Frequently Asked Questions – joint election

Contents

Q. What is a NIC joint election?

A. A joint NIC election is a document which, when formal approval has been given by HMRC, allows the employer’s secondary Class 1 NICs liability arising on relevant employment income from securities options, restricted and convertible securities to be legally transferred to the employee acquiring those securities. The amount transferred can be:

  • the full amount of the employer’s liability on that gain or
  • a percentage of the total employer’s liability due on that gain or
  • a specific amount of the employer’s liability due on that gain.

Q. What are the differences between a joint election and an Agreement?

A. The main differences are:

  • A joint election requires formal approval to be given by HMRC but an agreement does not.
  • A joint election legally transfers the (employer’s) secondary NICs liability to the employee. Under an agreement the employer remains legally liable for payment of the secondary contributions, but the employee agrees to reimburse the employer for the cost of that liability (or an agreed part of it).

Q. What format must the election be made in?

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

Q. Why are there two model formats?

A. We have produced two model formats, a single and a two-part, which employers may use an exact copy of or may use a basis to prepare an alternative format. These models contain the minimum a joint election would need to contain in order to be in a form ready to receive HMRC approval. Elections which are an exact copy of one of these models qualify for Fast Track approval, which means that, assuming all necessary information and documents are provided with the approval application, we will grant approval within 14 days of receipt of the application.

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 all employees entering into that election.

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

A. Yes. However, there is an ‘agreement’ method, for which HMRC approval is not required. This is simply a voluntary arrangement between the employer and employee where the employee agrees to reimburse the employer for the cost of secondary (employer’s) NICs due on the gains made from their securities options, restricted securities or convertible securities. In this case the legal liability remains with the employer. No HMRC involvement is required. We do not even advise on wording, but both employer and employee must agree.

Q. How does an employer make an application for approval?

A. The application should include the form of election that the employer wishes to use and details of the arrangements that will be used to collect the NICs transferred from the employee. The application should be sent to:

HMRC
Employee Shares & Securities Unit
Room G52
100 Parliament Street
London
SW1A 2BQ

Q. What payments can a joint NICs election cover?

A. The legislation will allow a joint NICs election to cover:

a. Existing share options already granted, but it can only cover liabilities arising after the employer and the employee have entered into the joint election;

b. Specific grants of securities options and awards in restricted or convertible securities, details of which are provided in the election. This may include grants and awards planned at a future date, but only if those planned grants and awards are specifically referred to in the joint election and they are made to the employee. This may also include awards of restricted or convertible securities made before the Election is entered into, but the Election can only apply to post-acquisition liabilities that arise after both employer & employee sign the Election document;

c. Any cash payment made to the employee for the assignment, release or cancellation of a securities option. This will also include cash cancellation payments made for share options granted before 6 April 1999;

d. Any cash payment made for surrendering restricted or convertible securities awards;

e. Awards of securities made under a conditional award plan, normally referred to as a “Long Term Incentive Plan” (LTIP).

Q. Can a joint NIC election apply to share options granted under EMI (Enterprise Management Incentives) or CSOP (Company Share Option Plan)?

A. Yes.

Please note that Companies seeking to enter into joint NIC election with their employees for options granted under a CSOP are advised to check whether this will require a change to the rules of the CSOP.

Q. What amount of employers NICs can be transferred to the employee under a joint NIC election?

A. The election may cover some or all of the employer's NICs that may arise on security options and restricted or convertible awards. For example, an election may say that the employee will pay all of the employer's NICs liability, or a proportion of it, or any employer's liability above a certain monetary amount.

Q. What must the election include?

A. An election must include the following:

a. details of the security options, restricted or convertible securities to which it relates, or of the period within which the security options are to be granted or the restricted or convertible securities to which it relates are intended to be awarded.

b. a statement that the election relates to any relevant employment income on which the earner is liable to pay contributions under:
(i) in the case of securities options, section 476 of ITEPA 2003 and section 4(4)(a) of the Social Security Contributions and Benefits Act 1992;
(ii) in the case of restricted securities, section 426 of ITEPA 2003 and Regulation 22(7) of the Social Security (Contributions) Regulations 2001;
(iii) in the case of convertible securities, section 438 of ITEPA 2003 and Regulation 22(7) of the Social Security (Contributions) Regulations 2001
and an explanation of the effect of the relevant legislation.

c. the amount or proportion (as the case may be) of the liability for secondary contributions to be transferred.

d. a statement that its purpose is to transfer the liability for the secondary contributions referred to in paragraph (c) from the secondary contributor to the earner.

e. a statement as to the method by which the secondary contributor will secure that the liability for amounts of contributions, transferred under the election, is met.

f. a statement as to the circumstances in which it shall cease to have effect.

g. a signed declaration by the earner that he agrees to be bound by its terms, and

h. evidence sufficient to show that the secondary contributor agrees to be bound by its terms.

