There have been significant changes relating to EMI options and other employee share ownership arrangements (approved and unapproved) which have taken effect since 6 April 2014 even though the 2014 Finance Act which will implement them did not become law until 17 July 2014.
The changes have been both technical and administrative and are reviewed in more detail below. In relation to EMI options, although they are still by far the most flexible and tax-efficient form of incentive (and can even result in employers having a negative tax charge), the requirement that their grant must now be notified electronically to HMRC has added a significant additional level of risk for unwary companies and their advisors.
EMI options – online registration and reporting – Are HMRC properly prepared?
In order that EMI options qualify for the considerable EMI tax advantages, their grant has to be notified to HMRC (along with certain confirmations from employer and employee) within 92 days after the date the options are granted. These tax advantages are clear, not least the CT deduction for the employer on the gain made by the option-holder and CGT for employee option-holders at 10% on all growth in value of the shares after grant as long as the options were granted more than 12 months before sale – please note employee option-holders do not need to have at least 5% of the shares and the votes which is a condition for CGT entrepreneurs relief in all other cases.
Notification of the grant of an EMI option on or after 6 April 2014 now has to be done electronically via the PRS System. Until the EMI plan has been registered with HMRC can the Forms EMI 1 now be filed. Numerous companies do not have an EMI ‘plan’ as such but grant the options directly via agreements between themselves and their employees. They will still have to register the fact that they propose to grant EMI options or have granted them before the EMI 1 forms can be filed.
The plan registration process is new and untried and untested. There is a guide for companies in HMRC’s Employment-Related Securities Bulletin no 15 published in April 2014.
The registration can only be done through HMRC Online Services and PAYE, so companies not already signed up for this will have to do so first. Once a plan has been registered it will be possible for the person at the company who registered it to appoint an ‘Employment Related Securities Agent’ (which can be a third party) to file forms EMI 1 and complete and submit the annual returns.
Until now it has been our practice and preference (and we imagine that of many other lawyers and advisors) to file the EMI 1 forms notifying the grant of options with HMRC on behalf of our clients to make absolutely sure it gets done. A busy finance director or company secretary will probably want to move on to the next task once the options have been granted. BUT this is where the risk lies – advisors are not allowed to do this for their client unless the EMI plan has been registered and they have been appointed as the official agent. Since all this needs to be done before the expiry of the 92 day deadline, the process should be started way in advance!
Registration of other share plans
In addition to EMI arrangements, all other share plans, approved and unapproved and whether established before or after 5 April 2014 have to be registered with HMRC by 6 July 2015. As with EMI, companies will have to do this themselves although once a plan is registered, they can appoint an official agent to deal with the annual returns. If you are already the PAYE agent, you can simply apply online.
Self-certification of ‘approved’ share plans
Before 5 April 2014, companies wishing to establish one of the three ‘approved’ share plans (CSOP – Company Share Option Plans, SAYE option plans and SIP – Share Incentive Plans) had to ask for formal approval from HMRC in advance. If they did not, the plans would not qualify for the statutory tax advantages. CSOPs, SAYE and SIPs established on or after 6 April now have to be self-certified, ie, it is the responsibility of companies and their advisors to ensure that the plan complies with the legislation.
This is a welcome change with the HMRC approval process having become progressively slower and slower (up to 3 months was not unusual). Enterprise Management Incentive (EMI) arrangements have always been self-certified and as long as companies are properly advised the lack of advance confirmation from HMRC that all the boxes have been ticked should not be a problem.
Online annual reporting
Companies granting EMI options or operating one of the three approved plans or any unapproved arrangements have for some time had to report all activity to HMRC by 6 July following the end of the relevant tax year. With effect from the 2014/15 tax year onwards the returns will have to be filed online. Once they have registered their plans, it is likely that many companies will appoint their administrator as their agent for this purpose.
Other changes to approved plans
Other changes have also been made with effect from 6 April 2014 which increase some of the participation limits and improve flexibility:
- CSOP options may now be exercised up to 20 days before or after a change of control and still qualify for income tax relief even though the CSOP conditions may not be satisfied at the point of exercise;
- SAYE options may also now be exercised within 20 days before or after a takeover without loss of income tax relief and the monthly savings limit has doubled from £250 to £500; and
- Partnership and dividend shares held in a SIP can now be subject to forfeiture in the same way as free and matching shares, although on forfeiture the SIP trustee must pay back the lower of the market value of the shares or the price paid for them or the amount of dividends reinvested. The maximum amount which can be invested in partnership shares has increased from £1,500 a year to £1,800 and the maximum value of free shares which can be awarded each year has increased from £3,000 to £3,800.
These are positive changes, particularly in relation to the exercise of options on a takeover where having to time the exercise to take place contemporaneously is an additional administrative headache companies can do without. In our experience however, buyers will want all options to be exercised before completion to save them having to make subsequent small additional acquisitions so we are not sure how much use will be made of the ability for options to be exercised within 20 days afterwards in practice.
Rollover of restricted securities
Since Royal Assent to the 2014 Finance Bill passed on 17 July 2014, it is now be possible on a change of control for employees to exchange restricted securities for consideration wholly or partly in the form of new restricted securities without triggering an income tax charge by reason of the exchange. The unrestricted market value of the new restricted securities (plus any cash consideration) has to be the same as the UMV of the old restricted securities immediately before the exchange and to the extent there is a cash element, income tax is only payable on that part.
This is a very welcome change and one which has been lobbied for for some time. Under the old rules, if employees hold restricted securities in a company which is acquired by another company on the basis of a share for share exchange, an income tax and NICs liability was triggered even if the employees had no option but to accept the exchange.
Corporation tax relief preserved for 90 days after takeover by an unlisted company
According to old legislation, if an unlisted company (and AIM companies are unlisted for this purpose) acquired control of another company, the corporation tax deduction available to the target company was lost if options were not exercised or shares did not vest before control had passed to the acquirer. With effect from Royal Assent on 17 July 2014 the corporation tax relief is preserved as long as options are exercised or shares vest within 90 days afterwards.
Since July 2013, the period during which EMI options can be exchanged following a disqualifying event such as a change of control has been increased from 40 to 90 days and so the corresponding extension of the period during which the Corporation Tax deduction is preserved is a sensible amendment. However, in the interests of an orderly sale, it is likely that any acquiring company will still expect all options etc to be exercised before control has passed so there is no reason for subsequent small share acquisitions.
Section 222 – extension of employee reimbursement period
Section 222 of the Income Tax (Earnings and Pensions) Act 2003 is one of the harshest and most disliked provisions in all the legislation relating to employment securities. If an employer is treated as having made a notional payment of income to an employee and is required to account for the employee’s income tax on that notional payment (such as on the exercise of an unapproved option on a takeover), and the employee does not ‘make good’ the amount of that tax to the employer within 90 days after the event (even if the employer has not accounted for the tax on his behalf), the tax which the employer has, or should have, accounted for to HMRC is itself treated as a taxable benefit. The employee has to pay tax on the tax via self-assessment and the employer has to account for Class 1A NICs even if the tax is subsequently reimbursed. With effect from notional payment triggers on or after 6 April 2014 the period during which the tax must be made good by the employee is extended to 90 days after the end of the tax year in which the trigger event occurred.
This will be a much appreciated amendment to section 222 which has long been recognized as extremely harsh and inflexible. It is to be hoped that HMRC will issue guidance in the near future which may confirm that ‘making good’ can take place even if there has been no actual payment of cash by the employee within the 90 day period.
For further advice in relation to any of the points raised in this post, please contact a member of the WHA tax team for further information.