Where an employee is granted a right to acquire shares (an
option) under an option plan that is not a scheme approved by HMRC,
there will be a potential tax charge under Part 7 Chapter 5 ITEPA
2003 when the option is exercised, assigned or released (see Share
Schemes Manual, SSM3.1).
The legislation at Part 7 Chapter 5 ITEPA 2003 was amended by
Schedule 22 FA 2003 with effect from 1 September 2003. The guidance
below relates to share options exercised before 1 September 2003.
For:
see
EIM12300.
A charge to tax may also arise when the option is granted,
but only if the option is capable of being exercised more than ten
years after it was granted (sometimes referred to as "long
options"). The employer will then be required to operate PAYE in
respect of the grant of the option if the option itself is a
readily convertible asset (see
EIM11855)
Section 700 ITEPA 2003 says that the employer is required to
operate PAYE in the following circumstances:
Certain shares are excluded from being assets for the purposes of Part 11 Chapter 4 ITEPA 2003 and so cannot be readily convertible assets (see EIM11931).
The person who was the employer at the time the option was
granted must operate PAYE when the option is exercised (see
examples
EIM11877 and
EIM11878).
The definitions of employee (see
EIM11804) and employer (see
EIM11805) for the purposes of Part 11
ITEPA 2003 include ex-employees and hence ex-employers. Thus the
person who was the employer at the time the option was granted
remains responsible for operating PAYE when the option is exercised
even if the option holder is no longer an employee of that person
at the time of exercise.
Section 700 ITEPA 2003 also requires that PAYE is operated on
payments to employees, either in cash or in readily convertible
assets, in return for assigning a share option. If the payment or
value of the payment made in readily convertible assets exceeds the
amount taxable as employment income under Section 477 ITEPA 2003,
then PAYE only applies to the amount that is taxable.
PAYE applies to all cash payments, including those
in respect of assignment of an option including options over shares
in approved schemes and options over shares in unapproved schemes
granted before 27 November 1996.
Where an option is assigned in return for cash, the person
paying the cash must operate PAYE. Where an option is assigned in
return for a readily convertible asset, the person who was the
employer at the time the option was granted must operate PAYE.
Section 700 ITEPA 2003 also requires that PAYE is operated on
payments to employees, either in cash or in readily convertible
assets, in return for giving up or not exercising a share option.
These are sometimes known as cancellation or release payments. If
the payment or value of the payment made in readily convertible
assets exceeds the amount taxable as employment income under
Section 477 ITEPA 2003, then PAYE only applies to the amount that
is taxable as employment income under Section 477 ITEPA 2003.
PAYE applies to all cash release payments
including those paid to employees for not exercising options over
shares in approved schemes and those paid to employees for not
exercising options over shares in unapproved schemes granted before
27 November 1996 (see example
EIM11879).
Where an option is released or cancelled in return for cash,
the person paying the cash must operate PAYE. Where an option is
released or cancelled in return for a readily convertible asset,
the person who was the employer at the time the option was granted
must operate PAYE.
