View the related Tax Guidance about Employee share schemes
Employee trusts ― implications of disguised remuneration and where are we now?
Employee trusts ― implications of disguised remuneration and where are we now?Employee benefit trusts (EBTs) are commonly used to support employees’ share schemes and to provide other benefits to employees. For example, EBTs were used to provide additional benefits where the previous reduction of the pension lifetime allowance resulted in employees having significantly less tax efficient pension provision than was intended. Many employers established employer financed retirement benefit schemes although the trusts were in fact an EBT that permitted the provision of retirement benefits. EBTs were also used to provide what was believed to be ‘tax efficient’ bonuses ― contributions to an EBT would be held for an employee’s (or a class of employees’) benefit. The EBT would either invest for the benefit of the employees, or more widely, the EBT would provide a loan to the employee. The employee would have the benefit of the loan and not suffer the tax liability of a payment made outright to the employee.The use of EBTs has been significantly affected by the introduction of the disguised remuneration rules. For further information, please see the Disguised remuneration ― overview guidance note. There are statutory exclusions from those rules to cover many of the share scheme-related activities of EBTs. However, providing loans or opportunities for wealth creation through long-term investment schemes, has declined due to the tax and NIC treatment as a result of the disguised remuneration legislation.Legislation introduced in Finance Act 2014 promoted employee ownership of companies. Employee owners who dispose of
Restricted securities
Restricted securitiesIntroductionThe application of the restricted securities legislation is complex. This guidance note summarises the key tax implications and looks at some of the practical issues for employers in analysing and handling the potential risks associated with the acquisition of restricted securities by employees and directors in private and unlisted public companies.The definition of securities is found within ITEPA 2003, s 420. It includes, amongst other things, shares (the most common type of security issued in a private company and the focus of this guidance note), loan stock, warrants and units in a collective investment scheme. Key considerationsWhen might the restricted securities regime apply?The restricted securities regime is most likely to be relevant where a director or employee acquires shares at less than market value (disregarding any restrictions on the shares) that are subject to compulsory transfer arrangements. For example, the director / employee is required to sell the shares on leaving the employment for less than the market value at that time.Restrictions are not limited to those contained in the company’s Articles of Association. They can also include restrictions contained in any ‘contract, agreement, arrangement or condition’. For example, restrictions contained in shareholders agreements would be caught under the legislation. Restrictions of any nature are covered if their effect is to decrease the market value of the shares. They include:•good and bad leaver clauses that determine the price an employee receives on termination of employment•forfeiture of shares if performance conditions are not met•requiring the consent
Calculating relevant IP profits ― new entrants and 1 July 2021 onwards
Calculating relevant IP profits ― new entrants and 1 July 2021 onwardsChanges to relevant IP profits calculationsNumerous modifications were made to the way in which the patent box calculations could be performed with effect for accounting periods beginning on or after 1 July 2016. The commentary in this guidance note applies to the calculation of relevant IP profits of a company:•that is a ‘new entrant’, ie its first patent box election, or its most recent election, takes effect on or after 1 July 2016, or•where the accounting period begins on or after 1 July 2021CTA 2010, s 357AAccounting periods which straddle these dates are split into two notional periods and profits and losses are apportioned between them on a just and reasonable basis. The calculation now requires streaming of profits by reference to each IP right, with relevant R&D expenditure directly linked and allocated to the patent or patented item. As a result, the amount of profit that can qualify for the lower effective rate of tax applicable under the patent box regime depends upon the proportion of development expenditure that has been incurred by the company. A greater level of detail is now needed as the calculations require the allocation of income and expenditure to each sub-stream, which must be supported with evidence. HMRC expects that companies must be able to demonstrate the methodology by which R&D expenditure is allocated to individual sub-streams, at least in the first such period of calculation. Any significant adjustments to
Non tax-advantaged share option schemes
Non tax-advantaged share option schemesSummaryAs with any other discretionary option plan, a non tax-advantaged share option plan involves the granting of a specific number of options to an individual. These options provide that the individual can, at an agreed date or point in time, acquire a given number of shares (the underlying shares) for a fixed price. These share schemes used to be known as ‘unapproved’ share option plans.Given that there is both no up-front cost to acquiring the options and no requirement for the individual to pay over any monies unless the underlying shares increase in value, there is little risk attached to the receipt of options. As a result, the tax treatment and tax rates applicable will often appear to be very similar to cash bonuses.Key considerationsGrant of optionsThe terms of the options need to be set out in a suitable legal document known as ‘the Rules’. The Rules govern all pertinent matters between the company and employee and, given the tax complexities that can occur in such arrangements, a suitable and up to date precedent should be obtained.One of the key terms is the price that the individual has to pay to acquire the share, known as the exercise price. As no income tax charge arises when the non tax-advantaged options are granted, no matter the exercise price, the exercise price can be set at any figure from zero upwards. Under a non tax-advantaged plan, there is no limit as to how many options are granted.
