What constitutes a General Offer, and when is PAYE due?
The case of Hema Tailor v HMRC  UKFTT 199 (TC) concerns the question of whether Pay As You Earn (PAYE) should be applied to the gain made on exercise of Save-As-You-Earn (SAYE) options, if not exercised “under” the scheme. This is becoming significantly applicable to other schemes such as the CSOP.
Generally, shares are treated as “assets” under section 701 Income Tax (Earnings & Pensions) Act 2003 (“ITEPA”). If they are also readily convertible assets under section 702 ITEPA, they will be subject to PAYE. Shares acquired “under” an SAYE scheme will not be assets, and therefore cannot be subject to PAYE. In this case, it was decided that the shares acquired on the exercise of the SAYE options were not acquired “under” the rules of the scheme, and so were readily convertible assets and subject to PAYE.
An employee exercised their SAYE option following a management buyout (MBO) of their employing company (Enterprise plc). The scheme permitted exercise following a purchaser obtaining control as a result of a general offer to acquire all the issued shares. The acquiring company (Kirk Newco) made an offer to public shareholders, including SAYE option holders. This offer was subject to approval at an EGM, due to Rule 16 of the Takeover Code. The employee originally included this exercise on their self-assessment as a capital gain, but later, when it became clear that income tax should have been charged, argued that the PAYE should have been operated by Enterprise on the gain.
First tier tribunal
- The shares acquired on the exercise of the SAYE options would be readily convertible assets, and subject to PAYE, unless they were acquired “under” an approved SAYE scheme;
- Shares acquired on exercise of the option could only be said to be acquired “under” an approved SAYE scheme if the option was exercised strictly in accordance with the rules of the scheme; and
- The tribunal questioned whether there had been a “general offer” to acquire all the issued shares, as a result of which the scheme rules permitted early exercise.
Meaning of a general offer
The first tier tribunal’s review of what constitutes a “general offer” was integral to the case. There is no statutory definition or case law on this, and HMRC does not give much guidance. Firstly the tribunal considered Rule 9 in the Takeover Code, which provides that a person who acquires 30% of the voting rights of a public company must make an offer to all other shareholders. The Tribunal looked at the first general principle which states that all holders of same class securities should be afforded equivalent treatment. The tribunal also held that it was not necessary for an offer to be made to all the shareholders of a particular company in order to be a general offer. Finally, it considered existing HMRC guidance, which states the acquiring company must be “on precisely the same terms, to all the shareholders of the relevant class or classes”.
Does the offer have to be made for the whole of the issued share capital?
- In this case, the tribunal decided that the offer had not been made for the whole of the issued share capital. For example, the offer made to the management shareholders was different from that made to the other shareholders.
- Paragraph 37 allows the SAYE scheme rules to include a provision permitting early exercise following a change in control as a result of a general offer for the whole of the issued share capital.
- If the offer is a general offer not made for the whole issued share capital, the shares are not acquired “under” the scheme rules and will be classed as assets under section 701 of ITEPA 2003.
Generally HMRC’s practice is to ensure that no PAYE is operated on SAYE options. However, as in this case, shares will not be acquired under a SAYE scheme if the option was not exercised in accordance with the scheme rules.
Where options are exercised early under a provision included in the scheme rules under paragraph 37, any gain is subject to income tax. Finance Bill 2013 will amend ITEPA 2003 so that early exercise following certain types of cash takeover will not be subject to income tax. Draft Finance Bill 2013: Tax- advantaged share scheme simplification.
Companies and advisors will need to consider whether an SAYE option that is exercised before its maturity date is exercised strictly in accordance with the scheme rules. This will potentially make it harder for corporate transactions to fall within paragraph 37, as offers to acquire the whole issued share capital are not common. Even following the change of legislation noted above, a tax-free early exercise would only be permitted if the Hema Tailor definition of general offer applied in the circumstances.
Companies who have SAYE schemes, with similar takeover offers may need to make arrangements to deduct income tax (and NICS) through PAYE and this should be communicated to all option holders early on within the transaction.
The facts of this case relate to other share plans, including Company Share Option Plans (CSOPs).
For further advice please call the RM2 team on 020 8949 5522.