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Changes to approved employee share schemes in the Autumn Statement 2013

The Chancellor has announced that the limits on the
market value of shares which can be awarded to each qualifying employee
under an HMRC-approved Share Incentive Plan will increase from £3,000 to £3,600 per tax year for free shares, and
from £1,500 to £1,800 per tax year for partnership shares (with a corresponding
increase, from £3,000 to £3,600 in the maximum value of matching shares
which can be awarded to those taking up partnership shares).

The maximum monthly amount that an employee can
contribute each month to a Save As You Earn contract linked to an SAYE
share option will increase from £250 to £500.

All these changes will take effect from 6 April 2014.
This is the first ever increase in the SIP limits, and the first change
in SAYE limits since 1st September 1991!

These changes should be seen in the broader context of
moves to encourage the use of these plans to support wider share
ownership. When combined with the simplification of the rules relating
to the plans, the removal of the need for prior HMRC approval and
allowing existing owners with a “material interest” in the companies to
participate, the scope for the use of these plans to encourage wider
share ownership tax-effectively is increasing significantly and the
total benefits available can be substantial.

With the maximum use of reliefs under each of the
schemes but without the benefit of any share price growth, a basic rate
taxpaying employee could receive shares over a three year period with a
total value of £49,500 in return for an effective investment of £21,672
after tax relief, delivering a tax free profit of £27,828. Those
benefits increase further if the share price increases during that time.

SIPs and SAYE schemes should be reconsidered by all
independent companies which do not currently operate them, particularly private companies which may not have
been able to use such schemes under the old legislation (because their shares were subject to “restrictions”) and where the
scope for share price growth may be more substantial than with a well
established listed company.

Other changes to SIPs, SAYE schemes and CSOPs

The principal change will be the withdrawal of the system of securing
prior HMRC approval of such a scheme, and the introduction, from 6
April 2014, of a requirement to self-certify and notify HMRC of the
existence of a plan intended to qualify as a tax-favoured SIP, SAYE scheme or
CSOP. Annual returns will need to be made electronically.

SHARE INCENTIVE PLANS (“SIPs”)

Substantive changes to the requirements for a SIP

Partnership and dividend shares must not be subject to any provision for “forfeiture”. This is defined as a provision to the effect that “a participant ceases to be beneficially entitled to shares on the occurrence of certain events”. In practice, HMRC has always allowed companies to impose a requirement that an employee who leaves must offer for sale partnership and dividend shares acquired under a SIP. To regularise the position, from 6 April 2014, partnership and dividend shares may be subject to provisions (typically in the articles) requiring the shares to be offered for sale on the employee leaving, but only if the price at which they are required to be offered for sale is at least equal to the amount of partnership share money, or dividend, applied in acquiring the shares or, if less, their market value at the time of sale. This flexibility allowing companies to impose a requirement to (in effect) sell shares on leaving on a ‘no gain no loss’ basis though it really only restores the position which has always existed in practice and imposes a safeguard for employees as to the price at which they may be required to sell. This will be welcomed by many smaller companies. However, in many cases it will require an amendment to be made to the articles (and/or shareholders’ agreement) to ensure compliance with the new rule.

The ‘purpose test’ is to be amended to provide that a
SIP must not provide benefits to employees otherwise than in accordance
with the statutory rules and must not (for example) provide cash to
employees as an alternative to shares. Further, the trust deed must only
contain terms necessary for (and not, as now, ‘or reasonably incidental
to’) the purpose of securing compliance with the statutory
requirements. For existing SIPs, this change will have effect only from
the first occasion on which any alteration is made to the plan or the
trust deed on or after 6 April 2014.

Companies with existing SIPs will need to be alert to
the need to make amendments to the rules and trust deed to reflect
these changes; however, companies which alter the plan or trust deed on
or after 6 April 2014 in order to take advantage of the new rules
regarding the sale of partnership shares on leaving should be aware that
this will also bring them within the scope of the new, stricter ‘purpose
test’.

SAYE SHARE OPTION SCHEMES

Substantive changes to the requirements for an SAYE share option scheme

The ‘purpose test’ is to be amended to provide that
an SAYE scheme must not provide benefits to employees otherwise than in
accordance with the statutory rules and must not (for example) provide
cash to employees as an alternative to share options or shares which
might otherwise be acquired by the exercise of options. For existing
SAYE schemes, this change will have effect only from the first occasion
on which any alteration is made to the scheme on or after 6 April 2014.
Companies with existing SAYE schemes will need to be alert to the need
to make amendments to the rules of the SAYE scheme to reflect these
changes.

