REV BN 28: Simplifying Employee Share Schemes
Who is likely to be affected?
1. All employers who operate an employee share scheme and their employees who benefit from such schemes.
General description of the measures
2. Together with the anti-avoidance and reform measures, also announced in the Budget today, a further package of measures will be introduced to simplify employee share schemes legislation and reduce the administrative and regulatory burden on employers. The measures will:
- modernise both Company Share Option Plan (CSOP) and Save As You Earn (SAYE or Sharesave);
- simplify the Share Incentive Plan (SIP) and provide increased flexibility for employers and employees;
- extend the time limit for employees to reimburse PAYE to their employers. In addition National Insurance contributions (NICs) rules will be changed so that this new time limit applies to NICs charges that arise if the PAYE has not been reimbursed; and
- ease the regulations relating to recovery of employees' NICs on share based remuneration so that employers can administer the 1% NICs increase effectively.
Current law and Proposed Revisions
CSOP
Removal of the "second three year rule"
3. Currently, CSOP tax relief is dependent on exercising an option after three years from grant and three years from a previous tax relieved CSOP exercise. Removal of the second "three year rule" will allow tax-free exercise of a CSOP option within three years of a previous tax relieved CSOP exercise.
Treatment of "good leavers"
4. Under SAYE and SIP, employees are exempt from tax and NICs if their participation ends through injury, disability, redundancy or retirement (known as "good leavers"). The change will extend the same treatment to CSOP schemes where the employer grants CSOP options and these are exercised within three years of date of grant by good leavers.
5. Operative date: these two changes will be effective from 9 April 2003.
Acceptable features of scheme
6. Arrangements for funding the exercise price and dealing with the payment of PAYE and NICs have, up to now, been regarded as features which are not essential, or reasonably incidental, to the purpose of providing share options. In future these arrangements will be acceptable for CSOP purposes as long as they do not give a right to receive cash. This administrative change will simplify and speed up the approvals process.
Market value
7. In future CSOP rules will be allowed to specify "market value" by reference to published prices on Recognised Investment Exchanges in terms similar to those for shares listed on the London and New York Stock Exchanges. This administrative change will mean that companies will be able to quickly agree the basis of valuation of shares in such cases with Inland Revenue's Share Valuation.
8. Under the current process, sight of the document which establishes a scheme (usually a certified copy of a company or director's resolution) is required before approval is given. This can lead to delay in issuing formal approval. In future companies will be advised, when giving informal approval to draft schemes, that formal approval is effective from the moment the scheme is established provided there are no changes to the form of the scheme, the legislation or the circumstances of the company in the interim.
9. Operative date: these three administrative changes will come into effect from 9 April 2003.
CSOP and SAYE
10. The definition of "material interest" in CSOP differs from that in SAYE and SIP. These will be aligned so that they are all consistent.
11. Currently even minor changes to SAYE and CSOP plans must be submitted to the Inland Revenue for approval. In future the need for approval will be limited to changes made to key features only.
SAYE
12. The right to exercise SAYE options is currently lost where an employee loses their job following injury, disability, redundancy, or retirement following a move between associated companies, usually after a takeover or a restructuring. The measure will provide for the right of exercise in such circumstances.
SIP
13. Currently, employees can only purchase partnership shares through deductions of up to £125 or 10%, whichever is lower, from monthly salary. A new measure will allow employees to purchase up to the annual limit of partnership shares at any time within the year.
14. Currently, employers have to use total salary when calculating the maximum percentage that can be spent on partnership shares. This causes practical administrative difficulties because of monthly variations in overtime payments and bonuses. The new measure will allow employers to decide whether all or part of an employee's salary will be used when calculating the maximum percentage of salary to be spent on partnership shares.
15. Currently, employees are unable to participate in two SIPs run by connected companies in the same year. This is unnecessarily restrictive where a group restructures and the employee transfers to another company within the group. The new measure will remove this restriction and allow continuity of SIP participation in such circumstances.
16. Employees can currently reinvest dividends from SIP shares into more shares, called dividend shares - up to £1500 each year - and must hold the shares for three years to qualify for tax reliefs. This holding period is shorter than the normal five years and the differing periods makes administration difficult. A new measure will change the holding period for dividend shares to align with the holding period for the base shares.
17. Operative Date: the legislative changes listed at paragraphs 10 to 16 above will be effective from Royal Assent.
"Unapproved Schemes"
Employees' refund of PAYE to employer
18. Employees must refund the PAYE on their share option gains to their employer within 30 days of exercising the option. Missing the deadline can involve an effective surcharge of 16% on the gain. The deadline will be extended to 90 days and NICs rules will be changed so that this 90 day period will also apply to any Class 1 NICs liabilities where the tax has not been reimbursed.
19. Operative Date: for tax 9 April 2003 and for NICs an appointed day after Royal Assent.
Administering the 1% NICs increase on share-based earnings
20. To help employers cope more easily with the April 1% NICs increase, the existing limit on the amount that may be recovered each month from an employee is being abolished. And the period over which recovery may be made is being extended into the following tax year.
Further advice
20. If you have any questions about this change, please contact the Public Enquiry Unit on 020 7438 6420 to 6425.
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