Changes afoot for Share Schemes
On 6th March 2012 the Office of Tax Simplification (OTS) published their final report on the review of the tax advantaged employee share schemes available to UK employees. Namely the Enterprise Management Incentive (EMI), the Share Incentive Plan (SIP), the Company Share Option Plan (CSOP) and the Save-As-You-Earn (SAYE).
This article summarises some of the main recommendations and proposals outlined in the report. The proposals, if implemented, should make it easier for companies to incentivise employees using approved share plans.
The proposals aim to relieve some of the administrative burden currently experienced by employers when implementing and administering an approved employee share scheme.
The approval process is a significant burden experienced by companies when implementing an approved employee share scheme. The SIP, CSOP and SAYE all require formal approval from HMRC before they can be implemented. This can significantly delay the roll-out of such plans. The EMI is currently the only approved employee share scheme which can be implemented on a self-certification basis. The proposal is that all four schemes can be implemented on a self -certification basis in the future.
The second recommendation of the report refers to CSOPs. There has been a decline in the use of the CSOP but the research didn't provide a definite reason for the fall. The OTS states that there is a strong case for the use of CSOPs by its current users and encourages further research into their use and relevance. The Companies that typically use CSOPs are smaller companies who (perhaps due to their trading activity) do not qualify for an EMI, Companies that are too large to fall within the limits of the EMI and companies who use the CSOP to reward employees who do not meet the working time requirements of EMI. The OTS recommends that more research is undertaken for CSOPs to establish more detailed information regarding the type of companies using them.
The third recommendation (a key proposal which RM2 put forward to the OTS during the consultation) is to merge the EMI and the CSOP, the two discretionary approved schemes. This recommendation is being made with a view that the schemes are already very similar and a merge of the two would result in a reduction of legislation and administrative burden. Similar criteria would apply to the schemes and the individual limits of the EMI (£250,000) and the CSOP (£30,000) would still apply. Those companies meeting the current EMI criteria could award options using the current EMI limits and those who don't meet the criteria could award options using the current CSOP limit. The merger would mean that a company using both an EMI and a CSOP wouldn't incur two lots of fees in the implementation and administration of the schemes. It would allow higher levels of flexibility in the plans with regard to changes in their trading activity. This would simplify both the rules and the associated legislation.
Along with the three main recommendations there are a number of improvements proposed. In short these are as follows:
- Create a single annual return form on which all approved grants could be recorded.
- Introduce online filing for share plan returns and notifications.
- Allow Company's and Trustees more flexibility in how they wish to communicate with the participants.
- Harmonise definitions across the four plans. For example create one definition across all of the approved plans e.g. simplifying the definition of Good and Bad leavers.
- In the event that an option exchange isn't feasible allow a tax free early exercise to protect the employees.
- Removal of the material interest provisions in relation to SIPs and SAYEs. It is the view that the legislation surrounding these particular plans is disproportionate to any tax avoidance which could take place.
- Permit associated companies to participate in approved schemes provided that they are a subsidiary of the company whose shares are being acquired.
Recommendations specific to SIP
- Reduce the tax free savings period to three years. This will be most welcome for SIP employees.
- Remove the cap on dividend shares and allow all dividends received on SIP shares to be reinvested into the scheme.
Recommendations specific to EMI
- Extend the 40 day exercise period to six months. In most cases this limit is impractical and doesn't allow sufficient time for the employee to raise the funds to exercise.
- Working time criteria should only apply to directors rather than all employees. This would allow those employees with flexible or part-time working hours to benefit from the scheme. This would reduce the likelihood of a participant being disqualified due to their working time.
- Reduce the list of excluded trading activities by removing certain trades. The legislation relating to qualifying trades and excluded activities is confusing. Companies can easily disqualify themselves by carrying out a disqualifying activity even if it only contributes to a minor amount of its activities.
During the research of this report The RM2 Partnership Limited were consulted by the OTS and asked for our thoughts. We welcome the fact that many of our suggestions have been reflected in the recommendations made in this report and will continue to support the OTS in their mission to simplify employee share schemes. We now await the Chancellor's Budget on 21 March for news as to a timetable for implementation of these changes and whether any will make it into the Finance Bill for this year.
If you would like to read the full report you can find it here.