1. Key changes

Key changes to the approved share plan legislation have taken place in the past 12 months and a further wave of changes are due to take place from 6 April 2014. In addition to the increased plan limits, companies will now be required to self-certify that their tax-approved share plans are fully compliant with the approved legislation from 6 April 2014, and will therefore need to ensure, prior to making further awards post-6 April 2014, that scheme rules are up to date. Failing to satisfy the legislation will result in awards ceasing to qualify for the usual tax reliefs.

Set out below is an overview of some of the key provisions in the Finance Bill 2014 and the actions companies should now be taking.

2. Increase in the SAYE and SIP limits

As announced in the Autumn Statement, there will be a significant increase in the individual participation limits for the tax advantaged all-employee share plans. Please see our bulletin which provides further details.

In summary, with effect from 6 April 2014:

  • new SAYE savings contracts will be subject to a limit of £500 per month (from £250);
  • the value of "free shares" that can be awarded under a SIP will be £3,600 (from £3,000);
  • the value of SIP "partnership shares" that can be purchased will be £1,800, or £150 per month (from £1,500), but still limited to 10% of salary;
  • the value of "matching awards" that can be made under a SIP will be £3,600 (from £3,000).

The new limits will not automatically override limits currently specified in existing rules which will need to be amended to take account of the increase. However, many approved all-employee plans simply cross-refer to the limits as specified in the applicable schedule of the legislation, in which case the new limits will automatically apply from 6 April 2014.

In respect of SIPs, if the rules cross-refer to Schedule 2 of ITEPA, communication of the new limits can be made prior to 6 April 2014, provided any share awards take place on or after 6 April 2014. Where employees have signed up to a free share agreement with no specified end date (i.e. an "evergreen" agreement), the precise terms of the agreement will determine whether a new agreement is required. Companies that are looking to commence partnership share deductions from employees' salary in April 2014 will need to ensure that employees have amended their contribution rates (either by notifying that they wish to increase, or by entering into a new award agreement) in sufficient time for the instructions to be actioned prior to the April payroll cut-off date.

With respect to SAYE schemes, it may be possible to issue SAYE invitations with the new monthly savings limit prior to 6 April 2014, provided the scheme rules allow this, but no savings contracts can be entered into until after this date as the new SAYE prospectus will not be in force.

Re-launching approved share plans using the new higher limits will, if taken up, increase the costs associated with operating the plans and therefore companies should calculate the estimated additional costs in terms of cash-flow, share dilution and the additional accounting charge. There is no requirement on companies to offer employees the full increase in the limits, but employees may expect their companies to do so. An issue often overlooked is whether payroll systems are able to process payments at the higher level. As the approved plan limits have not been increased for so long many payroll systems have the limits "hard wired" and so additional time may have to be factored in for payroll systems to be updated.

3. Self-certification for SIP and SAYE

Companies with approved schemes should by now have received a notification from HMRC regarding the need to comply with the self-certification requirements.

The draft Finance Bill 2014 provides details of the new online registration and self-certification regime for tax approved share plans.

With effect from 6 April 2014, all share plans (whether or not they are tax advantaged) must be registered with HM Revenue & Customs Online Services and Company Secretaries will by registering a scheme, be confirming to HMRC that that the SIP and SAYE rules were fully compliant with the applicable legislation from the date on which the rules were first operated post-6 April 2014. The deadline for the online registration and self-certification is 6 July 2015 for plans in existence prior to 6 April 2014 (and 6 July following the tax year in which the first award is granted in respect of plans established after 6 April 2014), failing which the usual tax reliefs associated with such awards will be lost.

Previously, companies' advisers submitted share plan rules to HMRC for approval and, provided the plans were operated in accordance with the approved terms, companies had certainty that the company and their employees would benefit from favourable tax treatment upon vesting/exercise. However, this will no longer be the case as the requirement to ensure that plan rules and ancillary documents are fully compliant with the applicable legislation will become the responsibility of the applicable company.

Although it is possible to lodge draft or amended documentation with HMRC prior to 6 April 2014, HMRC will not formally approve plan rules after this date. The main benefit to the new self-certification regime is that companies will be able to establish, and start granting awards under, "approved" share plans much more quickly than was previously the case. However, companies need to be aware that there are substantial penalties for either not self-certifying by the applicable deadline or self-certifying in circumstances where the rules are not fully compliant (see below).

Although companies operating approved share plans prior to 6 April 2014 will have received formal approval from HMRC that their rules complied with the legislation at the time of approval, HMRC has refused to provide any assurance that, if it should subsequently transpire that a company's share plan, although having been approved, is not strictly in compliance with the legislation it will continue to be treated as being compliant. As a result, companies are unable to rely solely on previous approval when making this self-certification. With the raft of changes that have taken place over the years since plans were adopted, and the fact that some "special provisions" may have been were agreed with HMRC at the time a plan was approved, it is possible that many approved share plans may not be fully compliant with the applicable legislation as at 6 April 2014 and therefore it is important that the rules and ancillary documents are reviewed to ensure compliance.

With regard to amendments to approved plan rules, no HMRC approval will be required on or after 6 April 2014. Instead, if an amendment relates to a "key feature" of the plan, the company will be required to certify that the plan rules did, at the date of the amendment, comply and continue to be fully compliant.

4. Online filing of annual returns and penalties

From 2014/15 onwards, all annual share scheme returns must be completed and filed online by 6 July following the applicable tax year; returns can only be completed once the plan has been registered with HM Revenue & Customs Online Services (see above).

HMRC will be able to enquire into a plan by giving notice prior to 6 July 2016 (for plans approved prior to 6 April 2014) and within one year following 6 July after the tax year in which the first award is granted (in respect of plans established after 6 April 2014).

