• HMRC is considering amending rules on the taxation of Restricted Stock Units
  • Submission of outstanding 2014/15 annual share scheme returns where error made in registering scheme
  • Re-submission of 2014/15 annual share scheme returns required in some cases 
  • HMRC publishes the results of research into the use of growth share plans 
  • Consultation on the taxation of termination payments closes – 16 October 2015 
  • Chancellor's Autumn Statement – 25 November 2015


  • The Investment Association announces creation of a working group to bring forward proposals for a radical simplification of executive pay


  • European Banking Authority issues report on bench marking remuneration practices and data on high earners

In full:


Taxation of Restricted Stock Units

Most employment-related securities options have ‘money’s worth’ when awarded and are taxable under Chapter 5 of Part 7 ITEPA 2003. However, where employment-related securities options, including many examples of Restricted Stock Units (RSUs), do not have ‘money’s worth’ at the time of the award, the view of HM Revenue and Customs (HMRC) is that the receipt of the shares is likely to give rise to a general earnings charge (under section 62 Income Tax (Earning & Pensions) Act 2003) as money’s worth at that time, in priority to a Chapter 5 charge.

As a reminder, under a RSU shares are delivered automatically once the employee satisfies a vesting schedule. The vesting schedule will set out when, and to what extent, the RSUs will vest.  Once the vesting requirements have been satisfied, the shares are delivered to the employee without the need for any action on his/her part. This is sometimes also referred to as a "conditional share award".

The difference between the income tax treatment of an employment-related securities option tax under Chapter 5 and one taxed under the general earnings charge has been eliminated by Schedule 9 to the Finance Act 2014. However, the application of National Insurance contributions rules can vary depending on whether shares from a securities option are treated as general earnings or Chapter 5 income. This has lead to continuing uncertainty in this area which is not resolved by HMRC’s current policy or handling of individual cases.

As a result, HMRC is considering whether a further amendment to the rules to clarify the tax treatment would be appropriate and will be holding a meeting with interested stakeholders during October. 

We will update you as soon as HMRC publishes the details of the outcome of that meeting.

Submission of outstanding share schemes annual returns

HMRC has stated that it is concerned by the number of cases in which a company has registered a share scheme for the 2014/15 tax year but has not submitted an annual return (which was due by 7 July 2015).

Although in some cases this could be due to an oversight in filing an annual return, HMRC thinks that there are likely to be instances where the company made an error in registering a scheme - for example, by duplicating registrations.

Where this is the case, the system will still require an annual return to be submitted on the ERS online service. HMRC has urged companies with share schemes to check that they have submitted an annual return for each scheme they have registered - including schemes they might have set up in error.

Companies can easily check whether a return has been submitted as follows:

  • Log into the HMRC online service and access the ERS online service
  • In this section select ‘View Schemes and Arrangements’ which will display a table of registered schemes 
  • Select the scheme to be checked and on the following page it will show whether the return for 2014 to 2015 has been submitted

To close a scheme registered in error for 2014 to 2015, once again log into the HMRC online service and access the ERS online service and select ‘View Schemes and Arrangements’ to display the table of registered schemes. Select the scheme to be closed and on the next screen select ‘Enter date of final event’. HMRC has recommended that in these cases that you enter 6 April 2014.

HMRC has stated that there is no need for customers to call to check whether their return has been submitted.

Re-submission of 2014/15 annual returns

Due to a technical problem at HMRC, data from some of 2014/15 annual share schemes returns (which were correctly filed prior to the submission deadline) has not been correctly captured.  HMRC will be sending out letters to the companies affected asking them to re-file their share scheme returns for the 2014/15 tax year.

If your return is affected you will receive a letter from HMRC addressed to the company secretary. It will identify the scheme name and the unique scheme reference number of the scheme for which the return needs to be re-filed. You will receive a separate letter for each share scheme return that needs to be submitted.

If you do not receive a letter from HMRC, your return is not affected and you do not need to take any action.

HMRC publishes research report on the use of growth shares

HMRC has published a research report on the use of growth shares and other leveraged arrangements such as ratchets, joint share ownership plans and debt-based gearing used by companies to incentivise their employees.

The qualitative research comprised hour-long in-depth telephone interviews with advisers (accountants and lawyers), employee benefit consultants and employers and sought to identify the reasons why companies set up growth shares and the perceived benefits and drawbacks.

In summary, the research found:

  • Firms interested in growth share schemes can often be those with ambitious growth plans and clear exit strategies in the short to medium term (3-10 years), as well as private equity firms and management buy-outs.
  • While not sector-specific, advisers taking part in the research felt that growth share were of most value and appropriate to the hi-tech, communications and media sectors.
  • The appeal of growth shares for employees lies in the opportunity to see their income increase in relation to the effort, skill and time they put into the business, plus favourable tax treatment. The drawback is that income tax and National Insurance Contributions (NICs) are paid up front.
  • The benefits of growth shares for employers are: they help company owners to recruit, retain and incentivise employees and encourage attitudes and behaviours that will bring about high levels of growth; until and unless such growth is achieved equity in the business remains intact; and there can be a tax advantage for employers in some cases as there are no NIC costs to the employer.  The key drawback is there is usually no deduction for corporation tax purposes.
  • Advisers said that growth shares are complex and can be fairly costly to implement because they are always bespoke, require changes to the Articles of Association and the shares need complex valuation at issue. They tend to require a great deal of explanation to employers and employees alike. These complexities, it is suggested, are why in practice only a small proportion of enquiries about growth shares result in implementation.
  • Advisers were most familiar with ratchet growth shares whereby the value of an employees’ shareholding increases as certain growth targets are met. By delivering the benefits over the course of the agreed period of growth, ratchets still provide a financial benefit even if the ultimate goal is not reached.

