loan charge would arise.
Approved share plans developments Increases to SIP and SAYE plan limits Changes to the limits for SIP and SAYE the first increases in over 10 years - will make these approved plans more attractive to companies looking to offer a tax efficient share plan to their employees. This would include both domestic UK companies and internationally listed companies currently offering Employee Stock Purchase plans to UK employees. For SIPs, the individual limits on the free shares that companies can award to employees from 6 April 2014 will be increased from 3,000 to 3,600 per tax year and the individual limits on the partnership shares employees can purchase will be increased from 1,500 to 1,800 per tax year (or 10% of an employee s annual salary). For SAYE, the amount that employees can save and apply towards the purchase of shares for 2014-15 will be increased from 250 to 500 per month. SIP forfeiture of partnership and dividend shares Finance Act 2013 introduced changes to the SIP legislation so that companies can now use shares subject to restrictions for their SIP. In particular, it removed the rule limiting forfeiture provisions to free and matching shares to three years from the date of award, effectively permitting companies to apply forfeiture provisions for any period to these shares. The draft FB 2014 proposes to extend the ability to apply a forfeiture provision to partnership and dividend shares. Currently, partnership and dividend shares cannot be subject to any forfeiture provisions. From 6 April 2014, it is proposed that companies can impose conditions requiring that employees must offer their partnership and dividend shares for sale when they cease employment, providing certain conditions in relation to the consideration paid to the employee for these shares are met (in other words, the employee can never receive less than they paid for the shares). Companies who wish to use restricted or forfeitable shares for their SIP will need to consider carefully how the legislation applies in their situation and what steps they need to take in order to implement this. Further guidance will be welcomed from HMRC. New requirements for CSOP options from 6 April 2014 FB 2014 proposes an additional paragraph providing new requirements for CSOP options, including a condition that the option must be capable of exercise within 10 years, and specific terms which must be stated at grant (e.g. exercise price, restrictions attaching to the shares). This will apply to new grants from 6 April 2014. CSOP and SAYE takeover provisions Building on the amendments to the change of control provisions introduced by Finance Act 2013, FB 2014 proposes the insertion of a new rule to take account of situations where the change of ownership of the parent company means that the CSOP will no longer be an approved plan. The new rule permits options to be exercised up to seven days before or after a change of control, and still qualify as an approved exercise. This will apply from 6 April 2014. Companies which wish to take advantage of this change
will need to amend their plan rules to add a provision enabling exercise following a takeover that meets the new conditions. Valuation of listed company shares Finally, there is news of a useful simplification of the rules on establishing the value of shares listed on a recognised stock exchange. This was a key point raised during the Office of Tax Simplification s review of employee share schemes. HMRC s recently published response indicates that it proposes to replace the current rules with a reference to a single method based on the closing price of the shares on the day of trading. Further guidance is awaited. Employee ownership structures As announced at Budget 2013 and following recent consultation, a number of new tax reliefs are to be introduced in FB 2014 to increase the overall attractiveness of indirect employee ownership structures for businesses and which comprise three broad measures. The first measure is an exemption from capital gains tax (CGT), such that share disposals in a trading company or in the parent of a trading group, to a new kind of trust, may be wholly exempt from CGT if certain conditions are met. Such an employee ownership trust must have specified characteristics and the trustees must hold a controlling interest in the company at the end of the tax year for which the relief is claimed. In addition, the trustees must apply the trust s property for the benefit of the employees of the company. The draft legislation to introduce the measure is detailed and includes five relief requirements all of which must be met for the CGT relief to be due. These include a trading requirement which must be met by the company whose shares are acquired by the trustees, an all-employee benefit requirement, a controlling interest requirement and a limited participation, anti-avoidance requirement. The fifth requirement is also an antiavoidance measure to prevent the claimant or any connected person receiving relief in respect of the same shares more than once. Such disposals for CGT purposes would normally be for a consideration equal to the market value of the shares. However, for the purposes of this relief, the disposal is now deemed to be for no gain or loss. The second measure introduces a limited exemption from income tax for bonus payments made to an employee by a qualifying indirectly employee-owned company that meets certain conditions. The bonus payments must be a cash award other than regular salary or wages that is paid to all employees on equal terms, although bonuses can be determined as a percentage of salary or length of service or hours worked. The exempt amount of bonus is subject to an annual cap of 3,600 per employee. Thirdly, the draft legislation also includes some amendments to the Inheritance Tax Act to ensure that transfers of qualifying interests to qualifying trusts do not attract an inheritance tax charge. The relief and exemption take effect from 6 April 2014.
EY Assurance Tax Transactions Advisory How EY can help A review of the impact of the above changes will require careful analysis of the plan documentation and an understanding of how these changes will impact your wider reward strategy. We would be happy to meet with you to discuss the impact of these changes on your existing incentive arrangements, as well as discuss whether there will be any impact on your future reward strategy. Our specialist team is able to help with all aspects of plan reviews, any design and implementation of new plans to take advantage of these changes, as well as stakeholder and employee communication. About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP Further information For further information, please contact one of the following or your usual EY contact: Giles Capon gcapon@uk.ey.com 020 7951 8082 Jessica Norton jnorton@uk.ey.com 020 7951 5494 Karen Horne khorne@uk.ey.com 0113 298 2402 Ceri Ross cross3@uk.ey.com 020 7951 4572 Andrew Morgan Jones amorganjones@uk.ey.com 01179 812136 Lorna Jordan ljordan@uk.ey.com 0118 9281 688 The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. 2013 Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None In line with EY s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk Catherine Bond cbond@uk.ey.com 0118 9281 681 Richard Burston rburston@uk.ey.com 0121 535 2136 John Cowling jcowling@uk.ey.com 0191 255 1040 Anita Eunson aeunson@uk.ey.com 0131 777 2478 6