HMRC Consultation on Unapproved Employee Share Schemes

A consultation is currently in progress relating to proposed changes to the rules on unapproved employee share schemes and employment-related securities.

The changes proposed could be quite radical and therefore advisors who deal with such schemes would be wise to consider responding to the consultation. Eaves and Co are currently preparing our own response to the proposals and we would welcome any further feedback that you may have, to be incorporated into our response.

The Proposals

The summary of the proposed changes is as follows:

  • Individuals would potentially be able to choose whether the tax charge on employee shares arises at the time they are acquired or, at the time at which they could be sold for their “unrestricted market value” (when they become ‘marketable’). Income tax and NICs would then be payable at this time.
  • The rules on marketable shares could potentially mean that shares in private companies (without an EBT) would not be treated as marketable until arrangements were put in place for a sale of the shares. This would potentially enable tax charges to be significantly deferred compared to the current rules, although an election could still be made to pay tax upfront.
  • Changes to the rules on readily convertible assets (RCAs) which determine when NICs are payable on employee shares. The proposals are that all such shares would be RCAs (with NICs payable at the point at which the shares became ‘marketable’ unless an election was made to pay tax upfront on similar terms to a current s.419 election.
  • Dividends and other income received from employee shares before they became ‘marketable’ would be taxed as employment income

Whilst the proposals seek to provide a simplification of the current rules, it remains to be seen whether this will be achievable bearing in mind the necessary anti-abuse clauses that will no doubt be required to prevent unforeseen uses for such rules. Our thoughts are that these proposals require detailed critical thought.

The consultation document proposes a ‘simplification’ in order to encourage the use of employee share ownership. Whilst there may be some cases where deferring an upfront tax charge might make such schemes more attractive, the fact that all of the uplift would be taxable as employment income might raise questions about what the purpose of entering into such schemes would be.

Similarly, one wonders what the policy thinking behind charging dividend income as employment income is, and how such a proposal would encourage the use of share schemes? If it is felt that dividends are taxed at the wrong rate, why are complicated rules like these proposed, rather than simply raising the tax rate on dividends?

As advisors, it will be important to ensure clients are fully aware of the pros and cons of making elections under these rules and the impact of paying tax at employment income rates on any profits and/or dividends arising on the shares if no elections were made.

Do you think these changes would improve the position for unapproved share schemes and encourage more use of such schemes, or would the new position with potentially increased amounts taxed as employment income have the opposite effect? Please let us know in the comments section below.

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