A facility to allow an employee to meet the employer’s secondary Class 1 National Insurance contributions (NICs) liability arising on share option gains was introduced in the Child Support, Pensions and Social Security Act 2000 (CSPSSA) on 28 July 2000¹. This can be achieved either by Agreement or Joint Election. However, unlike an agreement, a joint election constitutes the legal transfer of liability for payment from the employer to the employee and the law requires that any joint election must be approved by an officer of HM Revenue & Customs (HMRC).
The Employee Shares and Securities Unit (ESSU) are responsible for the administration of the approval process and publish model forms of election to facilitate it². For various reasons the model elections may not always be suitable for a particular company’s needs and practitioners may wish to customise them to suit a particular client. Whether or not the model election is used, HMRC still needs to approve whatever form of election is used by each company or group of companies. Before an election can be approved it must contain a number of elements to satisfy legislative requirements.
1) The parties to the election must be clearly identified. The Company (the 'secondary contributor'), its registered office address and company registration number must be included in the draft election and provision made for the full name of the employee to be recorded along with their National Insurance number.
2) The purpose and scope of the joint election (see model document) needs to be set out and this should clearly specify the option grant or award of securities which is subject to the election, the relevant legislation and the relevant employment income. An election will not be approved if it does not clearly identify the option grant or award to which it is to apply. For example, an election that is said to apply to all options whenever they may be granted will not be approved. This section also needs to include declarations (see model document) concerning Chapter 3A of Part 7 and retrospection (section 4B(2) SSCBA 1992).
3) The election should also state what arrangements are in place as to how the employee will account for the secondary NICs liability and ensure that it is paid over to HMRC in good time. Where the relevant employment income will be received from a third party then the employee should authorise that party to withhold a sufficient amount of cash (or sell sufficient shares) to cover the liability, and this should be provided for in this section. A clear statement that the employee understands that they are personally liable for the secondary NICs covered by the election should also be included in this section.
4) A clear statement of the means for determining that the election is no longer in force (see model document).
5) A clear statement that the election will continue in full force regardless of whether the employee ceases to be an employee of the company. Similarly a statement may be included concerning residency.
6) A declaration by both the company and the employee that they agree to be bound by the terms of the election which may be by deed if so required.
Recently a number of draft elections submitted for approval include other elements that are not within the scope of the legislation and they do not require HMRC approval. Including those elements within the election means that HMRC is being asked to recognise terms or clauses that are not a requirement of the legislation. Examples of terms or clauses which are being included are:
1) Transfer of employment within the group whereby the secondary contributor changes and the employee undertakes to enter into a new election with the new employer. This is not necessary as the joint election remains in force even if employment ceases (see section 5).
2) An indemnity in favour of the company against any expense incurred if the employee fails to satisfy their liability for secondary NIC. This expands the scope of the joint election and cannot be approved. If the company requires such an indemnity then it should be included within the option agreement or other similar document which does not require HMRC approval.
3) A power of attorney in order to enable enforcement of either of the above or any other aspect of the election. This again expands the scope of the election and cannot be approved. If required then it should be included in the option agreement or other similar document and could also be used to implement the joint election if required.
From the 1 December 2008 where draft elections are presented for approval that include additional elements not required by the legislation nor essential for the implementation of the election then approval will not be given. Further guidance on NIC Elections can be found in the Employment Related Securities Manual (ERSM 170750 and 170760).
¹ Subsequent changes to legislation increased the scope of NIC Joint Elections (& Agreements) so that they can include employment income arising from restricted securities (section 426 of ITEPA 2003) and convertible securities (section 438 of ITEPA 2003).
² Applications for approval should be sent to the address shown
at the link below. The application should include draft joint election,
supporting documentation for grant or award and if the model documents
are being used then a statement to that effect.