The Budget contained four announcements relevant for employee share plans – the most important is on the use of capital gains schemes:
Use of capital gains schemes
Over the last few years, many clients have used schemes where for a nominal or small initial outlay, an employee was able to receive future growth in share values which was taxed as capital rather than income (and also avoided National Insurance contributions). These schemes have taken many forms:
- joint share ownership interests (where a trust and employee jointly own a share and the trust has the value to date, with the employee receiving the future growth)
- growth shares – where a class of shares holds the right to receive all or some of the future growth in value of a company
- carried interest schemes – again, where employees receive shares in the future growth in value, usually in fund situations.
The Treasury have said that they will in 2010 conduct a review of these arrangements so that a proper amount is subject to income tax. They have said that this will be a very wide-ranging review and have not given any reassurance that the tax treatment of existing awards will be protected.
Companies considering implementing these schemes or making new awards under existing schemes are therefore in a difficult position as they will be making awards not knowing what the ultimate tax treatment will be and whether the relative complexity of capital gains schemes is worth it if there could be no ultimate tax saving.
We will update you as and when we know more details, but this could be the start of very important changes in this area.
No more CSOP awards over subsidiary shares
A CSOP is a Revenue-approved option plan under which market value options can be awarded over up to £30,000 of shares.
Normally, the company in which shares are offered has to be independent, but there has been an exception where shares are offered in a subsidiary of a listed company. With effect from 24 March 2010, however, no more options may be offered on this basis and if a company is a subsidiary it will no longer be able to offer CSOP options.
Existing CSOP options are unaffected, although a transitional period of six months will be allowed from 24 March 2010 for companies to amend their CSOP scheme rules.
Share Incentive Plans (SIPs)
This is a change only relevant for certain small companies.
Company contributions to SIPs which are used to buy shares are tax deductible but usually only when the relevant shares are awarded to employees. In most cases, awards are made immediately to benefit from the tax deduction. However, a change to legislation was made a few years ago to allow certain small companies to fund SIPs to acquire large amounts of shares, where the shares could be released over a period of time to employees but the corporation tax deduction could still be received immediately.
It appears that this exception has been used by some companies to obtain a large tax deduction where there is no realistic prospect of employees ever receiving shares. Arrangements have also been put in place subsequently to ensure that the shares put into the SIP have no real value so existing shareholders interests are not diluted.
Clearly this is contrary to the intention of the legislation and HMRC have announced that they will be including in the Finance Bill anti-avoidance legislation blocking this scheme, although they have argued that existing legislation allows them to counteract it anyway.
We have been assured that normal operation of SIPs is not affected and small companies who wish to use the exemption in good faith will still be able to do so.
Finally, the Government have announced that anti-avoidance legislation will be introduced to combat use of employee trusts and other vehicles in remuneration arrangements. No details are given, but arrangements that the Government could have in mind include sub-trusts where companies give monies to trusts which are then allocated so that they are restricted for the benefit of particular families or benefits are provided tax-free after the end of employment. Also, loans can be made which are never intended to be repaid. The intention presumably is to ensure that more income tax is collected on what can be seen as disguised employment income.
This article originally appeared in Law-Now, CMS Cameron McKenna's Free Online Information Service. To register for Law-Now, simply visit www.law-now.com and select the 'Register' link in the main navigation.