Purchase of own shares ― overview
Purchase of own shares ― overviewThis guidance note discusses the purchase by a company of its own shares (often referred to as a ‘share buyback’ or a ‘purchase of own shares’). This may be considered for a variety of reasons, such as a tax efficient exit route from the company or a simple restructure of share capital. However, there are a number of issues, both legal and tax, that need to be considered before such a transaction is carried out.The repurchased shares can either be immediately cancelled, which is typically the case, or they may in some circumstances be retained by the company (effectively ‘in treasury’). If the shares are retained, companies can sell them for cash (to raise funds or under an option scheme) or transfer them for the purposes of employee share schemes. These shares, referred to as ‘treasury shares’, are dealt with in further detail in the Treasury shares following a share buy back guidance note.The tax treatment for the shareholders in a company on a purchase of own shares will fall into one of two categories ― either the ‘income treatment’ or the ‘capital treatment’. Under the income treatment, the purchase is dealt with as an income distribution (ie a dividend). However, there is an exception for buybacks made by unquoted trading companies where, provided certain conditions are met, the seller is instead treated as making a capital disposal. See the Income treatment for purchase of own shares and Capital treatment for purchase of own
Save as you earn schemes
Save as you earn schemesWhat is a save as you earn (SAYE) scheme?Save as you earn (SAYE) schemes are savings-related share option schemes that provide directors and employees with the option to buy a specific amount of shares in their employing company at a future date, whilst obtaining certain exemptions from income tax.These schemes include contractual savings arrangements to which the participant contributes a fixed amount of salary at regular intervals over either a three-year or five-year contract period. These SAYE savings arrangements are self-certified by the employing company as meeting the relevant conditions.Under the savings contract, the participant agrees to pay a fixed regular monthly sum of between £5 and £500 over the contract period. Contributions are normally made by a deduction from pay.At the end of the contract period, known as the ‘bonus date’, the participant is entitled to an amount of money. This amount is the total contributions made and may include a tax-free bonus element (if the bonus rate is more than 0%), which may then be used to buy a number of shares in the company at an agreed exercise price.A number of changes were made to the SAYE rules by FA 2013 and FA 2014 to simplify the administration of the scheme and harmonise some of the rules with that of other tax-advantaged schemes. One of these changes means that from 6 April 2014 a qualifying SAYE is technically known as a ‘Schedule 3 SAYE option scheme’.The Government launched a call for evidence in June
Entity classification
Entity classificationImplications of entity classificationIf a subsidiary is established, it is important to determine how it will be treated for UK tax purposes as this will determine the basis on which it is taxed. A subsidiary may either be transparent (like a partnership, where the individual partners are taxed rather than the partnership as an entity itself) or opaque (like a company, which is taxed in its own right).If a subsidiary is transparent, then any UK members (who may be shareholders, beneficiaries, partners or something else) will be taxed on profits as they arise, regardless of whether or not they are distributed. It is also the members who must normally claim benefits under a double tax treaty, as the subsidiary itself is not usually entitled to treaty benefits. See the following guidance notes:•Tax treatment of partnerships and partnership types•Foreign trading incomeIf a subsidiary is opaque, then any UK members will not be subject to tax until the profits are distributed. It may then be necessary to determine how this dividend is classified for UK tax purposes (see ‘Classification of return from a foreign entity’ below). The exception to this is if the controlled foreign company (CFC) or transfer of assets abroad rules apply.See the following guidance notes:•Introduction to CFCs•Shareholder issues ― international corporate structuresIt may also be necessary to determine if the subsidiary has issued ordinary share capital for UK tax purposes. This will affect:•the availability of business asset disposal relief (previously known as
Introduction to share schemes