Q. Can a practitioner or adviser send in a generic form of election for approval?

A. We do not give formal approval to generic elections as such. If the election satisfies all the requirements, we will state that it is in a form capable of approval. The practitioner or adviser would still have to submit the election with the details of the secondary contributor for formal approval to be given.

Where we have accepted the use of a joint election which is in a form capable of approval with a particular Agent and have provided them with a unique reference number, we are then prepared to Fast Track such applications providing they are submitted in exactly the same format that was agreed with HMRC and all the necessary documents are submitted with the joint election application.

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

A. Yes, but the election itself may be contained in two documents, one signed by each participating employee and the other by the secondary contributor only once with respect to ALL participating employees.

Q. Will HMRC require a copy of the signed election?

A. No, once approval has been given we do not need to see a copy of the signed election. The employer and employee must keep a copy for their own records. HMRC will require that a return is submitted 92 days following the end of the tax year in which employers NICs had been transferred to the employee.

Nil returns are not necessary if no employers NICs have been transferred to the employee.

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, P11)
  • calculating the amount of employers and employee NICs due,
  • collection and payment of the NICs to HMRC,
  • preparing the end of year returns in relation to the NICs that has been transferred to the employee (P35, P14).

The employer should continue to include gains from securities options and restricted or convertible securities 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 very flexible about the way that the employee can meet the secondary NICs to be paid by them under the election. Examples of an arrangement that are likely to meet with HMRC approval are where a trust, an investment house or the employer withholds (& sells) some of the shares from the employee to meet the liability. The arrangements should however demonstrate that:

  • they will result in the timely payment of the transferred NICs;
  • the employer will be aware of when a share option gain has been made or, in the case of restricted & convertible shares, a post-acquisition chargeable event has occurred (so that he can meet his responsibilities for accounting and recording the NICs);
  • 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 gain was made or chargeable event occurred (A tax month starts on the 6th of one month and ends on the 5th of the next);
  • the arrangements will work regardless of which country the employee is working in when the gain is made and where the employee is no longer in the employ of the company.

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 require:

  • 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 information and necessary documents do I need to provide to HMRC?

A.

  • Scheme/Plan Rules.
  • Sample copy of the notice of grant/ exercise of a securities option.
  • Sample copy of the award document in respect of restricted or convertible securities.
  • Sample documents that will be used for the grant of the securities option, or the award of the restricted securities or convertible securities, 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 within the group. If the joint election is to cover an additional subsidiary at a later date, the employer will need to advise HMRC accordingly so that we can extend the Approval to cover the new subsidiary.

The election approval will not be valid for options/ securities awarded by this additional subsidiary until HMRC has granted an extension to the approval applying to that subsidiary.

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

A. Yes. Some companies use several schemes/ plans to award securities options, restricted securities or convertible securities to their employees. The election format can be worded 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 HMRC before making the changes?

A. Yes. Once HMRC approval has been granted no alterations can be made to a joint-election without first contacting us. 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 whether the revision being suggested is acceptable more quickly.

Q. How does an employee receive the income tax relief when they pay their employers NIC liability?

A. Income tax relief is available to the employee equal to the amount of the secondary NICs that is transferred from employer to employee under the terms of the joint 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 employers NIC transferred to the employee.

Example

Employee exercises an unapproved securities option on 6/05/04 and makes a taxable gain of £1,000. They have agreed with their employer that they will pay all of the employer's liability for secondary NICs.
Employee earns above the employee's upper earnings limit (UEL).
Employer's NICs is 12.8% of £1,000 = £128.
Additional Employees NICs of 1% is also due on the £1000 gain = £10
Employee pays the employers NICs of £128 on 10/05/04.
Income tax is collected through PAYE.
Amount on which PAYE is operated is £1,000 - £128 = £872.

Q. Will the transfer of the NIC liability and the income tax relief have any impact on the amount on which Capital Gains Tax is calculated when I sell the shares?

A. No.

To calculate the amount of a gain to be chargeable to Capital Gains Tax when employment related securities are disposed of, deductions are normally made for:

  • certain amounts treated as earnings for income tax purposes
  • any amount which the individual paid to acquire those shares.

