All of the changes to employee share incentive arrangements that were proposed back on 27 March (when the Finance Bill was published) have now formally made it onto the statute books: Royal Assent has been received and we now have the Finance Act 2014. Just as well really, given that the vast majority of the changes have already been in force since 6 April 2014 (and all lawyers can now stop the ‘but what if Royal Assent is not granted’ debate). So what are the key changes?
Implementing new “approved” share plans
One of the most significant changes to have been introduced on 6 April 2014 is that new Company Share Option Plans (CSOP), Sharesave Schemes (SAYE) and Share Incentive Plans (SIP) will no longer require prior approval by HMRC. Instead, companies will need to “self-certify” any new plans. Whilst this will undoubtedly reduce the amount of time it takes to implement a new plan, companies will need to take greater care to ensure that any new plans are compliant with the relevant legislation (as HMRC will no longer provide this confirmation and fines will be imposed for breaches).
With effect from April 2015, companies must submit HMRC’s annual returns for their employee share plans (including Forms 34 (SAYE), 35 (CSOP), 39 (SIP) and 42 (other plans)) online. In preparation for this, companies must register each of their plans with HMRC before 6 July 2015. The ability to register plans is already available but, given some of the teething problems HMRC has experienced, many companies are likely to wait until later in the year before attempting to complete their registrations.
The registration of plans, and the filing of annual returns, must be done through the “PAYE Online” portal on HMRC’s website. Further details can be found at www.online.hmrc.gov.uk.
Increased limits for SAYE and SIP
With effect from 6 April 2014:
- the monthly saving limit for SAYE increased from £250 to £500;
- the maximum ‘free share’ award under a SIP increased from £3,000 to £3,600; and
- the annual investment limit for ‘partnership shares’ under a SIP increased from £1,500 to £1,800.
Companies wanting to take advantage of the new statutory limits will need to make sure that their plan rules automatically cater for the higher limits. Equally, companies who do not wish to offer the increased saving opportunities to employees (for example, due to concerns about accounting costs and/or dilution limits) must take care to restrict their awards.
Other changes that affects all plans
The Finance Act 2013 introduced a number of changes that applied automatically to CSOP, SAYE and SIP plans (see http://blogs.olswang.com/budgetblog/2013/07/18/changes-to-approved-share-plans/). The Finance Act 2014 includes further ‘automatic’ changes, largely to reflect the fact that advance approval from HMRC will no longer be required to amend share plans or adjust awards following certain changes to a company’s share capital. Whilst there is no obligation to do so, companies should consider updating their plans to ensure that they reflect current law.
In relation to CSOP one particular issue to note is that the legislation now stipulates a minimum level of information that must be provided to option holders at the time of grant. All companies should, therefore, ensure that their CSOP award documentation does comply with this new requirement.
New ‘optional’ features
Building on the changes that have already been introduced by last year’s Finance Act, the Finance Act 2014 includes some additional ‘optional’ changes. In order to take advantage of these features, companies will need to amend their existing plans. The ‘optional’ features include:
- permitting the introduction of forfeiture provisions for ‘partnership shares’ and ‘dividend shares’ under a SIP (although, in practice, listed companies are unlikely to want to introduce this feature);
- allowing SAYE and CSOP options to be exercised up to 20 days before a takeover event without losing the tax-beneficial treatment;
- where a takeover may otherwise cause the loss of tax-beneficial treatment, allowing SAYE and CSOP options to be exercised up to 20 days after the takeover event without losing the tax-beneficial treatment (for example, where the takeover is by an unlisted company); and
- extending the definition of a ‘takeover’ in SAYE and CSOP plans to include certain overseas reorganisations.
In relation to SAYE plans, HMRC has also confirmed (in its updated guidance published earlier this week) that a provision can now be included to prevent tax difficulties in the US (under the s409A ‘deferred compensation’ regime) for SAYE option holders who move to the US.
Internationally mobile employees
Although they will not come into effect until 6 April 2015, the Finance Act 2014 introduces two changes that will affect internationally mobile employees:
- an extension of the availability of corporation tax relief for share options or other awards held by employees who come to work for a company within the scope of UK corporation tax; and
- reform of the taxation of options held by employees moving to, or away from, the UK, ensuring that UK tax is levied on the proportion of the option gain that reflects the time spent in the UK during the vesting period.
So what’s next?
After two consecutive Finance Acts containing material changes affecting employee share incentive arrangements, most practitioners are hoping for a quieter time next year! That said, HMRC has launched a consultation over the summer on the way in which HMRC values shares on the Official List of the London Stock Exchange (which will hopefully result in a move away from the use of ‘middle market’ or ‘quarter up’ values to the more commonly used ‘mid market’ price). Further updates on this to follow . . .