Office of Tax Simplification’s review of tax-advantaged share plans

3rd April 2012

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On 6th March 2012, the Office of Tax Simplification (OTS) published the “final report” of its review of the four tax-advantaged employee share plans – approved Share Incentive Plans (SIP), approved Savings-Related Share Option Plans (SAYE), approved Company Share Option Plans (CSOP) and Enterprise Management Incentives (EMI). This report represents an excellent start towards simplifying the complex tax legislation governing these plans.

Detailed improvements

During the first six months of its share plans review, the OTS carried out some extensive research into how tax-advantaged plans are used, their effectiveness and the opinions of companies, their advisers and administrators about how they could be improved. This has resulted in a large number of detailed recommendations for improvements, which include:

  • “Good leavers”: extending the range of circumstances in which employees who leave employment can exercise options or take shares out of the plan with income tax relief.
  • Retirement: making the provisions for employees who retire consistent for the three approved plans.
  • Features not reasonably incidental: removing vague references to “undesirable” plan features which allow HM Revenue & Customs (HMRC) to impose additional restrictions.
  • Takeovers: allowing income tax relief when options have to be exercised or shares removed from the plan on a cash takeover.
  • Tax charge on withdrawal from SIP: reducing the period before partnership, matching and free shares can be removed from a SIP tax-free from five to three years
  • £1,500 limit on dividend shares: removing the upper limit on the amount of dividend which can be reinvested in a SIP in any tax year.
  • EMI “excluded activities”: reducing the number of activities which exclude companies from offering EMI options.

However, there is much more which could be done to remove the unnecessary detail from the share plan legislation. The OTS did not have time to carry out a more fundamental review of why there should be so many requirements for tax relief and of which ones are strictly necessary.

Unfortunately, by issuing a “final report” at this stage, there is a danger that this once in a generation opportunity to modernise share plans will be lost.

Future of CSOP

A worrying development is that the OTS have called into question the future of the CSOP, which is by far the simplest and most flexible tax-advantaged share plan and the only one available to many companies. Despite their extensive research, the OTS have “found it difficult to identify clearly the types of companies using the CSOP”. The report recommends that further work should be carried out to investigate whether the CSOP is still relevant for UK business. We therefore urge all companies with CSOPs to write to the OTS (at ots-ess@ots.gsi.gov.uk) to explain what they use them for and why they are a valuable tool for motivating and retaining their employees.

Assuming that further investigation demonstrates that CSOPs are worth retaining, the OTS recommend that they should be merged with EMI to form a single discretionary share option plan. The current limit of £120,0001 to the value of shares under option will apply to companies which currently qualify for EMI and the current £30,000 CSOP limit will apply to other companies.

Merging the two plans will result in some welcome improvements for CSOPs, for example: it will be possible to grant options at a discount or even at nil cost (though any discount at grant will be taxed at exercise, as for EMI) the three-year period before options can be exercised with income tax relief will be removed; and certain restrictions, imposed by HMRC, on the exercise of discretion by companies will be removed.

These useful improvements are, however, complicated by introducing them through a two-stage process and a continuing distinction between EMI-compliant and other companies. It could be much simpler just to amend the CSOP legislation instead.

If the Government does decide to introduce a single tax-advantaged discretionary share plan, this should not be confined to share options, but should also include awards of the full value of shares, such as conditional and deferred share awards.

In the Budget on 21st March 2012, it was announced that this limit is to be increased to £250,000.

Abolition of the approval process

The other bold recommendation is to replace the current process for obtaining HMRC approval for SIP, SAYE and CSOP with a self-certification process, as already applies for EMI.

Companies will welcome any reduction in the time it takes to secure HMRC approval for plans, which has increased markedly over the last year due to reductions in the number of their share scheme advisers. However, many are reassured by the fact that their share plans have official approval. They will be alarmed by the OTS’s related recommendation that if HMRC discover that plans do not in fact meet the requirements for approval the companies will be liable for the underpaid income tax and will not be able to recover it from their employees.

A better solution would be to reduce the requirements for tax relief even more radically to a few essential provisions, so that the approval process becomes straightforward.

It is highly likely that this recommendation will be accepted by the Government because it will help HMRC to cut costs. However, we urge HMRC to retain its current share scheme advisers so that companies and their advisers will continue to be able to ask HMRC’s views about points of uncertainty in the legislation.

Further details

You can read a full summary of the OTS recommendations and MM&K’s detailed comments here.

Next steps

In the Budget on 21st March 2012, the Government stated that it will consider the recommendations of the OTS review and will consult shortly on how to take a number of the proposals forward. We understand that HMRC will be issuing a consultation document in April 2012 and there are unlikely to be any changes to the legislation before the Finance Bill 2013.

This article was prepared by MM&K, executive remuneration advisers.

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