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Securities and Shares
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National Insurance Contributions and Statutory Payments Act 2004
This Act received Royal Assent on 13 May 2004. It has five measures; two to make the administration of National Insurance simpler when employers reward their employees with security based earnings, and three to help bring the National Insurance, Statutory Payments and equivalent tax regimes closer together. The following is a summary of an article that appears in the recently published Tax Bulletin 71.
Recovery of NICs from employees' share-based earnings
Employers are able to retain or sell shares equal to an employee's NICs liability when making payments of share-based earnings. Prior to the new provisions, this could only be done where an employee
- had left the employment and the payment was made subsequently but in the same tax year, or
- had received the payment, was leaving in the same tax year, and the employer was unable to recover the NICs from the employee's subsequent monetary earnings.
The new Act relaxes the rules almost completely and allows the employer also to retain or sell shares equal to the employee's NICs liability where an employee
- is continuing in employment, whether or not the recovery could be made from the employee's subsequent monetary earnings, and
- had left the employment and payment was made subsequently in the following tax year.
The existing and new provisions apply to securities of any kind, i.e. shares, company loan stock, Government gilts and a number of specialised financial instruments.
Regulations to be made under the new Act will require the employer only to have obtained the employee's written consent for the employer to withhold or sell some of the securities. As long as consent is obtained prior to the day on which payment is made, the new rules can apply to share options that were granted before the new legislation took effect.
The new rules do not prevent an employer from using the alternative, and recently improved method of recovering NICs on the provision of securities, i.e. by deducting the NICs from the employee's earnings in each pay period in the current and next tax year, and without any limit on the amount of each recovery. See Newsletter of 23 May 2003.
Joint Agreements and Elections
When an employee exercises share options, the employer incurs a secondary NICs liability on the gain. As the amount of this liability cannot be quantified until the time of exercise, at which time the liability could be a considerable sum of money, the NICs legislation allows the liability to be transferred to the employee if the employee agrees.
There are two forms of agreement,
- a joint NICs election, where the liability for the secondary NICs transfers to the employee, and
- an agreement for the employee to reimburse the employer's liability.
The new Act extends these facilities to restricted and convertible shares. The award of such shares can give rise to an NICs liability at the time of a post-acquisition chargeable event that increases the value of shares to an employee, such as the lifting of restrictions that apply to the shares or conversion of the shares to other more valuable shares.
These new provisions take effect on a date yet to be set out in Regulations.
When an employee bears the employer's liability under these arrangements, the employee is entitled to income tax relief on the amount of the employer's NICs paid. This year's Finance Bill includes measures to extend this tax relief to NICs liabilities arising on restricted and convertible shares.
Other provisions
Three other measures help to align the National Insurance, Statutory Payments and equivalent tax regimes.
- In the context of the recovery by the Inland Revenue of a tax debt,
- the defined period for distraint action (i.e. seizure of goods in repayment of a debt) for NICs is aligned with the periods defined for the recovery of tax, and
- the powers of the Inland Revenue to levy distraint in England and Wales are extended to Northern Ireland.
- In the context of the Inland Revenue's powers to investigate cases involving National Insurance,
- the power to enter premises and examine persons on the premises is removed, thereby limiting the powers to requesting the provision of documents and information, as already applies for tax.
- new powers will be introduced by Regulation to all SSP and SMP records to be inspected in the same way as PAYE records.
- Failure to meet SSP and SMP obligations, until dealt with as minor criminal offences, is brought into line with the civil penalty system that applies in the case of SPP and SAP.
Commencement dates
With the exception of the changes to compliance powers, which will be brought into force from 6 April 2005, these new provisions are expected to take effect in mid-July.
Discuss this news item in the PayPerShop Forum
...back to 25 June 2004
Sources: www.inlandrevenue.gov.uk/bulletins/tb71.pdf
www.hmso.gov.uk/acts/acts2004/20040003.htm |
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Share schemes returns
The new return for reporting securities under unapproved share schemes is form 42. The form is issued on or after 6 April to employers which the Inland Revenue knows operate unapproved schemes. The deadline for returning the completed form is 7 July. If the form was issued on or after 8 June, it must be returned within 30 days of the day of issue. A penalty of up to £;300 may be imposed for failure to submit the return, with further penalties not exceeding £;60 per day if the failure continues.
