Employee shares? Sort them yourself

The last few years have been a period of unprecedented change for those advising on the structure and administration of employee share incentives, with changes to remuneration regulation in the financial sector, Department for Business, Innovation & Skills reforms on directors’ pay, and changes introduced in last year’s Finance Act including the controversial employee shareholder status.

This year is proving to be no different. Radical changes in the Finance Bill 2014 to the way in which tax advantaged employee shares plans are set up and administered take effect from 6 April 2014. The changes follow recommendations made by the Office for Tax Simplification (OTS) to remove some of the complexity of operating employee share plans.

Self certification: CSOP/SAYE/SIP

From 6 April 2014, companies setting up approved company share option plan (CSOP), save as you earn (SAYE) and share incentive plan (SIP) arrangements will no longer need (or be able to seek) HMRC approval of the terms of those arrangements. This should mean that companies are able to set up tax-advantaged arrangements more swiftly, but does put the onus on compliance with the legislation onto companies. New plans will now need to be registered with HMRC, and companies will require to “self-certify” that the arrangements comply with the relevant legislation. Submitting rules for prior approval in the past could sometimes throw up some unexpected objections from HMRC, so one would hope that clear guidance will be issued in relation to current areas of uncertainty.

New tax-advantaged plans will be registered using the PAYE online system by 6 July following the end of the tax year in which the new plan is first operated. Existing tax-advantaged plans must be registered and “self-certified” by 6 July 2015. Automatic penalties will apply for late filing. HMRC has suggested a timetable for a staged approach to registration based on the company’s place in the alphabet, but those falling within the first stage are likely to wish to wait until guidance has been issued by HMRC on some of the current uncertainties. Companies should ascertain whether additional personnel will require access to the PAYE online system in order to deal with the share plan online administration.

In line with the aim of smoothing the path to self-certification and making the operation of approved plans more simple, a number of other changes have been included in the Finance Bill, including:

• allowing forfeiture provisions (for the lower of market value and price paid) for SIP partnership and dividend shares in specified circumstances to make these arrangements more appealing for private companies;
• specifying the information which must be included on the grant certificate for CSOP options;
• permitting the tax-advantaged exercise of SAYE and CSOP options within 20 days before
• a change of control, or 20 days after if the company’s shares cease to qualify under the conditions set out in the legislation after the change;
• changes to equivalency and valuation requirements on rollover of SAYE and CSOP options, or variations of share capital affecting SAYE and CSOP options.

Some of these changes take effect automatically, but others will require a rule amendment to take advantage of them. Companies should consider amending their rules to include even those changes which will automatically be read in, to ensure consistency.

EMI and unapproved arrangements

The requirement to register online will also apply to enterprise management incentive plans and unapproved arrangements. After 6 April 2014, EMI1 Forms, and after the current 6 July deadline, Forms 42 will be a thing of the past, with the information being registered online instead.

In addition, changes in the Finance Bill include flexibility for a tax-free rollover of employment-related securities, changes to the taxation of partly paid, nil-paid and deferred payment shares, and an extension to corporation tax relief on the exercise of options following a change of control by an unlisted company.

For those operating share plans internationally, major changes are being made to the taxation of share incentives for internationally mobile employees.

What next?

A number of other changes were recommended by the OTS which the Government is considering, e.g. deferring tax on the issue of non-marketable securities. Some of the proposals could have significant consequences for the structure of share incentives. In addition, a recent call for evidence by HM Treasury on benefits generally, which requests evidence on the use of shares as remuneration, suggests that further potentially significant movement in this area can be expected.