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Changes to unapproved employee share schemes in the Autumn Statement 2013

UNAPPROVED EMPLOYEE SHARE SCHEMES: (FURTHER) CHANGES
IN RESPONSE TO OTS RECOMMENDATIONS FOR SIMPLIFICATION OF UNAPPROVED 
EMPLOYEE SHARE SCHEMES

Share-for-share exchanges and rollovers

A new section 430A (in Chapter 2 of Part 7) will, from Royal Assent of the Finance Act 2014, afford ‘roll-over’ relief upon an exchange of employment-related restricted shares and other securities. When, eventually, it does apply, it will bring into line the tax treatment of an exchange of restricted securities (including restricted interests in securities such as an interest as joint beneficial owner under a JSOP arrangement) with that of an exchange of share options. The relief applies if restricted securities (or such an interest) is exchanged wholly or partly for other ‘new’ restricted securities and the value of the consideration received in exchange is not more than the unrestricted market value of the old securities (and avoidance of tax and NICs is not the main purpose of the disposal). If the exchange is wholly for new restricted securities, the disposal is not a ‘chargeable event’, and Chapter 2 applies to the new securities as it applied to the old securities. If the disposal is only partly in consideration of new restricted securities, there is a chargeable event insofar as the disposal is in exchange for the other consideration. No election (under either ss425 or 431) can be made in relation to the new restricted securities, but if such an election had been made in relation to the old securities, the effect will hold good in relation to the new restricted securities.

If the old securities (or interest in securities) were subject to a short-term ‘risk of forfeiture’ (and, no election having been made on acquisition, the tax charge on acquisition was therefore deferred) and the new securities are likewise subject to such a ‘risk of forfeiture’, the deferral of the charge holds good until the end of the period of 5 years from the time of the original acquisition of the old securities or, if earlier, the occurrence of a chargeable event. If the new restricted securities are not subject to such a ‘risk of forfeiture’, income tax will be charged under Chapter 2 on their value immediately after the exchange as if the risk of forfeiture was removed at that time.

Insofar as the consideration consists of the new securities, the disposal of the old securities will be excluded from any ‘disguised remuneration’ charge.

These new provisions will have effect from the date of Royal Assent of the Finance Act 2014.

Correcting a fault in Chapter 3C – shares acquired at an undervalue

The opportunity is being taken to correct a long-standing ‘fault’ in the rules, in Chapter 3C Part 7 ITEPA 2003, relating to restricted securities, which particularly affected ‘partly-paid’ shares. Under current rules, if such shares (being shares acquired for part payment up-front with a liability to pay up the balance unpaid) are sold at a (lower) price which recognises the continuing existence of that liability in the hands of the acquirer, an unfair charge to income tax nonetheless arises upon their disposal on the amount unpaid. The change will ensure that, if the shares are sold to a third party with and subject to the outstanding liability, the ‘notional loan’ is not treated as discharged and therefore no immediate liability to income tax will arise. This change has affect from Royal Assent of the Finance Act 2014.

Corporation tax relief for employee share acquisition on exercise of an option following takeover of a company

It is a condition of corporation tax relief for
employee share acquisitions that the shares acquired must be shares in a
company which, if not under the control of a listed company, is an
independent company. If the shares are acquired pursuant to the exercise
of a share option after the company has been the subject of a takeover
by a non-listed company, the relief is lost. With effect from Royal
Assent of the Finance Act 2014, relief will still be available in such
circumstances if the shares are acquired within 90 days of the takeover
and the avoidance of tax is not a main purpose of the takeover.

Corporation tax relief for acquisition of shares by employee of overseas employer working for a UK host

With effect from 1 September 2014, relief from
corporation tax for employee acquisitions of shares and share options is
to be extended. Relief will be available in relation to the
acquisition of shares or options by an individual employee of an
overseas company who works for (eg is seconded to), but is not employed
by, a UK host company. If certain conditions are met, the individual
may be treated as an employee of the UK host, so that CT relief may be
available to the UK host in relation to shares acquired by the
individual. The shares acquired may be in either the overseas employer
or the UK host. Relief in these circumstances is limited to the amount
chargeable to income tax under ITEPA in relation to the acquisition of
the shares or a chargeable event relating to the shares.

Internationally mobile employees

Complex new rules apply in relation to
employment-related shares and options acquired on or after 1 September
2014 (except shares acquired pursuant to an option granted before that
date) to identify, in the case of internationally mobile employees, that
part of the amount counting as employment income which falls to be
taxed in the UK.

Section 222 ITEPA 2003: “making good”

Section 222 imposes a penal charge to income tax if,
in the case of payments from which a deduction of PAYE is not possible,
the employee fails to “make good” the tax accounted for by the employer
within 90 days. From 6 April 2014, the period within which tax must be
made good is extended to a period of 90 days after the end of the tax
year in which the notional payment is treated as having been made by the
employer to the employee.

Valuation of listed company shares

The Government proposes to take forward the OTS
recommendation for a change to the basis for determination of the market
value of listed company shares for tax purposes. It proposes to
replace the current reference to alternative bases (“quarter up” and
half-way between the highest and lowest bargains) with reference to a
single method based on the closing price of shares on the day of
trading. However, there will still be scope for alternative methods to
be applied in certain circumstances. HMRC is also considering further
stakeholder suggestions summarised in the Summary of Responses to HMRC’s
consultation on the OTS review of unapproved share schemes. No draft
legislation has yet been published.

Annual returns

In relation to the tax year 2014-15 and later tax
years, annual returns must be given electronically unless HMRC otherwise
allows on or before 6 July in the next tax year, and must include such
information as is required to enable HMRC the liability to tax,
including CGT, of any employee. There is a new regime of penalties for
failure to deliver annual returns on time.

Other recommendations for change

  • Form 42 and PAYE

Electronic filing of Form 42 will be introduced for
returns covering 2014-15 and later years (see above). The Government
confirms it will adopt ‘intelligent filing’ in relation to its online
employment-related securities return forms. Consideration will be given
to extending the deadline for RTI reporting of employment-related
securities income to 60 days after the end of the relevant tax month,
but only once RTI and the new online filing system have bedded in.

  • Marketable securities

The proposal to change the basis of taxation of
employment-related securities so that, as a general rule, they are only
subject to income tax and NICs when they become ‘marketable’ (ie capable
of sale to a third party) will require wide consultation and may be
considered for the Finance Bill 2015. The Government is currently
assessing the potential cost and the need for anti-abuse safeguards
before considering whether to proceed in 2015.

  • Employee shareholding vehicle (a “safe harbour trust”)

Work is ongoing to establish if such a vehicle could be
designed so as not to create potential for abuse or significant
additional cost to the Exchequer.

  • Valuation recommendations

HMRC is working with a valuation sub-group of the ERS
stakeholder forum to identify priorities in improvements in its
valuation guidance. Draft updated guidance will be made available
shortly for comment by stakeholders. A separate recommendation that a
pre-transaction valuation service be made more widely available will be
considered after HMRC has assessed the impact on its valuation resources
of the new ‘Employee Shareholder Employment Status (“Shares for
Rights”) made available from 1 September 2013.

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