As some advisers have experienced problems in completing the new form, the Inland Revenue has decided to extend the return deadline to 6 September 2004 where a form has not been issued in time to meet the statutory deadlines. An updated 'pdf' version of form 42 is available to download on the Inland Revenue website.
Discuss this news item in the PayPerShop Forum
...back to 25 June 2004
Sources: www.inlandrevenue.gov.uk/shareschemes/form42-extension.htm
www.inlandrevenue.gov.uk/shareschemes/ann-app-schemes.htm |
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Securities avoidance schemes
The Government is taking further measures to prevent the use of various new schemes that are designed to avoid the payment of tax and NICs on employment securities, i.e. government gilts and shares. The necessary changes will be made to the securities provisions of the Income Tax Earnings and Pensions Act 2003 by means of new clauses being added to this year's Finance Bill.
When securities, interests in securities or securities options are acquired in connection with
employment, all of the value received by way of remuneration in the form of shares or other securities is taxed at the time they are accessed by the employee. There are special exemptions from tax and NICs liabilities for shares provided under approved share schemes, i.e. Share Incentive Plans, Save As You Earn schemes, Company Share Option Plans and Enterprise Management Incentives. The changes that have been announced will ensure that, if employees receive remuneration in the form of added value from their ownership of shares once they have acquired them under the exempt scheme rules, the added value will be subject in full to tax and NICs.
In order to prevent future abuse of the exempt schemes, new anti-avoidance provisions are being inserted into the rules governing the operation of each of the approved schemes.
A similar weakness has been identified in relation to shares acquired in a public offer. Further changes will ensure that full tax and NICs liabilities will arise on remuneration value that is passed to employees who hold such shares.
A scheme involving gilts puts them into a special purpose vehicle owned by the employee and arranges for the employee to access the value at a time while he is still associated with the company, and subsequently breaks the association to avoid a tax charge. The changes will ensure that charges cannot be avoided by requiring that persons, once associated, remain associated and also provide for a charge on a benefit received through the ownership of securities options.
Consequential changes are also being made to the rules that determine the PAYE treatment of shares acquired through approved share schemes. These will ensure that PAYE and NICs are operated correctly in relation to any post-acquisition charges that may arise as a result of the amendments.
Discuss this news item in the PayPerShop Forum
...back to 18 June 2004
Sources: www.gnn.gov.uk/gnn/national.nsf...
www.hm-treasury.gov.uk/media//... |
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Employment related securities
The Government has introduced new measures into the current Finance Bill in order to block schemes that are designed to avoid income tax and National Insurance contributions using employment-related securities.
It was only in September 2003 that a range of new and complex anti-avoidance measures were enacted as part of the Income Tax (Earnings and Pensions) Act 2003. The Inland Revenue has since become aware of schemes marketed in an attempt to pre-empt the new disclosure requirements imposed on promoters of tax avoidance schemes. (See section on Tax Avoidance in the Budget Newsletter, dated 19 March 2004) These complex schemes disguise cash bonuses as securities and then artificially manipulate the value of the securities in an attempt to reduce liability to income tax and National Insurance contributions.
The measures introduced in September 2003 ensure that all of the value received by way of remuneration in the form of shares or other securities subject to restrictions is taxed at some time, while giving flexibility surrounding when the charge is taken. For example, the employer and employee can jointly elect to pay tax and National Insurance on a higher proportion when the shares are received, leaving future commercial growth in value of the shares in the capital gains tax regime.
These new amendments will block avoidance schemes using employment-related securities involving restrictions. They will also ensure that provisions designed to provide relief in certain bona fide cases cannot apply where the transactions are part of a scheme or arrangement to avoid tax or National Insurance contributions.
Discuss this news item in the PayPerShop Forum
...back to 14 May 2004
Source: www.gnn.gov.uk/...
www.hm-treasury.gov.uk/...pdf |
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Share Schemes returns
Following the introduction of the new securities legislation, the Inland Revenue has produced all of the various returns that are required for both approved and unapproved shares schemes.
