TT221: Do you like sharing?

June 02, 2015

One area of tax that has substantially changed over the last few years is the taxation and administration of employment related securities.

Share schemes – HMRC annual reporting

If your company runs a share scheme (approved or unapproved), the annual reporting forms now have to be filed electronically using HMRC’s online systems. HMRC no longer allow you to paper file the annual reports including Forms 42.

Failure to file the annual reports will result in a minimum filing penalty of £100 and ‘approved’ schemes (Share Incentive Plans, Save as You Earn or Company Share Ownership Plans and EMI share options) will lose their tax advantages.

Employment Related Securities – New residence sourcing rules

The UK taxation rules governing employment related securities awarded to international mobile employees are notoriously difficult to understand.

From 6 April 2015, income tax will be payable on employment related securities by reference to the employee’s residence and workdays during the period in which the award is earned. The relevant sourcing period considered for unapproved share options will generally be the period between grant to vest. The sourcing period for restricted securities (and convertible securities) runs from the date of acquisition to the date of any chargeable event. Similar rules will also apply for UK National Insurance Contribution (“NIC”) purposes.

Companies will have to introduce new systems to monitor employees’ residence, workdays and workplace location to ensure the correct proportion of the gain is charged to income tax and NIC purposes.

Reimbursement of PAYE on notional payments

One common occurrence when shares were awarded or options exercised was that the subsequent PAYE due via payroll was not covered by the employee’s cash salary for the month/week of the relevant event. If the shortfall of PAYE tax was not paid by the employee within 90 days of the chargeable event, the ‘shortfall in PAYE’ would be treated as an additional benefit liable to more tax (commonly referred as a ‘s222 charge’). The rules have changed from 6 April 2014 so that as long as the ‘short fall in PAYE’ is paid by the employee within 90 days of the end of the tax year, then the additional s222 charge will not arise.

Employee Shareholder (Employee Shareholder Status)

This is relatively new concept introduced by outgoing Coalition Government to promote employees to have a stake in their employers via share ownership (“employee shareholder status”). The concept appears to be loosely based on the John Lewis model.

There are obvious advantages for employers that participate in such schemes for example it can help to play a vital role in retaining and motivating key staff. The award of shares will also result in a tax deduction which will reduce a company’s corporation tax liability.

For the employee the award of the first £2,000 of shares will not be liable to income tax or NIC. The other major tax advantage for the employee is that the first £50,000 worth of shares received under the employee shareholder status will be exempt from capital gains tax on future sale.

If you have any queries, please do not hesitate to contact your Barnes Roffe partner.

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