However, because the employee is given income tax relief for payment of employer’s secondary Contributions in calculating the amount treated as earnings, it is necessary to re-establish the base acquisition cost for calculating the Capital Gains Tax liability.

Schedule 16 to Finance Act 2004 amended the Capital Gains Tax legislation (section 119A of the Taxation of Chargeable Gains Act 1992) to ensure that the cost of the secondary National Insurance liability borne by the employee does not affect the acquisition cost of the shares for Capital Gains purposes. So the income tax relief given as a deduction from the amount counting as employment income will not be clawed back through a higher Capital Gains Tax charge when the shares are sold or otherwise disposed.

The effect of the provision in paragraph 6 of Schedule 16 to Finance Act 2004 is to add back the deduction to the taxable amount and therefore increase the allowable deduction for calculating the Capital Gains Tax liability. Consequently, whether or not the employee bears the employer’s National Insurance contributions, his or her Capital Gains Tax liability on the disposal of the shares would remain the same.

Q. Will the income tax relief have any effect on the employee’s National Insurance liability?

A. No. Both the employer’s and employee’s NIC liability is calculated on the amount treated as employment income before the deduction for the income tax relief is made. The tax relief has no effect on the amount of either NIC liability.

Q. What if the employee agrees to pay the secondary NICs liability, but in the end the employer chooses to pay it instead – will the tax relief still be available?

A. No. The relief can be claimed only if the election is in force when the transfer of employers NICs in whole or in part takes place – i.e. the employee pays the liability which is transferred to them by virtue of that election. If the employer chooses to pay the liability instead, then no transfer has actually taken place and consequently no relief is due.

Q. If the employer pays the secondary NICs, despite the NIC election (or agreement), will this be treated as a payment of earnings and trigger further tax & NIC liabilities?

A. No. If the employer pays the secondary NIC liability, they are effectively cancelling the election with respect to the relevant employment income for which the secondary NICs would have been due, as a result of which the liability for payment of the secondary NICs remains with the employer rather than being transferred to the employee.

Q. Has any change been made to the tax relief available to employees who pay their employer’s NIC liability on securities option gains?

A. Yes, changes made as a result of the Finance Act 2003 puts beyond doubt that any cash cancellation payments made for giving up a securities option can be included in a joint election. Therefore, where a transfer occurs on a cash cancellation payment, employees will be able to claim any income tax relief available.

Schedule 16 to Finance Act 2004 made minor amendments to the legislation providing for this tax relief (section 481 ITEPA 2003). But this simply ensured that the provision of tax relief was consistent for options, restricted securities & convertible securities. No substantive change was made to the provision of income tax relief for option gains.

Q. As an employing company I can get Schedule 23 Corporation Tax relief for the restricted and convertible shares acquired by my employees. Will that relief be affected if they agree to pay the employer’s (secondary) NICs liability on these shares?

A. No. Section 85 and Schedule 16 of Finance Bill 2004 contain a consequential amendment to Schedule 23 of Finance Act 2003. This is to ensure that Corporation Tax relief for employee share acquisitions will not be affected by the employee getting income tax relief on earnings from those shares as a result of paying the employer’s NIC liability.

Q. If the employee pays the employer’s NICs, will the employer lose CT relief for those NICs?

A. Yes, the employer loses the CT relief.

An employer receives CT relief for payment of secondary NICs as these are part of the cost of employing the staff. With securities options, restricted securities and convertible securities, the employer and employee can agree that the employee will pay the secondary NICs.

In this case the employer has not borne the cost and so does not get CT relief.

Q. Will the employee get any benefit advantage from paying the employer’s NICs?

A. No - There is no Social Security contributory benefit advantage to the employee as a result of paying secondary NICs. But participation in an election or agreement to pay the employer’s NIC liability is voluntary for both employers and employees. The benefit to the employee of entering into an election is that they are receiving valuable securities (and the potential future growth in value of those securities) which their employer may not be willing to give them if they were unable to remove their exposure to an unpredictable secondary NIC liability by passing it to the employee.

In addition, employees paying their employer’s NICs on earnings from restricted and convertible shares will get income tax relief on those earnings equivalent to the amount of employer’s NICs they pay.

Q. Can I transfer employer’s NICs to an employee if I have entered into a section 430 or 431 (ITEPA 2003) joint tax election with my employee in relation to an award of restricted securities?

A. Joint election and agreements may be used only with respect to NIC liabilities arising after the securities are acquired – typically the lifting of a restriction applying to those securities.