In the case of approved schemes, the following forms are sent to the employer by the Inland Revenue for completion. The returns must be filed within 3 months of the date of issue, except for the Enterprise Management Incentives return which must be filed by 6 July.
- Profit Sharing schemes - form 30
- Save as You Earn schemes - form 34
- Company Share Option Plans - form 35
- Share Incentive Plans - form 39
- Enterprise Management Incentives - form 40.
The new return for reporting securities under unapproved share schemes is form 42. This 16-page document covers all types of taxable events that occur for employment-related securities, i.e. securities options, the acquisition of securities and events occurring after the acquisition of securities.
The form is issued on or after 6 April to employers that the Inland Revenue knows operate unapproved schemes. The deadline for returning the completed form is 7 July. If the form was issued on or after 8 June, it must be returned within 30 days of the day of issue. A spreadsheet providing the relevant details may be provided instead of completing the specific sections of the form.
If a return is issued but the employer has no taxable events to report, a nil return must be made and the declaration signed accordingly. Employers that have events to report but do not receive a return are still required to complete form 42 and file it by 7 July. A copy of form 42 can be downloaded for this purpose. There are penalties for failure to make a return of reportable events.
As already reported in the Newsletter of 19 March and as a consequence of the new securities reporting arrangements, form P11D for the 2004/05 tax year will no longer contain Section M, requiring employers to indicate if they have provided any taxable share benefits. However, for 2003/04 reporting purposes, the box in Section M should still be ticked if taxable share benefits have been provided, even though the appropriate new return has been filed.
Even though taxable events must be reported by the employer, it would be sensible to remind employees for whom taxable events have been reported that they must also include the details on their self-assessment tax return.
Source: www.inlandrevenue.gov.uk/shareschemes/ann-app-schemes.htm
...back to 4 April 2004
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Share Schemes
In the news item dated 26 December 2003, we reported the interpretation in Share Focus of the new statutory provision for Share Incentive Plans that allows the salary used to limit the amount that may be deducted from earnings for partnership shares to be reduced by "a particular description of earnings", e.g. overtime or bonus payments. We queried with the Shares Schemes Team their comment in the article that "If a particular description of salary is to be excluded it must apply to all participants in the plan. You cannot, for example, exclude bonus payments where only some participants receive bonuses."
The first part of this comment originates with the explanatory notes to the Finance Bill:
"Paragraph (7)(4) inserts a new sub-paragraph which provides for the plan to specify … that a particular part of the employee's earnings are disregarded in calculating the employee's salary to which the percentage limit is applied. Where the plan provides for a particular part of an employee's earnings to be disregarded, this must apply to all employees."
The legislation itself now says:
"(2) The amount of partnership share money deducted from an employee's salary for any tax year must not exceed 10% of the employee's salary for the tax year.
(4A) A limit lower than that specified in sub-paragraph (2) may be framed—
- as a proposition substituting a percentage lower than that so specified, or
- as a proposition that a particular description of earnings is not to be regarded as forming part of an employee's salary for the purposes of that sub-paragraph."
It is certainly true that Share Incentive Plans are "all-employee schemes" and, as a result, one set of rules must apply to all employees. However, there is nothing in the explanatory notes or in the legislation to justify the second part of the Share Focus comment that "you cannot, for example, exclude bonus payments where only some participants receive bonuses".
It would be unusual for every employee in a company, from part-time casuals to board directors, to have entitlement to the same additions to salary. Not all are likely to be entitled to overtime payments or bonuses. We therefore asked the Share Schemes Team the following question:
"An employer has (1) office staff, whose overtime tends to be minimal, (2) manufacturing staff whose opportunity for overtime is much greater at times, and (3) management staff who are not paid for any overtime they do. All of them have a basic salary that, in itself, reflects the nature of the work they do. If an employer in this situation had a plan rule that excluded overtime pay from "salary" for partnership share purposes, how could that be in breach of the new rules? Surely it would be seen to be fair to everyone?"
The first reply from the Inland Revenue Share Schemes Team stated:
"On your view, it would be possible for the company to specify that overtime earnings are excluded from salary. For an employee whose major part of salary is made up of overtime earnings, this would be detrimental compared to a director whose salary did not contain overtime earnings."
