Top 5 administration errors affecting UK share plans
The advantages of employee share plans for both employees and employers are well known. Employees are given the opportunity to share in the success of the business and enjoy potentially valuable rewards, sometimes tax efficiently. For employers, share plans can be an ideal way to engage and motivate the workforce, as well as a cost effective way of remunerating employees.
However, many of the advantages of shares plans can be undermined by mistakes in the way they are implemented. In particular, sometimes quite minor administrative errors can have seriously detrimental consequences.
We have outlined the most common administration errors we have come across when advising clients on their share plans.
UK tax advantaged share plans: EMI options
Enterprise Management Incentive (EMI) options provide some excellent tax benefits for employees – for small, fast growing companies, the ability to offer employees a share in the business and a 10% tax rate is a terrific incentive. However, there are a number of compliance requirements that can very often trip companies up, particularly start-ups with few administrative resources. These errors usually come to light when the company is being sold or undergoing some sort of corporate event rather than as the result of an audit by the UK tax authorities (HMRC). If the company has undergone significant growth since the options were granted, the loss of the expected tax relief can be particularly costly.
1. Failing to make EMI HMRC grant notifications within the 92 day deadline
If the 92 day deadline for notifying HMRC of the grant of EMI options is missed, there is nothing that can be done to remedy that (short of granting the option again), and the tax benefits will be lost. It is also necessary to take into account the lead time required for registering the plan with HMRC’s online system. For non-UK based companies in particular, this can take a number of weeks, if not months.
2. Having non-compliant documentation
Although there are not that many prescriptive requirements for EMI option agreements, they do need to contain certain specified information, and if they do not, they will not qualify for the tax benefits. In particular, one new requirement applicable from April 2014 is for the agreement to contain a declaration from the employee that he/she meets the ‘working time’ commitment (this was previously included in the notification form).
Another issue that often trips up non-UK based companies is getting the date of grant of the option correct. The date of grant will usually be the date the option agreement is signed and not the date the board decides to grant the option. This will impact on the relevant time limits for agreeing share valuations with HMRC and notification of the grant of options.
3. Failure to keep records
When a company is being sold there will be a great deal of scrutiny of the EMI documentation as part of the due diligence process. In particular, the parties will want to make sure that the EMI options are qualifying, as if they are not the company may have a large pay-as-you-earn tax (PAYE) and National Insurance contributions (NICs) liability. Companies should make sure they keep copies of all relevant documentation, including option agreements, HMRC valuation letters and the HMRC notification confirmations.
With the move to online notifications, there is now no possibility of accessing information included in the HMRC notification after it has been submitted. It is vital to retain screenshots or print outs of all relevant information together with the HMRC notification reference.
Non-tax advantaged options
4. Not deducting income tax under PAYE on the exercise of share options
There are relatively fewer compliance requirements when granting non-tax advantaged options to employees in the UK, but tax withholding is an area that many companies get wrong. Numerous companies, particularly those based outside of the UK with unlisted shares, incorrectly assume that there is no need for them to account for income tax on the exercise of a share option as employees can deal with this through their self-assessment tax return.
Whether PAYE withholding is required by the employer is a complex issue. Even where shares are not subject to any form of trading arrangements, PAYE withholding may still be required depending on the corporate structure of the business.
5. Not withholding PAYE where options are exercised by non-resident employees
Many companies assume that if an employee was not resident in the UK when an option was granted and/or at the date an option was exercised, there would be no UK income tax liability in connection with that option.
However, since April 2015, there have been new rules governing the tax treatment of internationally mobile employees holding share options. Under these rules, whenever an employee has worked in the UK for any part of an option’s vesting period, a UK income tax charge (and potentially a PAYE withholding liability) may apply. There are also similar rules for NICs.
How can we help
If you are considering implementing a share plan and want to avoid errors such as these, we can assist with:
- Advising on the best share plan for your company;
- Drafting the plan rules and associated documentation;
- Confirming compliance with the HMRC requirements; and
- Drafting participant communications including tax advice.
If you have any questions, or to discuss how we can help you, please contact us on +44(0)203 051 5711 or email us.
For more information on some of the issues covered in this article please see the following resources:
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