The government is simplifying parts of the four HMRC-approved share schemes.
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- HM Revenue and Customs is to introduce a number of proposals for approved share schemes with immediate effect.
- The Finance Bill 2013 includes legislation to simplify share schemes, including retirement and ‘good leaver’ rules.
- Self-certification for share schemes will be introduced in 2014.
The four HM Revenue and Customs (HMRC)-approved employee share schemes will undergo simplification in 2013 and 2014 under legislation introduced by the government.
In March last year, the Office of Tax Simplification (OTS) published a review of the four HMRC-approved schemes: sharesave, share incentive plans (Sips), company share option plans (Csops) and enterprise management incentives (EMIs), setting out recommendations for simplification.
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In June 2012, the government launched a consultation on 16 of the proposals in the review before announcing in December that the proposals would be taken forward, either as set out by the OTS or in a modified form. Alongside the consultation, the government published draft legislation for the Finance Bill 2013 that will enact many of the proposals.
Barbara Allen, head of employee incentives at law firm Stephenson Harwood, says: “The review has really focused on the ways in which the administration of approved share plans can be made easier and more streamlined.
“I think smaller [employers] especially found the administrative burden of operating an approved share plan could be a disincentive.” Proposals being taken forward by the government in 2013 include the removal of the limit on dividend reinvestment in Sips, an extension of the exercise period for EMI share options following a disqualifying event to 90 days, and removal of the prohibition on the use of certain restricted shares.
Two measures to be bought into effect under the Finance Bill are aimed at harmonising rules governing Sips, Csops and sharesave schemes to make them more consistent for employers and employees.
In these three schemes, shares have to be held for a certain period or share options have to be exercised after a certain time. But there are exceptions to this: retirement and ‘good leavers’, employees who leave because of, for example, an accident, ill health or redundancy. However, each scheme has different rules on retirement and the definition of a good leaver, leading to inconsistency.
Under the new proposals, employers will be able to set their own definition of retirement and, for good leavers, the sharesave and Csop rules will be aligned with those for Sips.
John Collison, head of employee share ownership at IFS Proshare, says: “Some [organisations] have a sharesave scheme with a [retirement] age of 60, a Sip with an age of 55 and a Csop where it is 57. So when someone retired, they could exercise one plan but not another and this caused immense confusion.” Some of the proposed changes do not need legislation to take effect, requiring only HMRC to update its guidance documents.
One issue that has been resolved with immediate effect is that employers can now provide share scheme members with information electronically or through a secure website. Collison says this is common sense. The sharesave scheme’s seven-year option will be removed when HMRC changes the sharesave prospectus after the option was deemed to be little used now.
Jennifer Rudman, manager of employee share plans product development at Equiniti, says: “This [option] was introduced right at the beginning of sharesave in October 1980.
“When it was introduced, an employee had 10.64% interest paid on the scheme if they went into the seven-year option and the equivalent monthly multiple was 36, so it was a big benefit back then. But now people are not expecting to stay with an employer for several years and, with interest rates so low, it is probably a good time for [the option] to end.”
The government has also announced plans to implement self-certification for Sips, sharesave schemes and Csops. Under the current system, employers intending to implement a scheme
or, in some cases, make changes to a scheme, are required to obtain HMRC approval, which has been seen as an administrative burden. Martyn Drake, managing director at Computershare, says: “[Employers] will no longer have to get formal approval for everything when launching a scheme. This will make a big difference. There was a fair amount of bureaucracy that had no real benefit.”
However, the government has decided to delay implementing self-certification until 2014 to allow HMRC time to consult. More details are expected in the 2013 Budget in March.
CASE STUDY: UTILITYWISE
Powerful take-up for sharesave scheme
Energy consultancy Utilitywise uses its sharesave scheme to encourage sales-orientated staff to engage with the organisation. It launched a sharesave scheme for its 300 employees in November 2012.
The only stipulation the employer applied for staff joining the scheme was for them to have passed their probationary period. At the launch of the scheme, 214 employees were eligible to join and 110 did so. The scheme is administered by YBS Share Plans.
Andrew Richardson, chief financial officer at Utilitywise, says: “A lot of our employees are sales driven and we really want to get engagement with them.
“It is important that they realise that what they do day-to-day directly influences the performance of the business and the easiest way to do that is to link it to the share price. If they have shares, or options in shares, we get engagement with them because they are not only concentrating on their individual tasks, goals and remunerations, but also this bigger pot, so they feel part of the business as a whole.”
Richardson says Utilitywise was pleased with the 50% take-up in the scheme because it shows employees’ commitment.
VIEWPOINT: Amanda Solomon, partner, head of corporate tax, Charles Russell
One of the unfortunate effects of an economic downturn is that employee remuneration can be adversely affected, because employers have less capacity to recruit new staff and employees may be subject to smaller salary rises or pay freezes. In such a tough environment, it is more important than ever for employers to be able to retain and incentivise staff. There are a number of share schemes that can help achieve this, including HM Revenue and Customs-approved plans.
Incentives such as the share incentive plan (Sip) and the enterprise management incentive (EMI) scheme have been approved, insofar as they are governed by legislation and benefit from favourable tax treatment. For example, participants in a qualifying EMI scheme can, subject to proper planning, make significant tax savings on the shares they acquire. Instead of paying up to 50% income tax plus additional national insurance contributions (NICs), they could be paying as little as 10% capital gains tax.
Although the tax treatment can be significantly more favourable under an approved scheme, these are also subject to specific requirements that need to be satisfied. Taking the EMI scheme as an example, there are specific conditions that apply to the employer. For example, the employer must be carrying out a ‘qualifying trade’, to which there are specific exclusions, and the employee must be employed by the organisation for 25 hours a week or 75% of their working time, whichever is less. There are also more general conditions.
The first step in effectively incentivising employees is knowing there are conditions that need to be satisfied. Specialist advisers can help analyse whether approved schemes may be a viable option for an organisation, and help maximise employee incentivisation in a tax-efficient manner.
SNAPSHOTS OF THE FOUR HMRC-APPROVED SHARE SCHEMES
- Share incentive plan (Sip): All-employee scheme that allows staff to buy partnership shares out of pre-tax salary, and be awarded matching or free shares by their employer.
- Sharesave (or Save-as-you-earn): All-employee savings and share option plan that allows staff to save out of taxed earnings and use savings to buy shares at a discount.
- Enterprise management incentive (EMI): A scheme aimed at small and medium-sized businesses with fewer than 250 full-time staff, who can be awarded share options.
- Company share option plan (Csop): A scheme in which certain employees are given options to purchase a fixed number of shares at a fixed price over a set period.