It should be noted that the results of the research do not necessarily represent the views of HMRC or Treasury Ministers.  However, you may recall that the Chancellor announced in the 2010 Budget that the Government would consult on the use of geared growth plans but that this consultation never materialised.  Whilst it is not completely clear what prompted HMRC to commission the research at this stage, it seems likely to be linked to the 2010 announcement.

We will update you on any development arising in this area following publication of the research report.

A copy of the research report can be found here.

Consultation on the taxation of termination payments closes – 16 October 2015

We outlined the main proposals set out in the Government's consultation on reforming the income tax and national insurance exemptions for termination payments in our July Update.  The proposals, if implemented in their current form, could result in the financial cost to employers of terminating employment increasing significantly.

The consultation closes on 16 October 2015. A copy of the consultation paper can be found here.

Chancellor's Autumn Statement – 25 November 2015

The Chancellor will issue his Autumn Statement on Wednesday 25 November 2015.  As in previous years, we will be publish an Employee Incentives Update immediately following the Autumn Statement to let you know how the announcements made will effect your remuneration strategy.


The Investment Association announces creation of a working group to bring forward proposals for a radical simplification of executive pay.

The Investment Association (IA) has announced the creation of a working group to bring forward proposals for a radical simplification of executive pay.

IA states that concern has been mounting in the investment industry, on company boards and with executives themselves that pay structures are becoming too complex, leading to a lack of clear incentives for company management to act in the best long term interests of the companies themselves and their investors.

The Investment Association's new Executive Remuneration Working Group will bring together senior representatives from the investment community and the corporate world to address the issue.

Daniel Godfrey, Chief Executive of the Investment Association said:

"Complex pay structures can make it difficult for investors and the wider community to judge whether high rewards are being earned for exceptional management performance or mediocre performance flattered by favourable external factors. This is an increasing source of reputational damage to business and of concern to investment managers.

"Simplification will help our members in their engagement with companies with the objective of supporting strategies and incentives that lead to long term, sustainable wealth creation for the benefit of our clients, the companies themselves and the economy."

The Working Group is expected to bring forward proposals in the spring of 2016.

Any interested parties who wish to contribute to the project can contact the secretariat, which is headed by Andrew Ninian, Director of Corporate Governance and Engagement,
The Investment Association is the trade body that represents UK investment managers, whose members collectively manage over £5.5 trillion on behalf of clients.


European Banking Authority issues report on bench marking remuneration practices and data on high earners

The European Banking Authority (EBA) is required to benchmark remuneration trends at Union level and to publish aggregated data on employees earning EUR 1 million or more per financial year.  The data for 2013 was published during September 2105. 
Background: In 2012, the EBA issued its ‘Guidelines on the remuneration benchmarking exercise’ and ‘Guidelines on the data collection exercise regarding high earners’ to facilitate the collection of data; these guidelines were updated in July 2014.  The national competent authorities are responsible for collecting the relevant information from credit institutions and investment firms and for submitting it to the EBA.

Analysis of 2013 data: The main results of the EBA's analysis are as follows:

  • The percentage of high earners who are identified staff has slightly increased over time. Nevertheless, the proportion of staff identified as having a material impact on the institution’s risk profile differs significantly between similar institutions; it can be expected that this will change in the future following the adoption in 2014 of the Regulatory Technical Standards (RTS) on identified staff.
  • The number of high earners decreased from 3,530 in 2012 to 3,178 in 2013. This reflects a number of factors, including movements in the exchange rate between the euro and the pound sterling.
  • Remuneration practices within institutions were not sufficiently harmonised, in particular, the application of deferral and pay out in instruments differs significantly between Member States and between institutions.
  • Overall it can be observed that the ratio of variable to fixed remuneration paid to identified staff was further reduced in 2013 to 104%. This will further change given the entry into force of the CRD IV in 2014 and the introduction of the limitation of variable remuneration to 100% of fixed remuneration (200% if approved by the shareholders), the so-called bonus cap.

The EBA will publish annual updates of this report.  The report looking at 2014 figures is scheduled for the end of2015. The forthcoming report will show the full impact on institutions’ remuneration policies of the regulatory technical standards on identified staff and the application of the 100% ratio of variable to fixed remuneration (200% if approved by the shareholders) for identified staff, which applies to remuneration awarded for the performance year 2014 and onwards.

A copy of the EBA's report can be found here