From 6 April 2014, the scheme rule which allows for the exercise price and number of option shares to be altered to take account of a variation of share capital must, if it does not already, secure that (i) the total market value of the shares under option immediately thereafter is the same as it was immediately before the variation and (ii) that the total exercise price payable remains the same. This spells out what have always been HMRC’s conditions for approving alterations following a variation of capital. From 6 April 2014 such approval will no longer be required. Companies will need to have their SAYE option plan rules reviewed to ensure compliance with this change. Further, a minor amendment is made to the permissive rules relating to exercise of an option after an employee leaves the group in consequence of a transfer of the business which is a non-TUPE transfer. This is to correct a drafting error in Finance Act 2013. Again, scheme rules may need to be amended to reflect this.

Exercise upon a change of control (takeover)

From 6 April 2014, the scheme may permit options to
be exercised within 7days before (but conditional upon), or 7 days, after a change of control, notwithstanding
that the shares acquired no longer meet the statutory requirements (e.g.
because the company has been acquired by an unlisted company). Exercise
pursuant to such a provision will then qualify for tax relief if the
employee receives only cash in exchange for the shares acquired. No
relief is given if the option is exercised following a voluntary
winding-up of the company. Further, the rules may be amended to provide
that an option may be exercised within 7 days before the “relevant
date” conditional upon the anticipated change of control going ahead.
The plan may also provide that options may be exercised within 6 months
after the “relevant date”. In the case of a “non-UK company
reorganisation or arrangement” affecting all the ordinary share capital
of the company or all the shares of the same class as those under option
or all the shares (or all the shares of that class) held by a class of
shareholders identified otherwise than by reference to their office or
employment or participation in the plan, the “relevant date” is the date
when the arrangement becomes binding. Alternatively, an exchange of
options may be offered in the event of a change of control as a result
of such a non-UK company reorganisation arrangement. For these purposes, a
non-UK company reorganisation arrangement is one made under the law of
an overseas territory which gives effect to a reorganisation of the
company’s share capital by the consolidation and/or division of shares
and which is approved by a resolution under which those who vote
represent more than 50% of the total voting rights.

In relation to option exchanges, the market value of shares is to be determined using a methodology agreed by HMRC.

COMPANY SHARE OPTION PLANS

Substantive changes to the requirements for a Company Share Option Plan (“CSOP”)

The ‘purpose test’ is to be amended to provide that a CSOP must be to provide benefits for employees and directors in the form of share options, and must not provide benefits to employees otherwise than in accordance with the statutory rules and must not (for example) provide cash to employees as an alternative to share options or shares which might otherwise be acquired by the exercise of options. For existing CSOPs, this change will have effect only from the first occasion on which any provision of the scheme is altered on or after 6 April 2014. Companies with an existing CSOP will need to be alert to the need to make amendments to the rules of the CSOP to reflect these changes.

As from 6 April 2014, a CSOP option must be capable of being exercised (presumably it is intended to mean must be exercisable “if at all”) at some time between the third and tenth anniversaries of the date of grant.

When a CSOP option is granted, the optionholder must be notified of (a) the exercise price; (b) the number and description of the option shares; (c) the restrictions to which those shares may be subject; (d) the times at which the option may be exercised (in whole or in part) and (e) the circumstances in which it will lapse or be cancelled (in whole or in part), including any conditions to which exercise is subject (in whole or in part). These terms may be varied after grant, but only as provided for in the adjustments clause of the plan or, in the case of the number or description of shares, only as provided for in the plan or by way of a mechanism notified to the participant at grant and, in any other case, only by way of a mechanism notified at the time of grant. Such mechanisms for adjustment must be based on fair and objective criteria. Such terms or mechanisms may confer a discretion on the optionholder and, but only if it is reasonable, on any other person and in the case of a discretion conferred on any other person, must be exercised in a way that is fair and reasonable.

From 6 April 2014, the plan rule which allows for the exercise price and number of option shares to be altered to take account of a variation of share capital must, if it does not already, secure that (i) the total market value of the shares under option immediately thereafter is the same as it was immediately before the variation and (ii) that the total exercise price payable remains the same. This spells out what have always been HMRC’s conditions for approving alterations following a variation of capital. From 6 April 2014 such approval will no longer be required. Companies will need to have their CSOP rules reviewed to ensure compliance with this change.