We pointed out that this example was rather unrealistic; most employees do not gain a major portion of their earnings from overtime, and most directors are paid a (relatively) high salary and do not receive overtime. The second response stated, referring to the three groups in the question:
"But, you could be restricting the amount that (2) had to invest in partnership shares thereby favouring (1) and (3). But, on the other hand, if everyone was entitled to a bonus, you could exclude bonus from the measure of salary even though people may be paid different amounts. Similarly, you could exclude variable amounts payable to all employees such as bonus, overtime or benefits to arrive at a figure of basic salary."
The Inland Revenue's formal interpretation of the change in the legislation is, therefore, that you cannot remove a particular pay element from the definition of salary in order to remove a perceived unfairness in the rules, e.g. that one group of employees has a greater opportunity to buy partnership shares because it is the only group to receive a particular pay element. Rather, the application of the new rule is severely restricted by a requirement that a particular pay element can only be excluded if all employees in the company are entitled to receive it.
...back to 9 January 2004
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Share schemes
The second issue of Share Focus is available. It includes current guidance on the recent changes to approved share schemes.
Included in these notes is a comment about the new definition of "salary" in the context of Share Incentive Plans. The salary used to limit the amount of partnership shares that may be deducted may now be reduced by "a particular description of earnings", e.g. overtime or bonus payments. However, Share Focus states that "If a particular description of salary is to be excluded it must apply to all participants in the plan. You cannot, for example, exclude bonus payments where only some participants receive bonuses."
This appears to be an arbitrary interpretation of the new rules that defeats the situation that the they are intended to address - i.e. where some employees receive a payment and, in the absence of the new rule, they would benefit at the expense of employees who do not receive it.
We have asked the Share Schemes Team to comment on this matter.
(Source: www.inlandrevenue.gov.uk/shareschemes/news/share-focus2.pdf )
...back to 26 December 2003
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Share schemes
The new Schedule 22 rules in the Finance Act 2003 for restricted securities require some complex calculations to be performed when determining the taxable gain. For example, if shares have a three-year forfeiture condition, a five-year restriction on sale, and the employer has made an election to ignore the deferral of charge provision for forfeitable securities, there will be three occasions of potential charge.
To help employers calculate the taxable gain in such situations, the Inland Revenue has developed a Restricted Securities calculator, based on an Excel 97 spreadsheet. The basic information is entered and the formulae are applied automatically. An electronic copy of the calculator may be obtained by clicking the source below and then selecting the third link down.
(Source: www.inlandrevenue.gov.uk/..htm#c )
...back to 4 October 2003
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Value of share options
The latest issue of the Inland Revenue's Working Together magazine confirms the way in which the market value of shares obtained under the exercise of unapproved share options is determined. The Income and Corporation Taxes Act 1988 (s.135) defines the reportable value as "the difference between the amount that a person might reasonably expect to obtain from a sale in the open market at that time of the shares acquired and the amount or value of the consideration given". This suggests that the value is the amount of money that the employee might be expected to receive after deducting selling costs.
The new formula in the Income Tax (Earnings and Pensions) Act 2003 (s. 478-480) defines the charge to tax as the amount of any gain realised on the occurrence of the chargeable event, less the amount of any consideration given and any related expenses. No allowance is made in the definition for selling costs in determining market value.
(Source: www.inlandrevenue.gov.uk/workingtogether/publications/wt_14.pdf )
...back to 26 September 2003
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Securities acquired by reason of employment
The Finance Act 2003 introduces new rules into the Income Tax (Earnings and Pensions) Act 2003 for the taxation of securities.
The Appointed Day for the new legislation on restricted securities, convertible securities, securities options and the operation of PAYE and NICs on securities is 1 September 2003. As a result, the final date for section 431 elections on restricted securities acquired between 16th April and the Appointed Day will be 14 days after the Appointed Day, i.e. Monday, 15 September 2003.
The Inland Revenue has stated that the 1 September date was chosen to ensure that the deadline for employers and employees wishing to make elections with respect to awards of restricted securities does not fall within the summer break period. It is suggested that the resulting 15 September election deadline should provide employers and employees with ample time to make the necessary election arrangements following the summer break period.
