As you are no doubt already aware, employers will be hit this year by the 1% increase in National Insurance contributions which was announced last year.
Other changes announced this year will not have as significant an effect on employers as that rise in staff costs, but a few other changes are worth noting
Tax efficient remuneration
The Chancellor announced a number of changes affecting Employee Benefit Trusts and Employee Share Schemes, the detail of which is in the Finance Bill.
The definition of equity remuneration will be widened to include a variety of financial products, as well as shares and company securities, and there will be consistency across the charging sections. The new rules will allow the Revenue to obtain information from any of the following sources: the employer company; the host employer (where the employee remains employed by a foreign corporation); the company issuing the shares; or the company whose shares are the subject of the issue; in order to ensure that employers comply with their obligations.
The Finance Bill contains provisions which will introduce a corporation tax deduction for employee share acquisitions in relation to acquisitions of qualifying shares (which must broadly be part of the ordinary share capital of the company) by employees in accounting periods starting on or after 1 January 2003.
The provisions in relation to share options in the Finance Bill also change the treatment of unapproved options with restrictions, to being in an ‘appropriate’ charge when restrictions are lifted. It will be important to keep up to date with the changes as the Bill progresses through Parliament.
Exercise of unapproved options: reversal of Mansworth
No great surprise is the reversal of Mansworth v Jelley. The recent case showed that an interpretation of the existing legislation allowed taxpayers, in certain circumstances, to use a disproportionately high amount as their deemed cost of acquisition when calculating their chargeable gain on disposal of shares acquired by exercise of an option. This meant that on exercise of an unapproved option a capital loss could be generated and has prompted many taxpayers to look for repayments of tax paid in respect of their share options.
The new measures will restore what was previously understood to be the position, that on sale of an option, an employee will only be able to take into account the sums paid for the option right, the amount paid on exercise and any amount on which Schedule E tax has been paid (i.e. taking it up to market value at the date of exercise) as the acquisition cost of the shares being sold.
The measure will have effect from 10 April 2003 in relation to any options exercised after that date. However anyone who acquired options by reason of their employment or from a related party, and exercised their options before that date, should seek advice, sooner rather than later.
Employee Benefit Trusts
Deductions from profit, previously allowable when employers made payments to Employee Benefit Trusts (EBTs), are to be deferred until a payment is made out of the EBT which gives rise to an income tax and National Insurance charge. This is an anti-avoidance measure, but may well have serious cash flow implications for employers using this type of tax efficient remuneration. The rules apply to periods ending on or after 27 November 2002 in respect of contributions paid to EBTs on or after that date.
Various other minor amendments were made to the share schemes rules - these are summarised below:
- removal of the rule which states that the exercise of an option under a Company Share Option Plan (CSOP) will not be tax-free if the date of the exercise is within three years of a previous tax relieved CSOP exercise;
- exercise of CSOP options within 3 years of the date of grant by good leavers (employees who leave the CSOP due to injury, disability, redundancy or retirement) will be exempt from tax and NICs;
- arrangements to fund the exercise price and deal with payment of PAYE and NICs will be acceptable for CSOP purposes as long as they do not give a right to receive cash;
- CSOP rules will be allowed to specify "market value" by reference to published prices on Recognised Investment Exchanges in terms similar to those for shares listed on the London and New York Stock Exchanges;
- the definition of ‘material interest’ in CSOP will be aligned to the definition in Save As You Earn (SAYE) schemes and Share Incentive Plans;
- the need for Inland Revenue approval of changes to SAYE and CSOP plans will be limited to changes to key features only;
- the right to exercise SAYE options will no longer be lost when an employee loses their job following injury, disability, redundancy, or retirement following a move between associated companies, usually after a takeover or restructuring;
- removal of the rule that employees can only purchase ‘partnership shares’ through monthly salary deductions of up to £125 or 10%, whichever is lower – they will be allowed to purchase up to the annual limit of partnership shares at any time within the year;
- employers will no longer have to use total salary to calculate the maximum percentage that can be spent on partnership shares – they can decide whether to use all or part of the employee's salary as the basis for the calculation;
- employees will be able to participate in two Share Incentive Plans (SIPs) run by connected companies in the same year – i.e. continuity of SIP participation will be allowed when an employee transfers from one company to another within a group as part of a restructuring;
- the holding period for dividend shares (reinvestment of dividends from SIP shares) will be aligned with the holding period for the base SIP shares – i.e. 5 years to qualify for tax reliefs;
- the deadline within which employees must refund PAYE on notional gains related to readily convertible assets (including some share option gains) to their employer will be extended from 30 to 90 days from the exercise of the option; this deadline will also apply to any Class 1 NICs where the tax has not been reimbursed; and
- a new measure will help employers cope more easily with the April 1% NICs increase; the existing limit on the amount that may be recovered each month from an employee is being abolished and the period over which recovery may be made is being extended into the following tax year.
Artificial arrangements to pay cash bonuses through pre-April 1999 share options followed by a series of partial exercises of the option will be brought within the NICs charge.
New anti-avoidance measures will prevent artificial manipulation of the value of shares to reduce the value at the time the tax charge arises. This will remove the need for the administratively complex provisions on dependent subsidiaries.
Interest on late payments of PAYE and NIC
The Finance Bill includes provisions which will formalise the current practice that interest payments in respect of late paid employment taxes are not allowable deductions in calculating a business’ profits for tax purposes.
The thresholds for specific tax and National Insurance exemptions for certain benefits-in-kind provided by employers for employees are to be increased. Regulations are to be introduced which will amend the relevant exemption limits as follows:
- the limit on the exemption for awards for long service will be increased from £20 to £50 for each year of service;
- the limit on the exemption for the cost to an employer of an annual party or similar celebration will be increased from £75 to £150 per head per annum;
- the limit on the exemption for a non-cash gift received by an employee from a third party will be raised from £150 to £250; and
- the limit on the number of cycle to work days on which free meals can be provided to employees is removed.
There is also to be a measure benefiting employers who contribute to the household expenses of employees who work at home. Effective from 6 April 2003, a specific exemption from income tax for contributions made by employers to additional household costs incurred by employees who regularly work at home under agreed flexible working arrangements will be introduced.
Employers will be able to pay up to £2 per week (£104 per year) without providing supporting evidence of the additional costs incurred by the employee. The exemption will be available for higher amounts provided the employer can provide evidence that the payments are wholly in respect of additional household expenses incurred by the employee in carrying out his duties at home.