Office for Tax Simplification Release its Final Report on Employee Share Schemes

The Office of Tax Simplification (OTS) in its final report on employee share schemes which are not tax-advantaged (non-approved).
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Jan. 31, 2013 - PRLog -- The Office of Tax Simplification (OTS) in its final report on employee share schemes which are not tax-advantaged (non-approved).  This covers arrangements such as gifts of shares to employees, discounted employee shares and non-approved share options.  It does not cover approved employee share schemes - EMI options, the Share Incentive Plan (SIP), approved options (or CSOPs) and SAYE options – which have been the subject of a separate report.

The OTS’s  key recommendations are

·         Major reform of the tax treatment of employment-related securities and share options in Part 7 of ITEPA 2003. Generally, employees are currently taxed on the value of shares in their company when they are acquired even if they have no way of selling any of them to cover the tax. OTS recommends allowing individuals to choose the time when a tax charge arises, which could be on acquisition of the shares or later,  when they  can be sold for cash (when they become “marketable”). The default position, would be that no tax charge arises until the shares can be sold for cash. This would  remove the so-called “dry” tax charge that arises when an employee cannot sell shares to cover the tax due.

The proposal would apply both to a simple acquisition of shares by an employee and to shares acquired on the exercise of a previously granted share option.

Presented with a choice between paying tax when shares were acquired or deferring the tax until the shares can be sold, an employee might take into account that one consequence of deferring could be that by the time the tax does become due the shares will have grown in value, so that the tax charge wil be greater.

         To balance this proposal, OTS also recommends that “marketable” shares should be always be treated as readily convertible assets (RCAs) and therefore subject to PAYE income tax and National Insurance.

·         Introduction of a simple vehicle to enable companies (mostly, but not exclusively unquoted) to manage their employee share ownership arrangements and create a market for employees’ shares. This could be a statutory “safe harbour” employee benefit trust (EBT) which can be used safely and easily by private companies wishing to establish employee share schemes, or to warehouse shares and provide a limited market for employee shareholders. OTS’s aim is to shelter companies from some of the more draconian aspects of anti-avoidance legislation aimed at EBTs but at the same time protect tax revenues  by restricting

the ways in which this vehicle might be used. OTS considers this to be a particularly important recommendation if Government policy is to encourage wider employee ownership in private companies.

·         Alignment of the tax treatment of international assignees with the general earnings tax treatment, simplifying with a common approach and extending the corporation tax deduction in relation to employees from abroad seconded to work for UK companies where income tax is payable. OTS comments that the current tax treatment of shares acquired by such employees in the company they work for is “complicated, inconsistent, illogical and a source of huge frustration and confusion for employees, companies, advisers and HMRC alike”.

·         Several recommendations are made on share valuation. These include increased availability of pre-transaction valuations in certain circumstances, better provision of valuation information and more flexibility for companies on non-recognised stock exchanges.

·         Proposals to extend the deadline for unpaid PAYE to be made good, and for online filing of HMRC returns concerning for non-approved employee share schemes.

The OTS’s final report can be found by clicking on the link

If enacted, these changes would, in our view, be very significant and positive for employee share ownership, and in our view would make it significantly more attractive for many companies. The recommendations in the Final Report have been submitted to the Chancellor of the Exchequer in advance of Budget 2013, but it remains to be seen to what extent they will appear in the Finance Bill 2013. We would not expect a rapid response from Government on all the proposals, as any action to implement the recommended changes is unlikely before very careful review of the consequences and the impact on HMRC’s resources.  

If you or your clients would like to discuss the final report, please contact:

or call us on 020 7470 8805

Note for Editors:

POSTLETHWAITE is a law firm which provides specialist advice on employee share schemes, employee share ownership and majority employee ownership, including EMI share options, approved options, long term incentive plans, Share Incentive Plans (SIPs), ownership by employee trusts and a wide variety of other share schemes.  We look after clients from all parts of the UK, with a particular focus on smaller listed and private companies.  

For further information concerning employee ownership and employee share incentives, please contact Robert Postlethwaite on 020 7470 8805 11-15 Betterton Street London WC2H 9BP

Authorised and regulated by the Solicitors Regulation Authority, number 385417
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