(Source: www.inlandrevenue.gov.uk/...htm )
...back to 22 August 2003
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Securities acquired by reason of employment
The Finance Act 2003 introduces new rules into the Income Tax (Earnings and Pensions) Act 2003 for the taxation of securities. This is detailed and complex legislation and if, like the author, you don't know what "tag-along" and "drag-along" rights, equity kickers and ratchet arrangements are, this legislation may not be of interest to you.
However, readers who need to understand the tax rules on
- managers' equity investments in venture capital and private equity backed companies, and
- a carried interest in venture capital and private equity limited partnerships
may be interested in two documents published by the British Venture Capital Association. The application of the new legislation within the circumstances described in these documents has been agreed with the Inland Revenue.
The Inland Revenue has also added a new question and answer on earn-outs from sale of shares in a company to its series of FAQs on the new legislation.
The Appointed Day for the new legislation on restricted securities, convertible securities, securities options and the operation of PAYE and NICs on securities is now expected to be in late August. As a result, the final date for section 431 elections on restricted securities acquired between 16th April and the Appointed Day will be 14 days after the Appointed Day, not Tuesday 2nd September as originally expected.
Final prescribed copies of the Inland Revenue approved form of elections for restricted securities have been published. Note that, for restricted securities acquired on or after 16th April 2003 and before the Appointed Day, the forms for section 431 elections may be modified to refer to the 14-day time limit after the Appointed Day, (rather than "date of acquisition" in section 3).
(Sources:
www.inlandrevenue.gov.uk/....pdf
www.inlandrevenue.gov.uk/....pdf
www.inlandrevenue.gov.uk/....htm#l
www.inlandrevenue.gov.uk/shareschemes/news/index.htm)
...back to 25 July 2003
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Extra-statutory concession to help reservists
Under the provisions of the new extra-statutory concession A103, employers are able to take action to maintain a reservist's participation in an Inland Revenue approved share scheme for the duration of active service. The test of the concession is as follow:
"Extra Statutory Concession (ESC) - A103:
Armed Forces Reservists : Revenue Approved Share Schemes and Enterprise Management Incentives (EMI)
Where a reservist is called up for service under the Reserve Forces Act 1996, the Inland Revenue by concession will treat the employment with the Ministry of Defence (MOD) as fulfilling the employment conditions for Inland Revenue approved employee share schemes*
By concession, employers and scheme providers will also be allowed to take such action as is necessary to maintain a reservist's participation in an approved employee share scheme, for the period they are away serving with the MOD and this action will not compromise the approval of the scheme.
*For the purposes of this ESC Inland Revenue approved employee share schemes include, Company Share Option Plans, Share Incentive Plans, Save as you Earn Schemes and Enterprise Management Incentives."
The concession applies from 7th January 2003.
The Inland Revenue's press release includes some practical guidance notes for employers on the application of the concession.
(Source: http://213.38.88.204/80256CA...)
...back to 18 July 2003
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Taxation of employment-related securities
Clauses 138 and 139 of the Finance Bill will make changes to the taxation rules for tax-approved share schemes and for share schemes and other securities that do not have tax approval.
Schedule 21 of the Bill, introduced by clause 138, amends the provisions of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) for Share Incentive Plans (SIP), Save As You Earn Option Schemes (SAYE) and Company Share Option Plans (CSOP). These include the extension of the application of PAYE to gains following early exercise of a share option and the removal of the charge to income tax on a second option exercised within three years of a previous exercise.
Schedule 22 of the Bill, introduced by clause 139, amends the rules in ITEPA on the taxation of employment-related securities in order to close loopholes, prevent avoidance and correct a number of anomalies. The Revenue has published a series of questions and answers on the changes, including their effect on PAYE and NICs. In particular, the definition of "readily-convertible assets" is amended to include a test that excludes only non-tradable shares in UK companies that are not subsidiaries, where the cost of issuing the shares can be deducted in the company's accounts. This limits the scope for arguing that securities are not readily-convertible assets. Where the securities are not shares, or where the shares do not meet those conditions, the securities will always be deemed to be "readily convertible assets" for PAYE and NICs.
