Background
One of the stated aims of the present Government is to simplify the UK tax system. To assist with this, in July 2010, they established the Office of Tax Simplification (OTS), an independent office of the Treasury that draws on external legal and tax expertise to identify areas where complexities in the tax system can be reduced. The OTS is then responsible for delivering reports and making recommendations to the Chancellor.
One of the areas currently being reviewed is that of tax-advantaged (or “approved”) employee share schemes. These are schemes designed to incentivise employees by giving them an interest in the employer’s shares. Tax-advantaged schemes must comply with certain legislative requirements but benefit from favourable tax treatment. The OTS is currently considering whether these schemes meet their policy objectives, what practical problems may arise under the current rules, and whether they can be simplified.
The OTS has therefore been gathering views from advisers and employers. Bond Pearce have been involved in this process, organising and hosting an event to help the OTS gather feedback.
The tax-advantaged schemes
There are currently four types of approved scheme.
1 SAYE (Save as You Earn) Scheme
Under SAYE, employees are granted an option over shares in the company and contribute part of their earnings on a regular basis into a savings scheme over a fixed period – usually for 3 or 5 years. Then they can either use their savings to exercise the option and acquire shares, or they can simply take the savings. There is no obligation to buy shares if the value has fallen, so there is no risk for the employee. SAYE must be open to all employees and allows savings from as little as £5 per month, up to a maximum of £250. Both the savings arrangement and any discount inherent in the option exercise price receive beneficial tax treatment.
2 SIP (Share Incentive Plan)
This is a share plan, rather than an option plan, and allows shares to be acquired completely tax free by employees, up to an annual maximum value of £9,000 per employee. Employers can give each employee shares worth up to £3,000 per year (“Free Shares”), and employees can buy shares, out of pre-tax salary, worth up to £1,500 per year (“Partnership Shares”). In addition, employers can provide up to two additional free shares for each Partnership Share purchased. Finally, employees can use any dividends to buy a further £1,500 worth of shares each year.
The shares must be held in an employee trust and, provided they are held for five years, no income tax or national insurance is payable. Furthermore, for as long as shares are held in the trust, any gains are free of capital gains tax. Like SAYE, this plan must be open to all employees.
3 CSOP (Company Share Option Plan)
This plan is generally more appropriate for executives since options can be awarded on a discretionary basis and an employee can hold options over shares worth (at the time of option grant) up to £30,000. Options may be exercised free of income tax and national insurance, but usually only if they have been held for at least 3 years. The option exercise price cannot be set at less than market value at the date of grant.
4 EMI (Enterprise Management Incentives) option arrangements
EMI is a flexible, discretionary option arrangement aimed at smaller, high risk companies wishing to recruit and retain key employees. Employees can hold options over shares worth, on grant, a maximum of £120,000 in a particular three year period. Unlike CSOP, EMI options can be granted at a discount to market value, or even at nil cost (although any discount would be subject to income tax on exercise); and there is no minimum exercise period. EMI is therefore more popular for executive remuneration but is only available to smaller companies with gross assets of no more than £30 million, which have fewer than 250 full time employees and which are not involved in trades relating, broadly, to real property or finance.
Unlike the other tax-advantaged plans, there is no requirement to seek advance approval for a EMI option from HMRC (although the Revenue must be notified of the grant within a certain period). This makes the process of implementing EMI much quicker than for CSOP, SAYE and SIP, where HMRC must review all the rules and documentation before any options are granted or shares awarded under those plans.
Next Steps
The OTS is due to submit a report summarising its conclusions and recommendations before Budget day (21 March). Although Government is under no obligation to follow any of the recommendations, the points raised by the OTS are likely to influence the approach to the law in this area. Further, even if the recommendations are not followed, Government will almost certainly publish a statement giving their reaction to the OTS’ report and this should give employers and advisers some insight into the Government’s thinking.
The next phase in the OTS’ review of share schemes will be to look at non-tax advantaged/unapproved schemes. There may be a further opportunity for clients to contribute their views in this area later in the spring.