A section 431 ITEPA tax election may be entered into such that employer & employee choose to crystallise their income tax and National Insurance liabilities on the full, unrestricted value of those securities at the time the employee acquires the securities. If so, there will be no further NIC liabilities after acquisition and, therefore, no problems for the employer in providing for a future unquantifiable liability. In this case a NIC election (and agreement) may not be applied to any of the NIC liability due on earnings from these securities.

Alternatively, a section 431 tax election may be entered into such that at least one restriction is ignored at the time the securities are acquired, for the purposes of calculating tax and NIC liabilities, but at least one post-acquisition chargeable event will arise. In this case, a NIC election may be applied to the NIC liabilities that arise after the securities are acquired – i.e. at the time of post-acquisition chargeable events resulting from the lifting of restrictions which were not ignored for tax/ NIC purposes at the time the securities were acquired.

A section 430 ITEPA tax election may be entered into at the time a post-acquisition chargeable event occurs. For instance, if no section 431 election, or a section 431 election applying only to certain restrictions, has been made when securities are acquired, a chargeable event will occur when a restriction (not covered by a section 431 election) is lifted. NICs will be payable at that time on the value associated with the restriction being lifted.

However, if a section 430 election is entered into at the time of a post-acquisition chargeable event, tax and NICs will be payable at that time not only on the value associated with the restriction being lifted at that time, but also on the value associated with all other restrictions which will be lifted in the future. Therefore, after a section 430 election is made, there will be no further chargeable events and no further tax or NIC liabilities.

If a NIC election has been entered into before the section 430 tax election is entered into, the NIC election may be used to transfer to the employee the full employer NIC liability arising at the time of the chargeable event to which the section 430 election applies. That is, not only the NIC liability due on the restriction being lifted at that time, but also the NIC liability payable at that time on the value associated with the remaining restrictions which are the subject of the section 430 election.

Q. How do I calculate the income tax and NICs due when an ex-employee exercises their options several months after leaving the company?

A. If an employee exercises their options more than 6 weeks after receiving their P45, you should operate a 1-week earning period for NICs purposes, and tax must be calculated at basic rate. This rule applies generally to earnings payments made after employment has ceased.

Any higher-rate tax due must be reported in the individual’s Self-Assessment Return. The individuals concerned should therefore consider referring to the supplementary pages relating to Share Schemes.

Please also see page 15 of the CWG2

Q. How do I calculate the income tax and NICs due for an ex-employee when restrictions or conversions take place on their restricted or convertible securities several months after leaving the company?

A. This is the same answer to the question above, but instead of options being exercised we have the lifting of restriction or a conversion taking place. Please also look at page 15 of the CWG2.

Q. If an ex-employee (mentioned in the previous Q & A) exercises whilst working for another company, which company is responsible for collecting & paying the income tax and NICs?

A. The company that is the secondary contributor responsible for accounting for primary and secondary NICs, is the employer who granted the option/awarded the securities.

Q. I already have a joint election in place with my employees but it is only for options. Can I use it also for LTIPs without having to make a new election or seek further HMRC approval?

A. No. At the time that the company sought the employee’s acceptance to transfer the employers NICs, the employee would have been told under what specific circumstances the transfer of employers NICs would occur. If at that time the election referred only to liabilities on share option gains, then the election can be used only to transfer NICs on share option gains, not LTIPs.

If the company wishes to extend their joint election to reflect the legislative changes made by Schedule 22 of Finance Act 2003 (i.e. include LTIPs) and the Section 3 & 4 of the National Insurance Contributions and Statutory Payments Act 2004 (i.e. restricted & convertible security awards), then an amended joint election must be submitted to HMRC for approval to be given.

Where a company chooses to extend their joint election without reference to HMRC, then it must be stressed that the joint election will not be valid for any transfers made to the employee where HMRC approval was not sought and further there may be grounds for the approval to be withdrawn.

Additionally where income tax relief was claimed, then HMRC would consider applying penalties and interest where PAYE was incorrectly paid.

Q. When did the regulations come in to force formalising this process?

A. Regulations came into force on 10 October:

  • SI 2744 The Social Security (Contributions) (Amendment No 10) Regulations 2000
  • SI 2743 The Social Security (Contributions) (Amendment No 10) (Northern Ireland) Regulations 2000
  • SI 2742 The Income Tax (Sub-Contractors in the Construction Industry and Employments) (Amendment) Regulations 2000

New Regulations effective from 1st September 2004:

  • SI 2096 The Social Security (Contributions) (Amendment No. 4)
    Regulations 200