HM Revenue & Customs ("HMRC") have recently updated their manuals and provided their analysis of how Restricted Stock Units ("RSUs") should be taxed in the UK. Unless otherwise stated, this summary assumes the participant is a UK resident and ordinary resident at all relevant times.
HMRC’s default understanding of an RSU award is that this is normally an agreement to issue or transfer stock or shares at the time when the award vests; the award will vest when all the conditions laid down to be satisfied before the stock or shares may be issued have been met, e.g. time, employment or performance conditions.
HMRC take the view that the employee will generally be subject to income tax and possibly National Insurance contributions ("NIcs") on the value of the securities when the employee acquires the underlying shares or becomes entitled to acquire the underlying shares (if earlier). This may be immediately upon vesting and not necessarily when the shares are formally transferred. The tax charge is under the normal income tax earnings provisions rather than the employment-related securities provisions—this could have an effect on the taxation of internationally mobile employees (see below).
On the other hand, if the RSUs are structured so that the employee has to exercise the award in order to acquire the shares, the tax charge will arise on exercise. Essentially, the RSU is then treated as a stock option for UK income tax and NIcs purposes, and the tax charge arises under the employment-related securities provisions.
If the employee is entitled to dividend equivalents under the relevant plan, the employee will be subject to income tax and NIcs on the payments as normal employment income in the year in which the employee receives it, or earlier if he becomes otherwise entitled to such income.
If the RSU award is a stock appreciation right ("SAR") rather than an agreement to issue or transfer stock or shares, i.e. it provides a monetary value equivalent to the increase in value of a specified number of shares over a specified period of time, then the employee is generally going to be subject to income tax and NIcs when the right to benefit under the SAR is enjoyed. If the SAR is settled in cash, the tax point will normally be on receipt or earlier if the cash is otherwise made available to the employee. If the SAR is settled by shares, the tax point will normally be on acquisition of the beneficial interest in the shares—normally on vesting.
If RSUs are awarded to non-UK residents (e.g. internationally mobile employees), then the tax treatment may be different from what was expected and clients should speak to one of the Reed Smith team. Many businesses have historically assumed that RSUs will simply be taxed like stock options. Depending on the structure of the relevant plan and the circumstances of the awards, this assumption may be incorrect.
Broadly, where an employee is awarded a stock option, the tax position will depend on the residency of the employee at the date of grant. So, ignoring income remitted to the UK, if the employee is not a UK resident or ordinarily resident at the date of grant, a charge to income tax under the employment-related securities provisions may not arise on exercise, although there may be a charge on sale of the underlying shares. Again, ignoring the remittance basis, where the employee is provided with general income (e.g. on receipt of a cash bonus) under the standard income tax earnings provisions, the tax position will depend on the period that the income was earned. In that case, a non-UK resident employee may be subject to UK income tax for the relevant income on vesting to the extent that it relates to duties performed in the UK regardless of where he was resident at the date of grant.