Following a consultation exercise earlier this year, HMRC have determined to retain the facility for employers and employees formally to elect for a transfer of the liability to employers’ NICs, on share option gains and certain chargeable events in relation to employee share acquisitions, to be transferred to the employee. The employer and employee may instead simply agree between them that the cost of such employers; NICs will be borne by the employee out of the employee’s gain. The facility to elect to transfer the primary liability was first introduced to allow companies (particularly US companies) to remove altogether the contingent liability from their accounts. It is understood that subsequent changes to international accounting standards have meant that this facility is no longer required for that purpose, although it is also understood that many respondents to the consultation suggested that there are other commercial reasons for retaining the certainty of such an election. Please click here for a summary of responses to the consultation document “Employee Share Schemes: NIC elections”.
HMRC has been concerned to limit the tax erosion which results from ‘salary sacrifice’ arrangements and has consulted on how best to achieve this. One concern raised in response was the desirability of allowing employees to secure immediate relief, through PAYE, where a taxable gain realised upon the exercise of a share option and immediate sale of shares (or cash received on surrender of an employee share option) is directed to be contributed to a pension arrangement. Under existing legislation, relief would be available, but the tax charged on the option gain would (if the shares are readily convertible assets) be immediately due under PAYE resulting in a cash-flow problem for the employee. In the Autumn Statement 2016, it was announced that the tax and employer National Insurance advantages of salary sacrifice schemes will be removed from April 2017, except for arrangements relating to employer-provided pensions (including advice), childcare, Cycle to Work and ultra-low emissions cars. Arrangements in place before April 2017 will be protected until April 2018 and cars, accommodation and school fees will be protected until April 2021. Please click here for a summary of responses to the “Consultation on Salary Sacrifice for the Provision of Benefits in Kind”.
Tackling ‘disguised remuneration’
HMRC issued a Consultation Document, which included draft legislation for inclusion in the 2017 Finance Bill, seeking comments and feedback on proposals for tightening –up the disguised remuneration rules. The consultation (which closed on 5 October) included discussion of:
- a proposed new ‘close company gateway’ extending the scope of the DR rules to arrangements relating to directors and employees having 5% of the shares in a close company, regardless of the whether the relevant step was in connection with an employment;
- proposals to deny altogether CT deductibility for certain disguised remuneration;
- the proposals for a charge to income tax under Part 7A upon a release or writing-off of a DR loan. (The paper confirmed that this would not apply after the death of the individual.);
- proposals for transferring the liability to income tax under Part 7A to the employee, particularly if the employer is non-UJK resident, unable to pay, or has been dissolved;
- the proposed new charge on outstanding DR loans and loan transfers; and
- postponement of payment of tax on certain fixed-term loans if approved by HMRC.
Comments were also sought on detailed technical aspects of the DR rules including issues relating to double taxation, relief if an earlier tax charge has been paid, and the interaction with the rules on beneficial loans and accelerated payments, and further proposals on tackling disguised remuneration in relation to self-employed earnings.
Concerns have been expressed at the broad scope of the proposals. As drafted the ‘close company gateway’ would, for example, catch a loan by the company to a new employee to purchase a 5%+ shareholding from an employees’ trust or a departing employee. The proposal to deny CT relief could prejudice bona fide arrangements for satisfying deferred bonuses of cash or shares (etc.) paid by an employees’ trust funded by the company. The proposal that tax be paid when a contribution is made to a trust unless taxed payments are made out within a ‘reasonable’ time, will prejudice commercial arrangements under which funds are accumulated in a trust to pay future rewards.
The proposed ‘outstanding loan’ charge could penalise companies which have inherited arrangements, through company acquisition, where DR loans remain outstanding in favour of individuals who ceased employment before the change of ownership. To address this situation it is suggested that the tax charged on former employees be collected under self-assessment rather than through a PAYE charge on the former employer.
Please click here to access the technical note and summary of responses to the consultation document “Tackling Disguised Remuneration”.
Income tax and NICs on termination payments – consultation on draft legislation
HMRC has issued the government’s response to an earlier consultation on this topic, in 2015, and with it, draft legislation. In response, concerns were expressed in response to the earlier 2015 consultation on this topic that the receipt of shares, or of a right or opportunity to acquire shares, received at part of an employee’s termination settlement package should fall to be taxed, and exempted, in the same way as cash payments. As the proposed legislation is drafted (and, in particular, the definition of “excluded bonus income”), the value at termination of any share-based payment to which an employee ceases to be contractually entitled (typically because he or she has given or received notice of termination) would still need to be determined and could reduce entitlement to the £30,000 exemption, notwithstanding that the value will not itself qualify for the exemption. Further, a payment in recognition of the loss of tax-favoured share awards (e.g. SAYE, CSOP or EMI options) which might have qualified for exemption from tax on maturity would appear to reduce the £30,000 tax exemption on termination. The use of an ‘open-ended’ definition of “bonus” for these purposes (see the reference to “anything similar””) is unsatisfactory. Further, there appears to be scope for double taxation if the value of a share-based award has reduced the amount of a termination payment which is tax-free but the ex-employee ultimately acquires shares which are then subject to tax.
There is a lack of clarity as to the interaction of the new rules with the ‘restricted securities’ regime. Identifying the value of unquoted shares as at the time of termination, in addition to the time of acquisition or of a ‘chargeable event’, will impose unfair burdens on companies, particularly now that HMRC SAV have withdrawn their facility for agreeing such values. How are the uncertainties of future vesting – which may be at the discretion of the directors – or changes in value to be addressed?. It would seem that awards which, at the time of termination may be some years off vesting, must be taken into account, but there is no proposed ‘cut-off’ point at which potential future share benefits should be ignored for these purposes. It is suggested that, if pre-existing cash commitments are to be no bar to the application of the £30,000 exemption, pre-existing unvested share-based awards should be treated in the same manner.
Please click here to access the government response and consultation on draft legislation to the consultation document “Simplification of the tax and national insurance treatment of termination payments”.
Pett, Franklin & Co. LLP are experts in employee share schemes, share valuations and executive incentives. To find out how we can help you or your client, please call Stephen Woodhouse on 0121 348 7878 or email Stephen at firstname.lastname@example.org.