Schedule 2 Share Incentive Plan (SIP): Requirements relating to the trust and trustees of a Schedule 2 SIP: Trustees' obligations in relation to tax
This section is not concerned with the trustees’ tax obligations in relation to their income and gains generally but only with those obligations under the SIP Code relating to Schedule 2 SIP shares and partnership share money. The Trusts, Settlements and Estates Manual contains more general guidance about the taxation of trustees.
PAYE when Schedule 2 SIP shares “cease to be subject to the SIP”
The Schedule 2 SIP rules must enable the trustees to fund any PAYE obligation (sections 510 & 511) when shares “cease to be subject to the plan” (see ETASSUM28150) (paragraph 79). This happens where, for example:
- employees leave relevant employment and all their Schedule 2 SIP shares cease to be subject to the SIP (paragraph 97), or
- a participant withdraws partnership shares within five years of their award (section 506),
and in either case the shares are readily convertible assets at the time when tax arises.
The requirement to operate PAYE falls on the participant’s employer, or ex-employer if the participant is no longer in relevant employment (both referred to in ss510-512 as the employer company). The trustees are obliged to make a payment to the employer company of the amount of that PAYE liability (section 510(2)) but, very exceptionally, HMRC may require the trustee to operate and account for PAYE directly (section 511).
The SIP rules should allow the trustee to meet a PAYE obligation by:
- selling some of the plan shares which are being taken out of the SIP,
- selling some of the participant’s other Schedule 2 SIP shares, or
- accepting cash paid to them by the employee (paragraph 79(1))
The free share and partnership share agreements should normally indicate which method(s) will apply.
Disposing of Schedule 2 SIP shares
The SIP Code states that the trustees can buy some or all of the shares from a participant to meet that participant’s PAYE obligation (paragraph 79(3)). If they do so, the trustees must pay the current market value for the shares in accordance with trust law principles.
Disposing of SIP shares to meet PAYE and NICs, including where the trustees themselves re-acquire the shares, may trigger a tax charge on the shares disposed of, depending on how long the shares have been in the Schedule 2 SIP (paragraph 79(4)).
The SIP Code does not authorise the sale of SIP shares to meet other costs but it is acceptable in practice for the trustees to include their reasonable selling costs in the amount which they need to cover. This can include their own administrative costs and brokers’ charges, for example.
Partnership Share Money
The SIP Code provides that the trustees must return partnership share money to the participant in certain situations (section 503(2)). The amount of money returned counts as employment income of the participant for the tax year in which the amount is paid to him or her (section 503(1)). These situations are:
- where deductions are in excess of the permitted maximum (paragraph 46(5)),
- there is a surplus remaining after the acquisition of partnership shares (paragraph 50(5)(b) or 52(6)(b)),
- an individual ceasing to be in relevant employment (paragraph 52(7)),
- the accumulation period ends due to a specified event (paragraph 52(8)),
- the participant withdraws from the partnership share agreement (paragraph 55(3)), or
- the company terminates the SIP or HMRC withdraws the tax advantaged status (paragraph 56).
The trustees should normally discharge their obligation by paying the relevant amount to the employer company which will pay it over through payroll (see “PAYE when Schedule 2 SIP shares cease to be subject to the SIP” above). However, it is also acceptable for the trustee to ascertain by reference to the employer the amount to be withheld on account of PAYE and NICs before paying over the balance to the participant. If this method is adopted the trustees are responsible for ensuring that delays do not occur, as they are required to pay over the partnership share money “as soon as practicable”.
When a participant receives a capital receipt in respect of or by reference to any of his or her plan shares which have been held in the Schedule 2 SIP for less than 5 years (in the case of free, matching or partnership shares) or 3 years (dividend shares), the amount or value of the capital receipt counts as employment income for the tax year in which it is received (section 501).
Section 502 defines a capital receipt as any money or money’s worth except to the extent that it:
- constitutes income in the hands of the recipient for income tax purposes (or would do so but for the SIP Code),
- consists of the proceeds of a disposal of the SIP shares,
- consists of new shares which can be retained in the Schedule 2 SIP after a company reconstruction (see ETASSUM25130),
- constitutes the proceeds of a disposal of rights in order to fund the acquisition of further SIP shares in accordance with paragraph 77 (see ETASSUM25160 “When are new shares treated as SIP shares?”).
If the trustees receive a sum of money which is or forms part of a capital receipt which is taxable by virtue of Section 501, they must pay the taxable amount to the participant’s employer (section 513), (Any cash which is not taxable, or any non-cash capital receipt, must be paid or transferred to the participant as soon as practicable by virtue of paragraph 74). The employer company must pay over the money to the participant after deducting PAYE and NICs. In exceptional circumstances (e.g. where the company which formerly employed the participant no longer exists), HMRC may require the trustee to operate and account for PAYE on the capital receipt directly (section 514).