There were several announcements in the Budget 2012 relevant to employee share incentives. The changes relating to Enterprise Management Incentives ("EMI") share option plans will be helpful to small and medium sized businesses wanting to recruit and retain key employees. As expected, it was announced that there would be a reduction in the top rate of UK income tax to 45% from 6 April 2013. In addition, on 27 June 2012, the government published its consultation on the Office of Tax Simplification ("OTS") report on simplification of the four UK tax-advantaged employee share plans, which closes on 18 September 2012.
Changes to EMIs
The government announced that it would make several changes to the framework for EMI share option plans, which are aimed at small, higher-risk trading companies carrying on a qualifying trade under the legislation.
- Individual limit: the individual limit on the value of shares over which EMI options may be granted increased from £120,000 to £250,000. This increase came into force on 16 June 2012.
- Entrepreneurs' Relief ("ER"): shareholders who acquired their shares on exercise of EMI options on or after 6 April 2012 will be able to benefit from ER, subject to State aid approval. If capital gains qualify for ER, the rate of capital gains tax on the sale of the shares is 10% (rather than the normal 18% and 28% rates) up to the lifetime limit (£10 million). Normally individuals are eligible for ER if they meet certain qualifying conditions throughout a one-year qualifying period, including the condition that the individual holds at least 5% of the ordinary share capital of the company (and this holding gives the individual at least 5% of the voting rights in the company). However, employees who acquire shares on exercise of EMI options are unlikely to satisfy this 5% holding requirement, so the government announced in the Budget 2012 that ER will be available to employees who dispose of shares acquired on exercise of EMI options even if they do not satisfy this 5% shareholding requirement. All the other conditions for ER, including the one-year qualifying period before sale, will need to be satisfied. This means that the earliest date on which shares can be disposed of and attract ER under the new provisions is 6 April 2013. The changes will be included in the Finance Bill 2013.
- Extension of EMI: on 27 June 2012, the government published its consultation on extending the scope of who can participate in EMI share option plans to include academics employed by a qualifying company. The consultation closes on 18 September 2012.
Fall in UK income tax rate from 50% to 45%
As expected, the government announced that the top rate of UK income tax will fall from 50% to 45% from 6 April 2013. This may well lead to deferral of vesting of awards if possible to enable employees to take advantage of the lower rate. Please get in touch with a member of the team if you would like to discuss this.
OTS review of employee share plans
In March, the OTS published its recommendations to simplify the four UK tax-favoured employee share plans – Company Share Option Plans ("CSOP"), Share Incentive Plans ("SIP"), SAYE Plans and EMIs. Their key recommendations were as follows.
- Introduce a self-certification system to replace the current requirement to seek prior approval from HM Revenue and Customs of SIPs, SAYE Plans and CSOPs. EMIs already operate with a self-certification process.
- Further research into the use of CSOPs to see if they are still relevant, or whether they could be phased out or replaced.
- If CSOPs are retained, merge EMIs and CSOPs so that there is one set of rules governing tax-favoured discretionary share option arrangements. The OTS believes a merger of EMIs and CSOPs would be a relatively simple process because the two plans are broadly similar. The OTS proposes that the higher individual limits for EMIs would be retained for those companies which meet the EMI qualifying criteria. The merger would take place in two phases, with the first phase mainly involving administrative changes. The second phase would be more substantial, eg removing the three-year period between grant and exercise normally required to obtain income tax relief for CSOPs.
- Technical simplifications, such as introducing a single annual return (which can be filed online) for all tax-favoured plans, streamlining the leaver provisions and allowing the use of restricted shares (without the current limitations) for SIPs, SAYE Plans and CSOPs.
On 27 June 2012, the government published its consultation on the OTS report on the simplification of tax-favoured employee share plans (available here). This consultation closes on 18 September 2012. The government confirmed that it intends to take forward the OTS's recommendation on the introduction of a self-certification system, which it intends to implement no later than 2014. The government also intends to carry out further research into the use of CSOPs, the outcome of which will be announced in autumn 2012. (For this reason, the government is not consulting on the merger of EMIs and CSOPs at the moment.)
The government is also consulting on the majority of the OTS's other recommendations and, if it intends to proceed with any of these, further details will be published in autumn 2012, with a view to implementation in 2013. Chapter 5 of the consultation paper sets out the other OTS recommendations on which the government is not consulting at the moment. However, the government has noted some of these recommendations for further consideration. It is also seeking views and evidence on an alternative proposal for change to the "good leaver" rules (the extension of the "good leaver" circumstances for CSOPs and SAYE Plans to match those in place for SIPs).
The OTS has started the next stage of its review, examining the complexities involved in non-tax advantaged or "unapproved" share plans. The initial stage of this review is a fact-finding exercise, which includes a survey of companies which use unapproved employee share plans (which closed on 8 June). The OTS will report on the fact-finding exercise by 31 July 2012. This will be followed by a detailed examination of priority simplification areas which have been identified in the fact-finding exercise, with the aim of producing a final report by Budget 2013.