Introduction to share schemesIntroductionHistorically, the development and use of share schemes can be linked to companies seeking to use the rules to reward employees and directors in a way that did not, typically, attract income tax and national insurance contributions. However, as with all such schemes, the legislation has developed in order to ensure that payments by way of salary or bonus could not be simply recategorised in this way and paid out with lower (or even no) tax due.The share schemes legislation sets out a wide range of scenarios where income tax and, potentially, national insurance are due on transactions and events that involve shares and securities, particularly those where the recipients have an employment relationship with the company.However, share schemes are still a popular method of incentivising employees and there are a number of specific plans set out by tax legislation for companies to use. For commentary on why share schemes are popular methods of retaining staff, see the Why use a share scheme? guidance note.From 6 April 2014, share schemes, including share option schemes, no longer need to be approved by HMRC in advance of award of the shares or grant of the option. Instead, the company must provide notification within a certain time frame and self-certify that a scheme meets the criteria to benefit from the beneficial tax rules. Share schemes that were previously known as ‘approved’ schemes are now referred to as ‘tax-advantaged’ schemes.Given that tax-advantaged schemes confer tax benefits on the shares or
Share incentive plans
Share incentive plansWhat is a share incentive plan (SIP)?The share incentive plan (SIP) is a tax-advantaged employee incentive plan, which provides employees with the opportunity to obtain a continuing stake in the employing company through the acquisition of shares (not share options). Provided qualifying conditions are met, the SIP attracts income tax and national insurance contribution (NIC) advantages for participants.The plan must be open to all UK resident employees, although a qualifying period of up to 18 months can be imposed. The terms must be the same for every employee who wishes to participate, and no preferential treatment can be given for directors or senior employees.The SIP must be operated via a UK resident trust. The SIP trust holds shares on behalf of employees.A number of changes were made to the SIP rules by FA 2013 and FA 2014 to simplify the administration of the scheme and harmonise some of the rules with that of other tax-advantaged schemes. One of these changes means that from 6 April 2014 a qualifying SIP is known as a ‘Schedule 2 SIP’.The Government launched a call for evidence in June 2023 to determine whether the plan still meets its original policy objectives and whether the rules can be improved or simplified. This was published on the same day as a report commissioned by HMRC into the use of tax-advantaged share schemes.Key considerations for a Schedule 2 SIPEligible employeesAll UK resident eligible employees must be able to participate in the plan, and must be invited to do so. Generally speaking,
Share incentive plans ― an overview
Share incentive plans ― an overviewUpdate: At Spring Budget 2023, the government announced that it would launch a call for evidence on the save as you earn (SAYE) and share incentive plan (SIP) employee share schemes. The government will use the call for evidence to consider opportunities to improve and simplify the scheme.Link to the consultation is found here, and closes on 25 August 2023.IntroductionShare incentive plans (SIPs) were originally known as ‘All Employee Share Ownership Plans’ and were first introduced over 20 years ago. They are one of four tax-advantaged employee share schemes currently available in the UK. Under a SIP, employees can buy shares in their employing company from their gross salary whilst the employer can also provide them with matching shares at no extra cost to the employee. The shares are held in a separate SIP trust whilst they reside in the SIP plan. The legislation governing SIPs is found in ITEPA 2003 Schedule 2, and HMRC often refer to this type of plan as a Schedule 2 SIP.When all relevant conditions are satisfied, no liabilities to income tax or national insurance contributions (NIC) arise on shares being awarded to employees or withdrawn from the SIP. Qualifying Schedule 2 SIPs must be open to all eligible employees. See Simon’s Taxes E4.528. Employers must self-certify that all the SIP legislation is met by the plan following the end of the tax year in which awards are first made to employees. This self-certification must be repeated annually. Simon’s
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