Failure of a plan to comply with the legislation could result in a penalty of up to £5,000 being imposed. If HMRC determines that the breach is serious, the plan will lose its tax-approved status and HMRC may impose a penalty on the company of up to 200% of the income tax and NIC reliefs that would have been collected under PAYE had the previously granted awards been unapproved for tax purposes. Employees will, however, be unaffected by any such breach and their awards will continue to benefit from the usual tax treatment associated with such awards.

5. Other Finance Bill 2014 Changes

The Finance Bill 2014 introduces a number of key changes to SAYE and SIPs legislation. HMRC has confirmed that companies will not be required to formally amend their plan rules in order for the majority of the amendments in the Finance Bill 2014 to take effect, as such amendments will automatically be deemed to apply. Some of the provisions in the Finance Bill 2014 are, however, permissive rather than mandatory, and so such provisions will only take effect to the extent that the rules are amended.

Share Incentive Plans

Dividend shares and partnership shares may, from 6 April 2014, be subject to provisions which require those shares to be sold in certain circumstances. Employees must, however, be entitled to receive at least the lower of market value and the price that the employees paid to acquire the shares (or the amount of dividends reinvested). If a company wishes to provide for such automatic sale of dividend or partnership shares, it would require an amendment to the SIP plan rules and award agreement.

Save As You Earn

Companies may amend the change of control provisions within their SAYE rules to include a new right of exercise, which would allow options to be exercised up to seven days prior to a change of control, in a tax approved manner (however, to the extent the change of control does not take place within the seven days the options will be deemed to never have been exercised). Companies may also amend their SAYE scheme rules to allow options to be exercised up to 7 days after a change of control and still receive tax relief in circumstances where the shares no longer meeting the qualifying requirements in Schedule 3 (although the normal 6 month exercise period will still remain in place).

The legislation also allows companies to amend their rules to provide for a new right of tax-relieved exercise in circumstances where an employee is subject to a non-UK company reorganisation in circumstances where TUPE does not apply.

These above amendments do not, however, take effect automatically and would require an amendment to the plan rules. As noted above, any amendment to a "key feature" of the rules would require the company to make a declaration, on their annual return, stating that a key feature has been amended and the rules were at the time of the amendments, and still are, fully compliant with the legislation.

Where SAYE options are exchanged for options over a parent company's share capital, the valuation of the shares will now need to be determined using a methodology agreed by HMRC. Where a company is subject to a variation of share capital in circumstances which allow the company to amend the terms of SAYE options in order to preserve their intrinsic value, the terms of any such amendment must be in accordance with the legislation, although no amendment needs to be made to the plan rules to incorporate this change as this amendment is subject to the deeming provisions.

6. Company Share Option Plans

The self-certification and online filing provisions will also apply to Company Share Option Plans from 6 April 2014. Many of the deeming provisions that apply to Save As You Earn schemes, set out above, also apply to Company Share Option Plans.

7. Finance Act 2013

For completeness the key changes to the all-employee approved plans made as a result of the Finance Act 2013 are set out below:

In respect of SIPs:

  • the removal of the limit on dividend reinvestment;
  • plans no longer need to include a "specified age" for retirement and any such reference will deemed to have been deleted;
  • tax-favoured removal of shares from the plan is possible on certain types of cash takeover;
  • removal of the prohibition on using restricted shares;
  • new methods to calculate the value of partnership shares were introduced; and
  • the material interest threshold was removed.

In respect of SAYE schemes:

  • a tax-favoured exercise is possible on:
    • certain types of cash takeover;
    • ceasing employment either because of a TUPE transfer or because the participant's employing company is sold out of the group;
  • removal of the prohibition on using restricted shares;
  • plans no longer need to include a "specified age" for retirement and any such reference will deemed to have been deleted;
  • the material interest threshold was removed;
  • an amendment now allows exercise following a cash scheme of arrangement; and
  • the 7-year savings contract was abolished.

As a result of all of the amendments that took effect last year, and the amendments that are due to take place automatically this year, we recommend that companies update their plan rules so that the rules reflect the current state of the legislation even where, in many cases, the legislation took effect automatically. This will avoid the confusing situation where the rules do not reflect the terms of outstanding awards. Companies may wish to consider updating their plan rules to take advantage of provisions in the Finance Bill 2014 which provide new rights of tax-relieved exercise in certain circumstances provided the plan rules have been amended to introduce such a right.

8. Opt-out for SIP

Employees can now be automatically enrolled into receiving free share awards under a SIP provided certain conditions are satisfied without the need to formally enter into (i.e. sign and return) a Free Shares Agreement. HMRC now accept that offer letters which provide automatic enrolment after a specified period of time (generally no less than 25 days) should be sufficient to meet the requirement in the SIP legislation that employees must be "bound in contract with the company". The letter must, however, set out the terms and conditions of the free share award and the ability of an employee to opt out.

Where a company offers free shares pursuant to a free share agreement, companies are only required to give employees 14 days in which to return their signed free share agreement, which may therefore still be the route to adopt if this is limited.

Further, whilst a signed free share agreement will be valid in respect of future free share awards, so that the employees do not have to enter into further documentation in the future, where a company operates the "opt out" procedure, any subsequent free share awards would still need to provide employees with the same ability to "opt-out".

9. What needs to be done

If you are contemplating introducing a new all-employee share plan, want to change the terms on which you currently offer these arrangements, or are simply looking to re-launch an existing plan, you will need to consider:

  • reviewing the plan rules to ensure they are fully compliant with the applicable legislation;
  • considering the costs and implications of implementing the new share plan limits in full;
  • updating the rules and award agreements (if required) to bring them in line with the applicable legislation so that the rules accurately reflect the terms of outstanding awards;
  • compliance with the new self-certification regime;
  • registering the share plans and the new online filing obligations.