The UK is changing the way in which it taxes share options and share awards held by employees who move between countries. Some employees will gain and some employees will lose. As an employer, if you have employees on assignment from overseas or your employees are on assignment, you need to be aware of these changes and have systems in place to track employees and share awards. If you do not, you may incur unexpected PAYE liabilities.
When are the changes effective?
The new rules come into force on 6 April 2015 and will apply to all option exercises and vesting of share awards after 5 April 2015 regardless of when the awards were granted. This means that the tax treatment you may have expected to arise will no longer arise. In some ways, these changes are therefore retrospective.
Currently, the UK tax treatment of employee share incentives depends on the tax residence of the employee at the time of grant of an award. Broadly, employees who were UK tax resident at grant are subject to UK tax on exercise or vesting regardless of where they may be at such time. If they were non-UK tax resident at grant (unless they received the awards by reason of current or prospective UK employment) they are not usually subject to UK tax on exercise or vesting, even if they are in the UK when awards vest or are exercised.
From 6 April 2015, it is necessary to consider the period from grant to vesting or exercise of an award or option (‘relevant period’). The UK will tax a ‘just and equitable’ proportion of the award or option equivalent to the proportion of the relevant period during which the employee was UK tax resident. However, double-tax treaties may impose a different result, so it will be important to look at the circumstances of each employee.
The new rules may mean that employees who were not previously subject to UK income tax because their options or share awards were granted when they were not UK tax resident will now have an unexpected UK tax liability. Conversely, employees who were UK tax resident at grant but then left the UK may find their UK tax liability is reduced under the new rules.
The new rules could create planning opportunities for some employees. Employees whose overall tax bill will be increased as a result of the changes may wish to consider exercising options or triggering tax charges before 6 April 2015 when the new rules come into force. On the other hand, some employees may find that they are better off waiting until after 6 April 2015 to exercise options or trigger tax charges if they would benefit from lower tax charges under the new rules.
The National Insurance contribution (‘NICs’) rules will also change with effect from 6 April 2015. The intention is to standardise the approach as much as possible but this has been complicated by the nature of international social security treaties and the different ways that employees can remain covered by the social security system of a specific country. As with income tax, the NICs liability will be based on an apportionment of the relevant period, but in the case of NICs it is necessary to consider the amount of time during the relevant period for which the employee is covered by the UK NICs system. As social security treaties are different from double tax treaties and the UK statutory residence test, there will be occasions when the income tax and NICs treatment of share incentives held by internationally mobile employees are not aligned.
Employers need to be familiar with the new rules so that they can apply Pay-As-You-Earn correctly. They may need to amend communication documents for their internationally mobile employee population to explain the new rules. It will be a key aspect of compliance going forward that employers monitor time spent by their employees in each country and also monitor social security coverage so that they can correctly apply the new rules. Most companies already do this for other reasons but need to ensure that this information is shared with any share plan administrators or advisors who calculate tax charges, or with the internal teams who advise on employee share incentives and calculate payroll deductions.