Policy paper

Employee share schemes: simplification of the rules

Published 9 December 2015

Who is likely to be affected

Businesses that award employment-related securities (ERS), such as shares, or ERS options to employees, and the employees who receive these awards.

Payroll and share plan administrators.

General description of the measure

The measure will give effect to a number of changes to the rules for ERS and ERS options. These take further the government’s response to the Office of Tax Simplification (OTS) ‘Review of tax advantaged employee share schemes’ and ‘Review of unapproved employee share schemes’ by simplifying and clarifying the law as well as making some minor technical corrections. The changes will:

  • for non tax-advantaged schemes, clarify the tax treatment for internationally mobile employees (IMEs) of certain ERS and ERS options
  • reinstate rules for Share Incentive Plans (SIPs) previously repealed, to enforce the principle that shares with preferential rights cannot be issued to selected employees only
  • permit late registration of tax-advantaged share schemes where the taxpayer had a reasonable excuse

Policy objective

The measures support the government’s objective to simplify the tax system.

Background to the measure

The measures have been the subject of informal consultation with key stakeholders during the autumn of 2015.

Detailed proposal

Operative date

Operative date is Royal Assent to Finance Bill 2016, except for those measures backdated as explained in the section on proposed revisions below.

Current law

The main legislation on ERS and ERS options is set out in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). Statutory references in this Note are to provisions in ITEPA unless otherwise stated.

The main rules concerning the taxing of non tax-advantaged ERS options are in Chapter 5 sections 471-484. The provisions on Share Incentive Plan (SIP) are in sections 488-515 and Schedule 2.

The taxation of chargeable gains in relation to tax-advantaged share schemes is in Schedule 7D to the Taxation of Chargeable Gains Act 1992 (TCGA).

Current law on company reorganisations in Enterprise Management Incentives (EMI) is contained in Part 6 of Schedule 5.

The law on the price at which shares may be acquired is in paragraph 28 of Part 6 of Schedule 3 for Save As You Earn (SAYE), and in paragraph 22 of Part 5 of Schedule 4 for Company Share Option Plan (CSOP).

The required notification of a scheme to HM Revenue and Customs (HMRC) and consequences of late notification for SIP, SAYE and CSOP are contained in paragraph 81A of Schedule 2, paragraph 40A of Schedule 3 and paragraph 28A of Schedule 4 respectively.

Disqualifying events relating to the company whose EMI shares are under option are set out in section 534.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to amend ITEPA to achieve the following:

  • for Restricted Stock Units (RSUs) awarded to IMEs the charge to tax will arise under the Chapter 5 rules that deal with ERS options, rather than earnings. This will have effect in relation to ERS options from 6 April 2016 irrespective of the date that these have been acquired
  • following a corporate restructure, shares in a SIP will have to be offered to all employees on a similar basis. Preferential shares in a SIP will not be able to be awarded to particular employees only
  • where, by the deadline, a company has failed to make a notification to HMRC that a SIP, SAYE or CSOP scheme meets the legal requirements, it will no longer lose the tax advantages of the scheme where it satisfies HMRC that it has a reasonable excuse for this failure to notify. HMRC will be able to accept a reasonable excuse for notifications made on or after 6 April 2016
  • a company controlled by an Employee Ownership Trust will now be able to operate an EMI. This is backdated to 1 October 2014
  • following a company takeover, minority shareholders holding qualifying share options in an EMI will have the right for their share options to be acquired by the offer or without losing their tax advantage. This is backdated to 17 July 2013
  • there will no longer be a need for specific HMRC agreement to the methodology used by a company valuing share options in a CSOP by reference to a value at a time before the option was granted. Instead the law will provide for HMRC guidance on the matter

An amendment to TCGA will update the deadline for capital gains tax purposes for employees to exercise EMI options following a disqualifying event from 40 days to 90 days after the event.

Summary of impacts

Exchequer impact (£m)

2015 to 2016 2016 to 2017 2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021
nil negligible negligible negligible negligible negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

These changes clarify the tax treatment of certain ERS and ERS options and make it clear that any charge to tax will arise under the Chapter 5 rules. As a consequence of these changes IMEs acquiring securities under RSU schemes who have undertaken some UK duties will now be liable to pay National Insurance Contributions (NICs) only on the UK proportion of the award where they were subject to UK social security contributions. It is not possible to estimate the number.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The measure affects IMEs who are likely to be employees of above average income. The equality impacts will therefore reflect those protected equality groups represented in this population.

Impact on business including civil society organisations

These measures simplify rules without imposing an additional ongoing compliance burden. There will be a negligible one-off cost to businesses as they familiarise themselves with the changes.

Operational impact (£m) (HMRC or other)

The measure supports compliance activity and simplifies without imposing any significant operational impact.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Tom Rollinson on Telephone: 03000 585167 or email: tom.rollinson@hmrc.gsi.gov.uk.