Welcome to our Employee Incentives Update, we hope you find it useful. This Update contains a round-up of key developments in remuneration during September 2017.
► HMRC updates its statistics on how tax-advantaged share plans are used and the cost to the Exchequer of providing tax relief in respect of these plans
► HMRC publishes new Employment Related Securities Bulletin (i) setting out how to correct an online registration of a share plan where the type of plan has been incorrectly identified, and (ii) identifying common errors it has found in the drafting of tax-advantaged plan rules
► Date for your diary: The Autumn Budget will be delivered on Wednesday 22 November 2017
► ICSA and IA publish joint guidance on practical ways in which companies can engage with their employees and other stakeholders
HMRC updates its statistics on how the HMRC tax-advantaged share plans are used
HMRC offers four share plans that have tax-advantages for both employers and their employees: Company Share Option Plan (CSOP), Enterprise Management Incentives (EMI), Save As You Earn (SAYE) and Share Incentive Plan (SIP).
HMRC has now released updated statistics on how these plans are utilised. The latest information relates to the tax year 2015-16. The key findings make a comparison between tax years 2015-16 and 2013-14 as, due to technical difficulties on the change over from paper to online filing, no statistics are available for 2014-15.
► In 2015-16, the total value of shares and options awarded was around £4.3bn, 24% higher than the value of £3.45bn in 2013-14.
► The total value of options granted in SAYE, EMI and CSOP schemes increased by 47%, 23% and 20% respectively between 2013-14 and 2015-16. The total value of SIP shares awarded reduced by 6% due to isolated changes among some of the larger SIP schemes in 2013-14 that were not expected to be indicative of any persistent changes.
► The value of tax relievable gains on SAYE, EMI and CSOP share options exercised have increased by 16%, this is mainly driven by a large increase in EMI gains in 2015-16.
► The total cost of Income Tax and National Insurance relief in 2015-16 for all schemes was £880m, 17% lower than in 2013-14. This is largely driven by the changes in the SIP figures as a high number of SIP free shares were awarded in 2013-14 due to isolated changes among some of the larger SIP schemes. The SIP figures have reduced to expected trend levels in 2015-16. The relief for CSOP schemes has also reduced due to a lower number of employees exercising options in 2015-16 compared with 2013-14.
► The value of gains on exercised EMI options has increased by 85% since 2013-14. This is partially explained by the increase in the number of companies where employees exercised options in 2015-16. This could be due to share prices for unquoted shares being high in 2015-16, incentivising the high number of individuals granted options in 2005-06 to 2007-08 to exercise within 10 years to benefit from the tax advantages offered by the scheme. The increase could also be partly due to methodological changes due to the availability of more accurate data from EMI returns submitted online for the first time.
► The number of companies operating SAYE schemes has increased by 18% to 520 in 2015-16. The number of companies operating CSOP and SIP schemes have stayed broadly similar to 2013-14 levels. With the exception of 2009-10, the number of companies operating EMI schemes steadily increased over time until 2013-14, where it peaked at 9,820 companies. This decreased in the latest year to 8,610 in 2015-16. Overall, the total number of companies operating tax-advantaged schemes has decreased by 6% from 11,460 to 10,720, largely due to the decrease in the number of companies operating EMI schemes.
A copy of the HMRC report can be found here.
HMRC publishes new Employment Related Securities Bulletin
In Employment Related Securities Bulletin 25 HMRC states that it continues to find that many new registrations on the ERS online service are showing an incorrect scheme type. In particular, the scheme type Company Share Option Plan (CSOP) has been incorrectly selected for non tax-advantaged schemes and arrangements. The Bulletin goes on to set out the procedure to follow to correct an incorrect registration.
In addition, the Bulletin highlights the following common errors HMRC has found in the drafting of tax-advantaged plan rules:
► CSOP schemes
The rules do not allow share options to be granted by deed or for consideration. If no contractual obligation exists for options that have supposedly been granted already, HMRC states that it might regard the error as serious.
It is a requirement that a contract is formed between the grantor of the option and the employee, so that the employee obtains a legally binding right to acquire shares.
► SAYE Option schemes
The rules allows share options to be exercised in certain circumstances where the options have been held for less than 3 years, contrary to Schedule 3 ITEPA 2003.
Schedule 3 allows a SAYE option scheme to specify whether options may be exercised when employment ends for ‘any other reason’ but such a provision may only apply in the case of options granted more than 3 years before the termination date.
Some schemes allow early exercise of options when the employment ceases because of a change in control of the employing company (on a sale of that company out of the scheme organiser’s group). This is no longer an acceptable provision following changes to Schedule 3 made in the Finance Act 2014.
► CSOP and SAYE Option schemes
The ‘company events’ when share options may be exercised or ‘rolled over’ into an acquiring company’s shares are not within the scope of sections 979 to 982 or 983 to 985 Companies Act 2006.
Both Schedules 3 and 4 of ITEPA 2003 allow schemes to provide that share options may be exercised at any time when any person is bound or entitled to acquire shares in the company under sections 979 to 982 or 983 to 985 of the Companies Act 2006 (takeover offers: right of offeror to buy out minority shareholder)’. A scheme is not allowed to extend the provision to other Companies Act provisions, for example sections 974 to 978 covering takeover offers.
If your plan rules have not been drafted by us and/or they pre-date the Finance Act 2014, you may wish to review your plan rules to ensure that they do not contain any of the errors highlighted by HMRC.
A copy of the Bulletin can be found here.
ICSA and IA publish joint guidance on practical ways in which companies can engage with their employees and other stakeholders
You will recall from our August Update that BEIS' response to the Green Paper consultation on corporate reform included an intention to encourage industry-led solutions by asking the Institute of Chartered Secretaries and Administrators and the Investment Association to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders.
This guidance has now been published. It sets out 10 core principles which are explained by reference to best practice examples taken from individual companies.
The introduction to the joint guidance states that the aim is to help company boards think about how to ensure they understand and weigh up the interests of their key stakeholders when taking strategic decisions and that the guidance is designed to take boards through the different elements involved in understanding and assessing the impact on key stakeholders.
A copy of the joint guidance can be found here.