Welcome to our Employee Incentives Update for spring 2018.
This edition covers:
- An important update from HMRC on EU State aid approval for companies operating enterprise management incentive plans.
- GDPR and share plans.
- A reminder about annual returns and some developments in HMRC practice.
- Changes to the taxation of termination payments.
- Excepted Group Life Policy schemes.
EMI options | EU State Aid approval for companies proposing to grant EMI options
On 4 April 2018 HMRC published Employment Related Securities Bulletin No 27. This Bulletin is an important update for companies that operate EMI option plans, particularly those companies which are proposing to grant EMI options in the near future.
In summary, EU State aid approval for the EMI regime lapsed on 6 April 2018. EMI options granted in the period from 7 April 2018 until fresh EU State aid approval is received may not be eligible for tax advantages. This means that they would be subject to income tax and typically also employer’s and employee’s national insurance contributions on exercise. Accordingly, HMRC advised that companies may wish to consider delaying the grant of options intended to qualify as EMI options until fresh EU State aid approval has been given.
The Bulletin confirms that the government is working hard to ensure this period is as short as possible and HMRC will provide a further update in due course.
GDPR and share plans
As you will no doubt be aware, the General Data Protection Regulation will take effect across the EU on 25 May 2018.
Historically, companies operating share plans have typically relied on consent as the lawful basis for the processing of data. Under the GDPR, valid consent will be more difficult to obtain and may be withdrawn by an individual at any time (which could cause difficulties in operating plans). As there are other lawful grounds that a company may rely on under the GDPR for processing personal data (for example, the performance of a contract or compliance with a legal obligation), it will generally be preferable for the company to move away from reliance on consent in the operation of its share plans.
Annual returns for employment-related securities | A reminder
Don’t forget that the deadline for submitting annual returns in respect of employment-related security arrangements for the tax year ending 5 April 2018 is 6 July 2018.
Companies that have adopted new plans during the tax year ending 5 April 2018 are reminded that in order to submit an annual return, it is necessary for the company to first register the “scheme” with HMRC’s Employment Related Securities service. HMRC has indicated that this process is currently taking up to 10 days, so it is important to allow time for registration to enable companies to meet the 6 July deadline for filing annual returns. Late filing will now trigger automatic penalties from HMRC.
Companies that operate tax-advantaged plans (the share incentive plan, company share option plan, and savings related share option or ‘SAYE’ plan) will also need to complete the important self-certification declaration as part of the annual returns process.
Developments in HMRC practice
HMRC guidance has recently been updated to provide more clarity on the length of any extension period that may be agreed by Shares & Assets Valuation (SAV) for EMI plans and Share Incentive Plans.
For EMI options, the guidance now states that “Valuations for EMIs are valid for 60 days from the date of the agreement. You may be able to extend this agreement period for a further 30 days by writing to SAV. Include written confirmation that no significant events have happened since the original valuation or are likely to happen in the period for which you’re asking for the extension.”
This confirms that any extension will not exceed 30 days. From an administrative perspective, companies should be ready to grant EMI options promptly following agreeing a valuation, including preparing the necessary documentation and having any required shareholder consents in place.
At Autumn Statement 2017, it was announced that the SAYE savings holiday for employees on qualifying parental leave would be extended from 6 months to 12 months.
This was initially due to take effect from 6 April 2018, however HMRC announced in the March edition of its Employment Related Securities Bulletin that the government is delaying implementation of the extended SAYE savings holiday and extending it to 12 months for all SAYE plans (not just those with qualifying parental leave).
This welcome change will now take effect on 1 September 2018. We await publication of updated HMRC guidance to reflect this.
Changes to the taxation of termination payments
Significant changes to the taxation of termination payments apply from 6 April 2018. The new rules treat all employment contracts as though they contained a payment in lieu of notice (PILON) clause, so that the basic pay the employee would have received during the notice period will now be taxed as earnings (subject to income tax and employee’s and employer’s NICs). A statutory formula is used to calculate the part of a termination payment which must be treated this way.
Clarifying what has been a grey area, HMRC has confirmed that the new rules apply to payments or benefits received on or after 6 April 2018 in circumstances where the employment is also ended on or after 6 April 2018.
The previously announced introduction of employer’s NICs on other termination payments above the £30,000 limit has been postponed until April 2019. We shall provide further detail on this in a future Incentives Update.
Excepted Group Life Policy schemes
An Excepted Group Life Policy can be an attractive way to provide death in service benefits because it allows lump sum benefits to be paid on an employee’s death outside of the Lifetime Allowance, thus avoiding Lifetime Allowance charges. It carries the added benefit that joining an Excepted Group Life Policy scheme does not invalidate any previous protection claimed by employees.