Elections - questions and answers

Contents

Q. What is a joint NICs election?

A. A joint NICs election is a document which, when formal approval has been given by us, allows the employers secondary NICs liability on share option gains to be transferred to the employee. The amount transferred can be:

  • the full amount
  • X per cent of the total due
  • £X amount.

Q. Why two formats?

A. We have produced two formats, a single and a two-part . The single format is the basic format we expect most companies to use. Companies that want to enter into elections with a large number of employees can use the two-part format for ease of administration.

In the two-part election the employer only completes one document in respect of a number of employees.

Q. Is HMRC approval needed before an election can be used?

A. Yes. However, there is an 'agreement' method which can be used where Revenue approval is not required. This is simply a voluntary arrangement between the employer and employee where the employee agrees to reimburse the cost of secondary NICs due on the gains made from their option. No Revenue involvement is needed. We do not even advise on wording other than both employer and employee must agree.

Q. What are the differences between the 'election' method and 'agreement' method?

A. The main differences are

  • an 'election' requires formal approval by us but an 'agreement' does not
  • an election formally transfers the secondary NICs liability to the employee but in an agreement the employer retains the liability.

Q. Can an election apply to share options granted under EMI?

A. Yes.

Q. What share options can elections cover?

A. Once approval is received an election can cover:

  • Existing options granted after 5 April 1999, providing the gain was not made before the election was made
  • Aspecific option or options to be granted at a future date.

Q. How does an employee receive the income tax relief where an election exists?

A. Finance Act 2000 introduced income tax relief for the employee on the amount of the secondary NICs that is covered by a valid election. When the gain is made income tax will be collected through PAYE in the usual manner. Employers will be able to operate PAYE on the amount of the taxable gain reduced by the amount of any tax relief likely to be available.

Q. Will individual elections have to be made with each employee?

A. Yes. But the election itself may be contained in two documents, one made by the employee and the other by the secondary contributor. See two-part model.

Q. What format must the election be made in?

A. The election can be a separate document or be part of the option contract. It can be in a written or electronic format. However, for the purposes of approval you are requested to provide a written format to HMRC. If you choose to use an electronic format then you will need to ensure that they are available for inspection if requested by HMRC.

Q. Will the employee need to complete separate payroll records?

A. No. The employer will continue to be the responsible for:

  • preparing and maintaining the deduction working sheets (DWS)
  • calculating the amount of NICs
  • preparing the end of year returns in relation to the NICs that has been transferred to the employee.

The employer should continue to include the share option gain together with any other earnings on which NICs should be deducted on the DWS. The secondary NICs should continue to be recorded on the DWS in the column showing the total employees' and employer's NICs payable. It should not be included in the column showing the employee's contributions payable.

Q. What type of arrangements will meet with HMRC approval?

A. To help companies we are being flexible about the way that the employee can meet the secondary NICs to be paid by them under an election. Examples of an arrangement that are likely to meet with HMRC approval are where a trust, an investment house or the employer withholds some of the share option gain from the employee to meet the liability. The arrangements should however demonstrate the following:

  • That the transferred NICs will be paid on time.
  • That the employer will be aware of when a share option gain has been made, so that they can meet their responsibilities for accounting and recording the NICs.
  • That the employer will receive the funds from, or on behalf of, the employee in sufficient time to pass these to HMRC within 14 days of the end of the income tax month in which the share option gain was made.
  • That the arrangements will work regardless of which country the employee is working in when the gain is made, and where the employee no longer works for the company. It is important to point out that where another Company is acting on your behalf in the administration of the grant and exercise of employee share options, that there is a clear line of communication established.

Q. What information should be provided on the arrangements in order to obtain approval?

A. This will depend on the nature of the arrangements but in all cases we will need:

  • the name, address and capacity of each party to the arrangement
  • copies of any agreements relating to the arrangements
  • full details of the nature of the arrangements.

Q. What other documents do I need to provide?

  • Scheme/Plan Rules.
  • Sample copy of the notice of grant/exercise.
  • Sample copy of Stock Option Agreement if applicable.
  • PAYE and Corporation Tax reference numbers

Q. What happens if a group company administers the scheme but the employees belong to subsidiaries?

A. You will need to identify all the employing subsidiaries likely to use the joint-election and submit their details with the application. This will ensure the Notice of Approval extends to all employers. If the joint-election is to cover an additional subsidiary later on then you will need to advise us accordingly so that we can extend the Approval to cover the new subsidiary.

Q. Can I have more than one share option plan included in the joint-election?

A. Yes. Some companies use several schemes/plans to award options to their employees. The election format can be reworded to cover all the plans in operation.

Q. I already have an approved joint-election but wish to make some changes to it. Do I need to approach your office before making the changes?

A. Yes. You cannot make any alterations to a joint-election once HMRC approval has been granted without first contacting our office. When you send in a revised election format, please clearly highlight the changes from the previously approved format. This will help us to review and confirm the revision being suggested is acceptable more quickly.

Q. Where should applications for approval be sent?

A. Applications, with all the relevant documents, should be sent to the Share Schemes team.

Q. When will the regulations be available formalising this process?

A. Regulations came into force on 10 October:

Q. Where can I obtain more information?

A. The web site will be updated to include other frequently asked questions. If you have any further queries you may ring 020 7438 6718 or 7231 for assistance.