Following various announcements over the last few years, the Government yesterday finally published draft legislation on changes which will be introduced for HMRC-approved employee share plans in 2014.
Changes to tax-advantaged share plans and the introduction of self-certification
Self-certification rather than approval
The significant change being introduced in 2014 is the abolition of the approvals process for Share Incentive Plans (“SIPs”), Sharesave plans (“SAYE”) and Company Share Option Plans (“CSOPs”). This change is being introduced following recommendations by the Office of Tax Simplification (“OTS”) in 2012 and is a change which brings risks and opportunities alike. The key features of the new rules will be:
- Companies operating existing SIPs, SAYEs or CSOPs will need to register those plans with HMRC by 6 July 2015, even though the plans have previously been approved by HMRC. They must do this through HMRC’s PAYE Online for employers’ service. When registering, companies will need to confirm that the plans are, and have been, operated in accordance with the relevant legislation governing the plan.
- HMRC will no longer approve plans or changes to plans from 6 April 2014. Instead, companies will need to notify HMRC, within a specified time period, that they have established a new plan and that it meets the requirements of the relevant tax legislation. They will not need to submit a copy of the plan rules, however. Companies will also need to notify HMRC of any amendments to their plans as part of their annual return (see online filing below) and confirm that the plan continues to be operated in accordance with the relevant legislation governing the plan. The onus will therefore be on companies rather than HMRC to ensure that their plans are compliant, but on the other hand setting up an approved plan or changing plan rules will be simpler and considerably quicker, e.g. on IPOs, going forward.
- HMRC will have the power to open an enquiry into the operation of any plan. If HMRC determines that the plan does not meet the statutory requirements then:
if the infringement is not deemed serious by HMRC, the company will face a penalty of up to £5,000 and be given 90 days to amend the plan, following which, if the breach is not rectified, the infringement will be treated as a serious breach; or
if the infringement is deemed serious, the plan will cease to benefit from the tax advantages associated with the relevant plan. Awards already granted will not be affected (and so participants will still benefit from the intended tax-advantaged treatment) but the company will face a penalty of up to two times the estimated total income tax and NICs which would otherwise have been paid or payable if the plan had never been treated as tax-advantaged.
What is a “serious” infringement and HMRC’s published views on penalties will therefore be key. HMRC has spent much of the past year working on revised manuals on how plans can be operated but public drafts for comment are still awaited. Until then, the scope of penalties will cause companies and their advisers significant concern. This is the risk which comes with self-certification. It seems unlikely that a company could successfully seek to be indemnified by its employees for any penalty suffered if a plan did not comply with legislation, for example.
Companies clearly still have plenty of time to prepare for this, but in due course will need to think about who will take responsibility for this project, online filing, and the ongoing risks within their organisation.
Other changes to SAYE and CSOP
Some other changes have been announced for SAYE and CSOP plans. The most significant are:
- CSOPs – the revised legislation will require the option holder to be notified of certain option terms, including terms which confer a discretion:
on the participant (for example, whether to exercise the option); or
on any other person – such as the remuneration committee – and it must be fair and reasonable for the discretion to be conferred on that person and it must be exercised in a way that is fair and reasonable.
The exercise of discretion by the company (for example in determining the extent to which performance conditions have been satisfied or options can be exercised by leavers) has long been an area of contention, with HMRC reluctant to allow any exercise of discretion by the company. At first sight this appears to be a softening of HMRC’s views, although further guidance as to the approach HMRC intends to take is awaited.
- SAYE and CSOPs – one issue that has regularly arisen for these plans at the time of a takeover or sale is the independent company requirement at the time the options are exercised. This can be a problem where, in the case of an exercise following the takeover or sale, the company is then under the control of an unlisted company. In other cases, many companies prefer options to be exercised immediately prior to the takeover or sale so that the buyer can acquire all of the shares in the company on completion of the transaction. Workarounds do exist for both these issues but they are not entirely satisfactory. It is therefore proposed that options can additionally be exercised:
up to 7 days before completion of the takeover or sale, with exercise conditional on the event actually occurring; or
up to 7 days following completion of the takeover or sale, if the shares cease to meet the requirements of the legislation as a result of the event.
