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Employees or directors receiving benefits or cash sums including deferred consideration or acquiring shares or any other assets from someone who is not a direct employer, could find themselves within the scope of this new legislation.

Introducing this draft legislation, Danny Alexander explained it was to end an unfair practice so that no longer would highly paid employees be offered virtually tax-free lifetime loans never to be repaid, all income would be properly taxed and consultation had ensured that there would be limited impact on commercial arrangements. There followed 60 pages of draft legislation, covering much more than loans and including many innocent transactions.

This legislation is going through Committee Stages and has been amended incorporating a recommendations by the QCA Share Scheme Committee who met with HMRC to discuss and make representations. Hopefully more changes will be made but this came into effect from April this year with transitional provisions from 9 December 2010.

It is not yet possible to give a definitive summary of the application of the new provisions but here are some starting points.

Who and what might be affected?

  • The taxable person will be an employee (which includes directors) or former employee or prospective employee.
  • There will be an arrangement providing rewards, recognition or loans in connection with the former, prospective or current employment.
  • A person other than the employer takes a ‘relevant step’ in connection with this arrangement.

This might be an employee trust lending funds to a director or shares being provided by an existing shareholder (individual or trust or company) to satisfy a long-term incentive (LTIP) award or payments or shares in from an earn out or bonus arrangement.

When does the liability arise?

The tax liability arises, not when the employee becomes entitled to a sum of money or an asset or when the ‘relevant step’ is taken, but when it is ‘earmarked’ (however informally), even if details of the relevant step or the sum of money or the asset have not been worked out. 

You will appreciate the potential practical problems agreeing a tax liability if the details are still unclear.

When does it come into force?

It applies now and for any ‘earmarking’ on or after 9 December 2010, however, there will be no tax due before the end of the current tax year.

What are the exceptions?

The legislation, following representations from the Quoted Companies Alliance and others, seeks to exclude arrangements linked to HMRC approved share incentive arrangements, such as Share Incentive Plans (SIPs), Share Option Plans (CSOPs), Savings-related Schemes (SAYEs) and Enterprise Management Incentives (EMIs), and other incentive plans and awards involving shares and securities where entitlements are subject to conditions but will vest, if at all, within ten years. 

What next?

For the time being, till the legislation is settled, all companies need to monitor existing or proposed arrangements where money or assets are earmarked or allocated, subject to performance or other conditions, for employees and directors. If a trust or another company or another person is involved there could be a liability under the new provisions giving (amongst other things) the company a PAYE obligation and national insurance liability.

This article was written by Fiona Bell, a solicitor at Memery Crystal LLP, specialising in employee share schemes. She is also Deputy Chairman of the QCA Share Schemes Committee.

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