Exercise upon a change of control (takeover)

From 6 April 2014, the scheme may permit options to
be exercised early within 7 days after a change of control, notwithstanding
that the shares acquired no longer meet the statutory requirements (e.g.
because the company has been acquired by an unlisted company). Exercise
pursuant to such a provision will then qualify for tax relief if the
employee receives only cash in exchange for the shares acquired.
Further, the rules may be amended to provide that an option may be
exercised within 7 days before the “relevant date” conditional upon the
anticipated change of control going ahead. The plan may also provide
that options may be exercised within 6 months after the “relevant date”.
In the case of a “non-UK company reorganisation or arrangement”
affecting all the ordinary share capital of the company or all the
shares of the same class as those under option or all the shares (or all
the shares of that class) held by a class of shareholders identified
otherwise than by reference to their office or employment or
participation in the plan, the “relevant date” is the date when the
arrangement becomes binding. Alternatively, an exchange of options may be
offered in the event of a change of control as a result of a non-UK
company reorganisation arrangement. For these purposes, a non-UK
company reorganisation arrangement is one made under the law of an
overseas territory which gives effect to a reorganisation of the
company’s share capital by the consolidation and/or division of shares
and which is approved by a resolution under which those who vote
represent more than 50% of the total voting rights.

In relation to option exchanges, the market value of shares is to be determined using a methodology agreed by HMRC.

OTHER CHANGES TO SIP, SAYE AND CSOP SCHEMES

Notification to HMRC

Notice of the existence of a SIP, SAYE or CSOP must be given to HMRC, electronically (unless HMRC otherwise allows), before 6 July in the tax year after that in which the first award of shares, or grant of options, is made, accompanied by a declaration that it conforms to the statutory requirements. The notice must be in a prescribed form.

Late notice means that a SIP, SAYE or CSOP will only qualify for favourable tax treatment from the beginning of the tax year preceding that in which notice is given or, if the notice is given after 6 July, the tax year in which it is given. In the case of an existing SIP, SAYE or CSOP (i.e. one approved before 6 April 2014), such notice must be given on or before 6 July 2015.

Annual returns

These must be given electronically (unless HMRC otherwise allows) on or before 6 July each year. The return must include a declaration that if any alteration has been made to a key feature of the scheme (or to a term of the trust deed or the rules of a SIP), the statutory requirements are still, and always have been, met since the alteration. This replaces the requirement for alteration to key features to be subject to prior HMRC approval. The information which may be required to be given each year includes that which enables HMRC to determine any tax liabilities of participants, the plan company and any participating company, and the trustee (in the case of a SIP).

An annual return is not required for any year after which (in the case of a SIP) a plan termination notice has been issued and all the relevant requirements of the trustees have been met, or (in the case of an SAYE or CSOP) any year after which all options have been exercised or have lapsed and no more options will be granted under the scheme.

There are fixed and escalating penalties for failure to make a return unless HMRC is satisfied there is a reasonable excuse, but (i) an insufficiency of funds is no excuse unless attributable to events outside the company’s control, (ii) reliance upon an adviser is no excuse unless the company took reasonable care to avoid the failure and, (iii) if there was a reasonable excuse, but the excuse ceased, the failure must be remedied without unreasonable delay.

Enquiries

There are new rules for HMRC enquiries and appeals. A notice of enquiry must be given by 6 July following the tax year in which the initial notification deadline fell or, if notification was late, 6 July in the second tax year following the relevant tax year; or by 6 July in the second tax year following that in which an annual return is given. HMRC may also give notice of enquiry at any time if they believe the statutory requirements are not being, or have not been, met. If HMRC determine that the requirements are not being or have not been met, and the situation is sufficiently serious, the SIP, SAYE or CSOP will no longer qualify for favourable tax treatment and the company will be liable for a penalty. However, that does not affect the operation of the tax relief in relation to shares awarded or options granted before the giving of the closure notice (including options exercised after such notice is given). A penalty is limited to twice the total income tax and NICs for which participants have not been liable or will not in future be liable. In a situation judged by HMRC as not so serious, the company will be liable to such penalty as HMRC decide (not exceeding £5,000) and the company will have 90 days from the closure notice to ensure that the statutory requirements are met. In default, the SIP, SAYE or CSOP ceases to qualify and further penalties are levied on the company. There is a procedure for appeals against penalties.

ENTERPRISE MANAGEMENT INCENTIVES (“EMIs”)

On and after 6 April 2014, notification of the grant
of an EMI option must be given electronically unless HMRC otherwise
permits. A declaration made by the optionholder (that he meets the
statutory requirements relating to commitment of working time) must be
retained by the company and produced on request by HMRC. A copy must be
given to the optionholder within 7 days after it is signed. Annual
returns must be made for each tax year beginning with that in which the
first qualifying EMI option is granted and ending with that in which
there are no longer qualifying EMI options outstanding and no further
EMI options will be granted. There is a new penalty regime consistent
with that described above in relation to SAYE and CSOP options.

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