The new provisions include a number of situations where it may be necessary for employers and employees to make joint elections about their tax and NICs liabilities. Drafts of the Revenue-approved form of elections have been published for consultation.
(Source: www.inlandrevenue.gov.uk/shareschemes/news/index.htm)
...back to 11 July 2003
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Reservists and share schemes
Armed Forces Reservists who have been called up to active service are to be given protection to ensure they continue to benefit from tax and NICs advantages offered by any employee share schemes to which they belong.
Reservists may be disadvantaged if they have been called up for permanent service and, as a result, their employment ends. Alternatively, if the employer is treating their period of military service as unpaid special leave, the employee may fail the working tests associated with Enterprise Management Incentives and Company Share Option Plans, or may lose the opportunity to make payments into Share Incentive Plans or Save as You Earn schemes by payroll deductions.
An extra-statutory concession is to be issued soon that places the Reservists in the same position as if they had continued to work for their employer. The provisions will be backdated to 7 January 2003. The concession will be brought formally into law by provisions in the Finance Bill in 2004.
(Source: www.gnn.gov.uk/...)
...back to 18 April 2003
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Share scheme manual
The Revenue makes many of its internal manuals available on its website. The 'Schedule E Manual', for example, is an invaluable source of information about the way in which tax inspectors approach payments and benefits. The latest addition is the 'Share Schemes Manual', a new manual that covers the taxation of share and share-related benefits for employees and directors. It deals mainly with Schedule E consequences but also provides guidance on the Capital Gains issues when directors and employees dispose of shares acquired from their employment. The address is www.inlandrevenue.gov.uk/manuals/ssmanual/index.htm .
Payroll Briefing 4 - 18 July 2002
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Share options special offer
The news item "Special offer" in issue 195 of Payroll Briefing described a one-off opportunity that would become available to companies who have granted share options under unapproved schemes between 6 April 1999 and 19 May 2000. Rather than paying secondary Class 1 NICs on the gain in share price at an uncertain date in the future, employers will be able to settle the liability using the market price for the shares on 7 November 2000. The "window of opportunity" was expected to be a period of 60 days from the date of Royal Assent to the necessary primary legislation.
The Social Security Contributions (Share Options) Act 2001 was eventually passed on 11 May 2001. In the event, the period during which employers may apply to make the "special contribution" is the 92 days up to 11 August 2001. The liability is calculated as 12.2% (i.e. the standard employers' NICs rate on 7 November 2000) of the gain calculated under the provisions of the share option, using the market price for the shares on that date. If, using the market share price on that date, there is no gain under the option, the employer is deemed to have made the payment simply by giving notice and notifying the Revenue that the liability is nil.
As long as the employer gives the appropriate irrevocable "notice" and pays the "special contribution" before Friday, 10 August 2001 (note that 11 August is a Saturday), even if the payment is nil, there will never be any further liabilities for primary or secondary NICs on any gain arising after 7 November 2000. Conversely, there will be no refund of any of the special contribution if the gain, when the share option is ultimately exercised, produces a lower NICs charge than the special contribution. If the special contribution is not paid by 10 August 2001, the opportunity of making the early settlement will be forfeit. However, special arrangements are available where the payment subsequently turns out to incorrect and a further payment or refund is necessary.
Immediately following the passing of the Act, new Regulations were approved that define the nature of the irrevocable notice that must be given. The notice may take the form of a letter, or it may be sent electronically. A model notification form is available on the Revenue web site, at www.inlandrevenue.gov.uk/pdfs/nico/mn_nic.pdf
Payroll Briefing 203 - 8 June 2001
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All-Employee Share Ownership Plans (AESOPs)
The Revenue has published a new guide for employees, booklet IR2002. Over 300 employers have already sought Revenue approval for these schemes. The booklet makes reference to the potential problems for employees caused by the NICs relief available for the purchase of partnership shares through the payroll. Employers are reminded that, when introducing AESOPs, they must inform their employees that, if they purchase partnership shares through the payroll, their entitlements to state benefits, SSP, SMP and tax credits may be affected. - Payroll Briefing 201 - 9 May 2001
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