E-PAY
UK government unveils plans to reform tax levied on high-tech share options
The UK Government has announced plans to shift the burden of national insurance contributions (NIC) on unapproved share option gains from employer to worker after pressure from high-tech companies facing unpredictable tax bills.
The announcement follows a barrage of criticism from high-tech companies — including some of the biggest US technology investors such as Cisco, Oracle, and Sun Microsystems — that the way tax was charged on share options was damaging the internet economy.
Cash-strapped dot-com companies with volatile share prices, it was argued, were left exposed to unpredictable — and potentially huge — national insurance liabilities.
Government proposals
The new plans allow the employer's NIC to be recovered from or transferred to the employee. This will solve accounting difficulties and also help smaller start-up companies with limited cash flow, the Inland Revenue said. But the burden can only be moved by agreement between companies and their employees.
In addition, the employer's national insurance paid by employees as a result of this change will qualify for relief against the taxable gain on the share option. This will reduce the headline rate of tax on share option gains from 52.2% to 47.32%.
Financial Secretary Stephen Timms said:
Allowing employers and employees to come to an agreement to recover or transfer the national insurance charge should provide a technical solution by completely eliminating the unpredictability of the charge. Many of the companies that responded to the consultation said that they will use this solution.
Background
The dispute has been rumbling on for the past year, following the Inland Revenue's decision to impose national insurance charges on gains arising when share options are exercised outside an Inland Revenue scheme.
Before April 1999, national insurance was paid only when options were granted. But now, when an option is exercised, the company must pay national insurance charges, along with income tax calculated on the difference between the share's market value and exercise price of the option. Companies have no control over when employees exercise their options or their share price.
Document extract
National insurance on share option gains — Inland Revenue
1 The main change would remove the current statutory bar which prevents employers and employees coming to an agreement under which the employee can pay the employer's national insurance contributions (NICs) but only in respect of share option gains. The employer and employee will be able to come to a voluntary agreement under which the employee could agree to fund all or part of the employer's NICs. Alternatively, the employer and employee will be able to make a joint election under which the liability for all or part of the employer's NICs is transferred to the employee. An election will take effect after the Inland Revenue have approved the form of the election and the arrangements made for securing that any liability transferred by the election is paid.
2 The change will enable employers and employees to come to an agreement or make an election in relation to any unapproved share option granted on or after 6 April 1999 where a gain has not yet arisen.
3 This change should help companies with very volatile share prices that offer their employees substantial share options as part of their remuneration package. Recovering the employer's NICs from the employee or transferring the charge to the employee should solve the accounting difficulties faced by companies. These arise because of the need for companies to put a provision in their accounts for a NICs liability that is unpredictable since it depends on the company's share price at the time when the employee decides to exercise his or her option. It also helps smaller start-up companies, which may have limited cash flow, by putting the company in funds to pay their NICs charge or by moving the payment of the NICs charge to the employee.
4 In a separate measure, a new tax relief will be introduced which will allow employees to set off any NICs they pay, under an election or under an agreement to recover NICs, in calculating the income tax charge arising on the share option gains.
5 The Government does not want employers to be able to transfer their wider national insurance liabilities to their employees. The legislation will therefore also confirm the existing general statutory bar on doing so, and extend it to class 1A (on benefits in kind) and class 1B (on PAYE Settlement Agreements), both of which are only payable by employers.
6 These changes will be introduced at the first legislative opportunity.
Source: Inland Revenue
Want to know more?
Jump to the Inland Revenue web site and look at the press release for 19 May 2000 http://www.inlandrevenue.gov.uk/news/press.htm
Visit the Financial Times online at www.ft.com and type share option schemes into its global archive search box — you will find a series of reports on this issue.