COMPLIANCE
Many companies utilise HM Revenue and Customs (HMRC) approved share option schemes, such as the enterprise management incentive (EMI). This is a popular scheme which has had success with many private businesses within the UK. With an EMI, there’s typically no tax upfront at grant (the point where the options are granted / a promise to acquire shares is made), which gives them an edge over an unapproved scheme. There’s also no tax on exercise (the point where the shares are purchased / acquired). Instead, capital gains tax is payable once the shares are sold. It’s also possible to reduce the capital gains tax rate further by taking advantage of business asset disposal relief (BADR) if this is available, which will result in just a 10% capital gains tax liability. Unapproved options (also known as non-tax advantaged share schemes) are different. An unapproved option is simply a scheme which hasn’t been approved by HMRC. It’s still possible to grant unapproved options, and in some cases, this may be more appropriate should the conditions for approved schemes not be met (it’s also possible for contractors to receive unapproved options, not just employees). Although there’s no tax on grant with unapproved options, they do attract income tax on the difference between the market value at grant and the amount the employee pays. In addition to this, when the options are sold, capital gains tax is payable on any gain from the point of exercise. Typically, when income tax is payable, this must be done through a self-assessment tax return, due on 31 January following the tax year in which the exercise is made. So why is this relevant to payroll? Well, it’s important to understand the relevance of this for payroll teams and when a payroll submission is due. If the shares involved can easily be sold or exchanged for cash, such as quoted shares or where there’s a readily available buyer in place, the shares are known as ‘readily convertible assets’. If this is the case, then income tax needs to be settled through the pay as you earn (PAYE) system, and in addition, class 1 National Insurance contributions (NICs) are due for both employee and employer. In practice therefore, payroll and reward teams need to be well connected, to ensure the administration on this specific income
is handled correctly. Overall, this is still relatively straight forward, as long as a robust process is put in place. However, the situation gets slightly more complicated for UK employees working overseas. Outside of the UK, only certain countries (such as France or the US) have comparative tax advantaged schemes in place. This means that even if an approved EMI scheme in the UK allows typical tax advantages, which can potentially result in a 10% tax rate (due to BADR), the overseas tax regime may not follow this treatment. In practice, this means a review of the share plan in place would need to be conducted to really understand what would happen, and whether any taxation would be due above and beyond the UK rate – this will be at an additional cost to the UK tax. The situation grows complicated when overseas advice is required to understand this, when a worker is voluntarily working flexibly overseas. The question of who should foot the bill for this can inevitably arise. "As with any employment-related trend, employers must learn to adapt to changing needs, and perhaps this will lead to a rise in incentive
be somewhat relaxed in terms of the real time information reporting, payroll teams must ensure all compensation is captured within UK PAYE. In practice, overseas share option schemes and securities can have separate schedules produced, which must be provided to payroll teams in addition to regular compensation to ensure all relevant remuneration is captured and reported. Otherwise, this could result in a nasty shock for employees once their tax returns are finalised. Recent developments One interesting development in recent years is the rate at which employees are changing jobs. According to the Office of National Statistics (https://ow.ly/ jbVL50Q5paP), “Between April 2012 and April 2021, younger employees were more likely to change jobs than older employees. In the year to April 2021, 14.2% and 14.1% of those aged between 16 and 20 years, and aged between 21 and 24 years, respectively, had changed jobs. This is compared with 5.1% of employees aged between 35 and 49 years who changed jobs.” These statistics tell us that employers are finding it harder to retain employees, particularly those within the younger generations. Subsequently, as with any employment-related trend, employers must learn to adapt to changing needs, and perhaps this will lead to a rise in incentive schemes as a way of attracting and retaining talent. With the next UK general election being due by January 2025, we also have an intense political landscape on the horizon, as the various parties start to test and form their manifestos. It’s worth acknowledging that the Conservative government made some changes earlier this year to approved share option schemes, such as: l doubling the per-employee limit of the company share option plan from £30,000 to £60,000 l launching a call for evidence on employee share schemes, save as you earn plans and share incentive plans. Therefore, there may be further potential changes ahead as stakeholders respond with recommendations for the future. These potential changes, coupled with an increased need for organisations to tend to changing employee needs, may mean that alternative forms of remuneration are needed even more in the future. n
schemes as a way of attracting and retaining talent"
Where overseas employees work in the UK, a similar scenario occurs. In the US, for example, there are various types of options and awards in place such as incentive stock options or non-statutory stock options. While there are principles used to interpret how schemes should generally be taxed, the specific terms of each incentive arrangement should be reviewed carefully to understand the correct treatment. Often, overseas employees will be subject to either a modified or shadow payroll arrangement when working in the UK, which can be based on either the equivalent US bi-weekly payslips or a schedule of remuneration that’s been put in place. Although HMRC does accept that these modified or shadow payrolls can
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| Professional in Payroll, Pensions and Reward |
Issue 96 | December 2023 - January 2024
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