This Content Was Last Updated on February 9, 2017 by Susan Albest
As part of the tax simplification procedures the government has proposed a number of changes to the rules for employee share arrangements.
Share incentive schemes are seen by companies as an effective way of retaining employees in the short to medium term. In the majority of share option schemes, employees are not allowed to exercise their option until they have been with the company for a minimum period of three years. Rules in relation to employer share scheme and employer share options are set out in the Income Tax (Earnings and Pensions Act) 2003 (ITEPA).
An employer would receive corporation tax relief of an amount equal to the difference between the market value of the shares at the time the employee exercises a share option and the price the employee pays. The relief applies to Companies Share Option Plans (CSOP), Save as You Earn (SAYE), Enterprise Management Incentives (EMI) options and unapproved options or outright share acquisitions, or charges arising in connection with restricted or convertible shares, where the employee is subject to income tax.
The approved shares have a tax and National Insurance Contribution (NIC) advantage: providing that certain conditions are met the company will be able to award shares to its employees free of tax and NIC.
As part of the tax simplification procedures the government has proposed a number of changes to the rules for employee share arrangements. The changes will take effect on 6 April 2014.
Legislation will be introduced in Finance Bill 2014 to amend ITEPA so as to remove the current requirement that a SIP, SAYE or CSOP scheme must be approved by HMRC before it can be operated. This will be replaced with new requirements in relation to the self-certification of schemes by businesses. ITEPA will also be amended to provide for digital filing of ERS information to HMRC, including annual return forms and notifications of options granted under EMI. These changes will be accompanied by new HMRC compliance, penalty and assessment powers, information requirements, and appeal rights for businesses.
Legislation will also be introduced in Finance Bill 2014 to amend ITEPA to provide new purpose tests for SIP, SAYE and CSOP, and to clarify or simplify certain requirements of these schemes. This includes requirements in relation to the provision of information by companies to scheme participants; variations of share capital; company events that are subject to overseas legislation; and the exchange of option.
Legislation will be introduced in Finance Bill 2014 to amend Schedule 2 to ITEPA. This will increase the maximum value of SIP free shares (shares that can be awarded annually to an employee) from £3,000 to £3,600, and increase the maximum value of SIP partnership shares (shares an employee can purchase annually) from £1,500 to £1,800 (or no more than 10% of an employee’s salary for the year). The maximum ratio of matching shares to partnership shares that can be awarded will remain at 2 to 1. The maximum monthly amount that an employee can contribute to SAYE savings arrangements will increase from £250 to £500.
It is envisaged that the new measures would simplify a number of processes used by businesses that award shares or share options to its employees. There will be some one-off costs for businesses, associated with familiarisation with the changes and the self-certification of SIP, SAYE and CSOP schemes, but these are estimated to be negligible.
Article from ACCA In Practice