Following various announcements over the past year, the Government yesterday published a significant amount of draft legislation on employee share schemes. There are specific provisions on the EMI scheme and also on approved schemes generally.
Enterprise Management Incentives (EMI)
Entrepreneurs’ relief reduces the capital gains tax rate to 10 per cent on the first £10 million of gains. Normally there is a 5% shareholding requirement. However, the Government earlier this year proposed to extend the relief to all shares acquired on the exercise of EMI options, without any requirement to satisfy the 5% shareholding. Click here to see our earlier law-now. There was still a requirement though to have held the shares for a 12 month period prior to sale in order for entrepreneurs’ relief to apply.
After much industry lobbying, the Government has accepted that the 12 month holding period will run from the date of the grant of the EMI option. Accordingly, provided an optionholder who sell his shares after 6 April 2013 held his EMI option and/or shares for 12 months in total, any capital gain should be taxed at 10 per cent (although many gains are sheltered by the annual exemption anyway).
Another change is that the EMI legislation gives a grace period after a disqualifying event occurs before full beneficial tax treatment is lost. The draft legislation extends from 40 to 90 days the time available to exercise EMI options with the benefit of full beneficial tax treatment after a 'disqualifying event' occurs, though share scheme rules will also need to be changed.
Simplification of approved schemes
Following the recommendations of the Office of Tax Simplification (OTS) published in March 2012, click here to see our earlier law-now, the Government has published draft provisions aimed at simplifying employee share scheme taxation.
Currently, SAYE, SIP and CSOP have different requirements for the retirement age which applies to each scheme. The Government is proposing to harmonise retirement rules across SAYE, SIP and CSOP to allow businesses offering these schemes to align the definition of 'retirement' with a company’s own retirement policy.
With effect from a date likely to be in summer 2013, all “retirements” will be able to benefit from the early vesting/exercise opportunities under these plans and favourable tax treatment. This change will take place automatically. Companies will not have to change their rules to make this change (nor will they in the case of SIP and SAYE be able to prevent it taking effect). It is therefore likely that many more “retirements” could be covered under the rules although the effect of this will vary from company to company.
Takeovers and Sales of Businesses
The rules on takeovers and on leavers when there is a sale of a business vary across the schemes. The draft legislation lays down simpler and more consistent rules. The salient points are:
- There will be no income tax or NIC liability where shares are withdrawn from a SIP on most cash takeovers of companies. It seems odd, however, that this relief has been limited to takeovers by way of general offer only and not extended to include takeovers by way of schemes of arrangement. A further problem is that the relief only seems available if the takeover is not contemplated when the award of shares is made. Leaving aside the point of when exactly a takeover is contemplated for the purposes of the relief being withdrawn, the wording of the legislation means that any monthly SIP partnership share purchases would be fully taxable even though arrangements for those monthly share purchases have been in place long before a takeover was on the horizon.
- Again, there will be no income tax liability where an SAYE option is exercised and no income tax or NIC liability where a CSOP option is exercised before the third anniversary of grant on most takeovers. Similarly, the unavailability of this relief in cases of takeover by way of scheme of arrangement would be unhelpful.
- Schemes rules must allow for exercise of SAYE options on TUPE transfers (though in CSOP it will still be optional). In practice, most scheme rules provide for exercise anyway and so this will be of limited impact.
Material Interest Rules
The draft legislation modifies the present rules on 'material interest' which prevent employees from participating in SIP, SAYE and CSOP schemes if, broadly, they own more than 25 per cent of the ordinary share capital of a company. These are also of limited impact and only really have any effect in a private company, but are to be abolished for SIPs and SAYE schemes and raised to 30 per cent in the case of CSOPs.
Again, this change is something that mainly affects private companies, but has the ability to make all approved schemes more attractive to these employers. Currently, companies wishing to operate CSOP, SAYE and SIP arrangements can only allow restrictions on schemes shares in limited circumstances. The draft legislation removes many of the prohibitions on restrictions attaching to scheme shares and further accepts the OTS recommendation that such shares are to be valued as if they were not restricted. However, there will be the added obligation of providing employees with details of any restrictions applying to such shares at the time they are awarded or the option is granted – but this seems a small price to pay.
7 year SAYE options
No further 7 year options are likely to be able to be granted after 2013.
Where a company allows employees to purchase SIP partnership shares by deduction from salary over a period of time not exceeding 12 months, known as the ‘accumulation period’, there is now greater flexibility as the draft legislation provides additional ways in which prices for shares to be acquired during an accumulation period can be specified. Provided they are specified upfront in the partnership agreement, they can be: the lower of the price at the beginning and end of the savings period, the beginning of the period or the date on which the shares are acquired.
Further, the current annual limit of £1,500 on reinvestment of cash dividends in dividend shares is also being removed so that there will be no upper limit going forward.
All of these changes are welcome and are a source of good news for employee share schemes.
EMI options in particular are now a much bigger carrot for companies and employees alike who qualify for the EMI scheme. The changes simplifying the employees shares schemes for the SIP, SAYE and CSOP schemes are also a positive move and now give companies greater flexibility in implementing such incentive schemes without being burdened by undue complexities and unnecessary administrative requirements.
There is nothing in the legislative proposals about self-certifying the approval of schemes which has been a big topic of discussion over the last year and has the potential to remove much of the administration and a time delay in liaising with HMRC, albeit at some risk to companies of not having the certainty of favourable tax treatment. However, that is because the legislation for this is not being put forward until the 2014 Finance Bill.
The consultation on this draft legislation is open until 6 February 2013 and further announcement will be made in the Spring 2013 Budget due on 20 March 2013 and in the Finance Bill which follows and which implements the Budget.
To access the personal tax provisions of the draft Finance Bill 2013, please click here.