In combination with the corporation tax deduction extension to 90 days after a takeover or sale (see below), this should now make optionholder participation on sales and takeovers simpler. Companies may, however, need to change their plan rules to take advantage of this relaxation.
SIP free share participation
HMRC has separately announced that companies can operate SIP free share awards on an "opt-out" rather than an "opt-in" basis. Click here for the HMRC announcement on this.
While some rules would need to be changed to permit this, for many clients this change in practice offers significant potential to increase participation and reduce administrative costs.
SIP and SAYE limits
As stated in our recent Law-Now (click here), the Chancellor announced in his Autumn Statement that the annual limits for SIPs and SAYE would be increased with effect from 6 April 2014. Draft legislation has now been published in relation to those increases and this confirms that for SIPs, the maximum ratio of matching shares to partnership shares that can be awarded is to remain at 2:1, so that, as the partnership shares limit is being increased to £1,800 per tax year, the limit for matching shares will increase to £3,600 per tax year.
Enterprise Management Incentives or EMI
As part of the move towards online filing (see below), the process for notifying HMRC of the grant of an EMI option will change. Currently, the grant of an EMI option must be notified in writing to HMRC within 92 days of the grant of the option using a prescribed form signed by both the employee and employer.
From 6 April 2014 companies will be required to notify the grant of an EMI option electronically. The current 92 day deadline will continue to apply. However, the employee will no longer be involved in the notification process. Instead, the employee will need to separately declare in writing to their employer that they meet the working time requirements to be eligible to be granted an EMI option. The employer will then declare, as part of the online notification process, that they hold a signed declaration from the employee (which HMRC can ask to inspect). The employee will also need to be given a copy of the declaration within 7 days of having signed it. Companies will therefore need to change their grant procedures.
The other practical point to note is that HMRC will no longer send a letter acknowledging the receipt of the notification and listing all the EMI options that have previously been notified to it. Companies and their advisers have in the past found this acknowledgement to be a useful summary of the options granted and notified to HMRC, particularly as part of the due diligence process for a proposed takeover. It will, therefore, be important for companies to print out and retain a copy of the online acknowledgement which will be given at the time the EMI options are notified to HMRC.
Online registration and filing of annual returns for all employee share plans
The other significant change being introduced in 2014 is the move to online filing of annual returns for all employee share plans, including unapproved plans or other share awards. With effect from the annual return for 2014/15 – which must be submitted by 6 July 2015 – all companies will need to submit their annual returns online through HMRC’s PAYE Online for employers’ service.
As with tax-advantaged plans, companies operating existing and new unapproved arrangements will need to register these schemes with HMRC so that they can complete their annual return online. HMRC will no longer remind companies of the need to submit an annual return and there will be automatic penalties for late filing of annual returns.
Further information will be available in 2014, although HMRC has already published some practical information in its Employer Bulletin – Issue 45 available here.
HMRC is proceeding with a number of the recommendations made earlier this year by the OTS on unapproved share arrangements. For further information about the OTS recommendations, please see our earlier Law Nows (click here for our January 2013 update and click here for our May 2013 update). The main changes include:
- Corporation tax deduction – at present a corporation tax deduction is not available when an employee acquires shares in a company which is under the control of an unlisted company. This can cause problems where shares are acquired following a takeover or sale of a company. From 6 April 2014, there will be a grace period of 90 days following the takeover or sale during which awards can vest and options can be exercised without losing the benefit of the corporation tax deduction. This is in parallel with a change to approved plans mentioned above, albeit the HMRC are only giving a 7 day window to take advantage of that change.
Simplifying the taxation of internationally mobile employees for awards and options granted on or after 1 September 2014.
- As part of the Government’s policy of promoting greater employee share ownership and in particular encouraging employee-controlled companies, the Government has announced new reliefs for companies controlled by employee trusts. The new reliefs apply where a company is controlled by an employee trust which meets certain criteria and so will rarely be relevant.
The draft legislation is subject to consultation which closes on 4 February 2014. Revised legislation will then be published as part of the Finance Bill 2014 shortly after the 2014 Budget, although it will in practice take effect immediately from 6 April 2014 for approved plans.
HMRC is expected to publish further guidance in the New Year on the changes to tax-advantaged plans and in particular the move to self-certification and online filing.
Click here for HMRC's webpage with relevant announcements.