Now is a good time to review your share plans to take account of the new rules
Although they will not become final until July 2011, no major changes to the draft rules on “disguised remuneration” are expected between now and then. It is therefore a good time to take stock of your remuneration arrangements and practices and consider whether anything needs to change to take account of the new rules.
Individual arrangements will still need careful consideration against the exact terms of the rules, but this guide focuses on the most common problem areas we have identified where companies are most likely to need to change their existing practices.
Overview of the effect of the new rules
The new rules are designed to tax “disguised remuneration” paid to employees by third parties or trustees. The concept of disguised remuneration is very broad and potentially catches many innocent arrangements including straightforward deferral arrangements and loan arrangements.
If the rules apply, employees can be subject to income tax on sums or assets conditionally awarded to them, even though they may never receive the sum or asset in question (for example, because a performance condition or employment requirement is not satisfied). The tax charge can also arise even if the sum or asset is not formally awarded to an employee but is somehow “earmarked” for them.
The income tax must be deducted through PAYE and, although the NICs regulations have not been published, HMRC has stated that NICs will also be payable.
It is therefore important to ensure that arrangements fall outside the rules altogether or to ensure that arrangements fall squarely within an exemption to the rules.
Grants of share awards by trustee of employee benefit trust
The new rules are unlikely to trouble share plans where the awards are granted by the employing company or a member of the same group as the employing company.
However, if the trustee of an employee benefit trust grants awards then there is a potential income tax charge under the disguised remuneration rules. There may be an applicable exemption if the award is a “securities option” for tax purposes but specific advice should be sought on this point.
Note that the trustee of an employee benefit trust may still satisfy awards which have been granted by the employing company – provided the correct agreements are in place with the trustee in advance of the grant.
Hedging share awards through an employee benefit trust
Share awards can still be hedged through an employee benefit trust. However, care needs to be taken over hedging arrangements to ensure that shares are not “earmarked” for particular employees. If shares are earmarked, the employee will be liable to income tax and NICs on the value of the shares at the date they are earmarked even though they may not ultimately receive them.
Generally, provided that the trustee of the employee benefit trust is not provided with details of the names of employees and the number of shares under awards, then there is unlikely to be any earmarking. Companies should review the terms of any agreements with the trustees to ensure they are not obliged to provide this information to the trustee.
There are some difficult areas that will need careful review. For example, arrangements where the share plan administrator and trustee of the employee benefit trust are part of the same organisation or where the company has granted a “one man arrangement” in reliance on listing rule 9.4.2 which must be satisfied by a transfer of shares from the employee benefit trust.
Deferral arrangements including deferred bonus plans and co-investment plans are some of the innocent arrangements potentially caught by the new rules. There are exemptions within the new rules which are specifically targeted at deferred remuneration but there are a number of conditions which need to be met in order for the exemptions to apply.
Particular care will need to be taken with arrangements where the trustee of an employee benefit trust holds deferred shares on behalf of an employee and that employee benefit trust is also used to hedge any matching award. In those circumstances, it is likely that the trustee will be earmarking shares for the relevant employee and it will be necessary to ensure that the plan falls within one of the exemptions specified in the new legislation.
Cashless exercise arrangements
Cashless exercise arrangements should be unaffected by the new rules where they are offered by the employing company or a company within the same group.
If the cashless exercise facility is offered by a third party, for example the trustee of an employee benefit trust or a third party stockbroker, then any advance must be repaid within 40 days or the employee will be liable to income tax and NICs on the value of the loan.
Employee loans other than cashless exercise
There are only very limited exemptions available for loans and therefore loans granted to employees on or after 6 April 2011 by third parties, for example the trustee of an employee benefit trust, are likely to be caught by the new rules.
Loans made by the employing company or a company within the same group should be unaffected by the new rules. The specific tax regimes for season ticket loans and cheap loans will continue to apply.
There are special provisions for loans granted after 9 December 2010 but before 6 April 2011. No disguised remuneration tax charge will arise, even if granted by a third party, provided the loan is repaid before 6 April 2012.
Sub-funds, Sub-trusts and family benefit trusts
Sub-funds, sub-trusts and family benefit trusts are a stated target of the new disguised remuneration rules. If assets are earmarked for an employee (whether within a sub-fund, sub-trust, family benefit trust or otherwise) then the employee is likely to be subject to an income tax charge on those assets at the time they are earmarked. Consequently, sub-funds etc are unlikely to offer any income tax advantages in the future.
For existing sub-funds and family benefit trusts, there is limited scope as to what actions can be taken with respect to the assets held in that sub-fund. Provided certain precautions are taken, no earmarking charge should arise and it should also be possible to change the assets in which a sub-fund or sub-trust is invested. Specific advice should be sought on these issues.
Although we do not expect the draft rules themselves to change significantly, we are expecting some updated guidance from HMRC in the form of FAQs. It is hoped that these will clarify some current areas of uncertainty – particularly with regard to the operation of share plans. We are also expecting draft regulations setting out the NICs position on disguised remuneration later this Summer. We will provide a further update once these have been published.
Questions and advice
This guide focuses on the share scheme and employee benefit trust issues arising from the disguised remuneration rules. For pension issues arising from the new rules, please see our separate guide entitled Disguised Remuneration – An Update for Pensions.
If you have any questions about the new disguised remuneration rules and how they apply to your specific arrangements, then please contact Jocelyn Mitchell, Simon Evans, Alice Greenwell or your usual EPB contact.