Government consultation on some changes to the tax treatment of unapproved share plans

HMRC have published a consultation document following on from the Office of Tax Simplification (OTS) review of unapproved share plans which was published earlier this year.

The OTS report contained a number of recommendations on which the Government is now consulting, including establishing consistency in the tax treatment of all employee shares in share-for-share exchanges and rollover situations, extending corporation tax relief for employee share acquisitions and simplifying the taxation of share gains for internationally mobile employees (see below), the valuation of shares in listed companies and liabilities where PAYE is recovered late from employees.

Even if implemented, the changes being consulted on are likely to have very little impact on most employees' tax position or the way that HMRC interacts with these plans (unlike parallel changes being made to HMRC approved plans). To access our Law-Now on changes to approved plans, please click here.

Internationally mobile employees

In what is a particularly complex area, the OTS report made a number of recommendations to simplify the taxation of internationally mobile employees (IMEs) in relation to share awards. Under current rules, the taxation of restricted shares and share options awarded to IMEs depends largely on residence status at the time of the award of shares or grant of a share option. This can result in anomalies with UK tax not being chargeable on shares relating to UK employment or UK tax being chargeable on shares relating to work carried out overseas, which is not the case with other forms of employment income though HMRC practice and double tax treaties can ease this. Accordingly, the main recommendations were to align the tax and NICs treatment of international assignees who receive share awards with cash remuneration provisions as well as align the corporation tax deduction provisions.

A simple calculation could be used to establish what proportion of the income should be treated as earned in the UK with a ‘just and reasonable’ rule being applied to override the basic rules where these would give an inappropriate outcome in relation to non-standard awards.

However, this is a very detailed area. Share scheme changes in 2008 for IMEs took some time to bed down and a simplification exercise could easily in the short term result in significantly more complexity.

What OTS recommendations were left out of the consultation?

Importantly, at this stage the Government has chosen not to consult on the two key recommendations of the OTS report published in January 2013, which relate to the concepts of a marketable security and an employee shareholding vehicle.

This is disappointing as these were arguably the two most revolutionary proposals which would have made real changes for private company employee share ownership. The marketable security idea is designed to change the point at which tax becomes chargeable on employee shares generally in private companies such that income tax and NICs are only payable when the securities become marketable or are sold (whichever is the sooner). The employee shareholding vehicle concept, which essentially concerns employee benefit trusts which hold shares, is designed to allow private companies to manage employee share arrangements and create a market for shares. Whilst the Government believes these ideas have simplification potential, HMRC says it will assess the potential Exchequer cost and further explore the anti-abuse safeguards that would be necessary for the implementation of these two concepts before deciding on whether to proceed with legislation in this area in 2015. It is not clear yet whether this represents genuine enthusiasm for these ideas tempered with caution or these ideas being kicked into the long grass.