We take a look at the latest HMRC figures for approved share plans. In addition to announcing the figures for 2006-07, HMRC revised previous figures for the cost of the tax relief (dramatically downwards) due to more sophisticated data collection techniques.

The cost of tax relief for approved employee share plans is a sensitive issue in these difficult times when the Government finds itself somewhat strapped for cash. So it is perhaps welcome that the estimated costs of the reliefs have been reduced.

In 2006-07 the estimated costs of the tax reliefs of income tax and NIC foregone were:

SAYE: £520 million

SIPs: £300 million

CSOPs £190 million

EMI: £200 million

For 2005-06 the costs were revised down by:

CSOPs: £15 million to £190 million

SIPs: £40 million to £280 million

EMI: £30 million to £140 million

For 2004-05 the costs were revised down by:

SIPs: £60 million to £290 million

EMI: £20 million to £90 million

HMRC say the revisions are necessary due to improvements in their data validation and estimation methods. We say now the tax breaks appear to cost less this is all the more reason to retain them!

The number of operational Company Share Option Plans increased slightly in 2006-07 by just 10 to 2,450. We expect there to be more live plans this tax year, however, thanks to the new 250-employee limit on EMI plans (reported in the last edition of e-news dealing with the budget changes).

For the second tax year running, the number of Share Incentive Plans (“SIPs”) has outstripped the number of Save As You Earn (“SAYE”) plans (by 940 to 780). One reason why companies may be more keen to introduce SIPs is that the charges to the P&L account for SIPs tend to be steadier and more predictable than those for SAYE options.

Although the number of SAYE plans is lower than SIPs and the limits are lower than SIPS (maximum participation £3,000 per year compared to up to £7,500 for SIPs) the take-up of SAYE amongst employees is still higher than SIPs (570,000 SAYE participants versus 530,000 SIP participants). This reflects the fact that SAYE options have no downside risk – if the share price falls participants simply don’t exercise their options – whereas participants in SIPs who buy partnership shares are taking a real risk with their investment.

Enterprise Management Incentives remain the most popular type of approved share plan, with 8,020 such plans in operation at 5 April 2007. The rate of increase in new EMI plans has slowed slightly but remains strong at just under 20%. We expect this to slow a little as a result of the new 250-employee limit, but with the individual limit on shares under qualifying EMI options having just risen in tax year 08-09 from £100,000 to £120,000, the tax breaks on these plans will ensure its continued popularity. For more information see: http://www.hmrc.gov.uk/stats/emp_share_schemes/menu.htm

Please remember that approved share option plans are only eligible for tax relief if they are operated in accordance with the relevant legislation.