Tag: company share option plan

US equity for UK employees – tax considerations

Posted on by Alicia Sprott

Type of equity offered

The equity offered to UK subsidiary employees will typically replicate what is offered to US employees. This may include any of the following:

  • Options, including US tax-advantaged Incentive Stock Options (ISOs)
  • Restricted Stock Units (RSUs)
  • Profit units (in the case of a US LLC parent)

Are such awards taxable in the UK?

Where the employee is working in the UK, such awards will be subject to UK tax. This can be problematic in practice if awards are made by the US parent, without informing the finance or HR team of the UK subsidiary. The UK subsidiary will be responsible for operating any Pay As You Earn (PAYE)/National Insurance Contributions (NICs) due and paying any penalties for non-compliance.

Key UK tax considerations

Where equity is offered to UK employees, it is important to review the documentation from a UK tax perspective. The key considerations will include:

  • Will Income Tax be due on award?
  • Will Income Tax be due on a later vesting of the award or later sale of the equity?
  • If Income Tax is due, will PAYE and NIC withholding be required?
  • Does the documentation contain adequate PAYE/NIC withholding clauses and indemnities to protect the employer?
  • Does the documentation specifically authorise the employer to pass the cost of any employer NIC to the employee?
  • Should protective ‘section 431’ tax elections be considered?
  • How should the awards be reported to HMRC on the UK subsidiary’s Employment Related Securities Annual Returns?

Can we improve what is offered?

Where awards have been designed from a US tax/legal perspective, they may be inefficient from a UK tax perspective.

Whilst it is generally not agreeable from a US perspective to make material changes to scheme rules or to create new share classes to suit the interests of the UK employees, in some cases it is possible to modify awards to improve the UK tax position.

For example, an option scheme would normally have significant PAYE/NIC charges on exercise, but by making small changes to the individual option certificates or by adopting a UK sub-plan to operate alongside the US main plan, it may be possible to restructure as UK tax-advantaged Enterprise Management Incentive (EMI) or Company Share Option Plan (CSOP) schemes. This can create significant tax savings for the UK subsidiary and its employees, whilst having little to no effect on the operation of the scheme, from a US perspective.

For further advice on US equity options for UK based employees, please contact David Bareham, Share Schemes Director.

Employee option schemes – recent changes

Posted on by Alicia Sprott

As of 6 April 2023, changes have been made to HMRC tax-advantaged option schemes. These changes are summarised here:

  • Company Share Option Plan (CSOP) value limit – increased from £30k to £60k per employee.
  • CSOP removal of restrictions on share class to be used.
  • Employee Management Incentive (EMI) removal of requirement to sign a working time declaration.
  • EMI removal of requirement to itemise restrictions over shares.
CSOP changes

The increase in the value of shares that can be subject to CSOP options has increased to £60k. Whilst this is still significantly lower than the equivalent £250k limit for EMI, it is a welcome and long overdue increase. Considering that it is usually possible to negotiate discounted share values with HMRC, the £60k limit may prove enough incentive for second tier, and in some cases, first tier management.

The removal of restrictions on share class for CSOP is also a welcome change. The historic rules made it difficult for companies with multiple share classes to operate a CSOP or prevented them from granting options over minority share classes. The changes now allow for CSOP options to be granted over growth shares or other bespoke share classes. The use of CSOP options over growth shares allows for more shares to fit within the £60k limit, allowing for a viable incentive for first tier management.

EMI changes

The EMI changes are also welcome. The removal of the requirement to sign a working time declaration is retrospective, applying to EMI options exercised post 6 April 2023, even if granted earlier. It must be noted, it is still a requirement that the option holder meets the working time requirements (working 25 hours per week or spends 75% of their time working for the employer or group company).

Similarly, the removal of the requirement to itemise restrictions over EMI shares is also retrospective, applying to options exercised post 6 April 2023, even if granted earlier.

The lack of signed working time declarations and/or the itemisation of share restrictions had often been omitted in EMI scheme documentation, only to then be picked up on a due diligence exercise, creating concern and uncertainty to the tax status of the ‘defective’ option agreements. Removing these requirements should significantly help facilitate a smoother due diligence process where EMI options are involved.

Further EMI changes due

There are further changes due from 6 April 2024, whereby the notification of EMI options to HMRC will change from being an ‘in-year’ requirement reportable within 92 days of grant to being reportable by 6 July, following the end of the tax year of grant.

Whilst the extra time to notify may prove useful, it may present greater risk for employers. For example, if the person responsible for filing the notification leaves the business before the end of the tax year, it is possible that their successor will not be aware of the requirement. Missing the notification deadline can be a serious issue for employers, as it removes the EMI status of the option, meaning the exercise is likely subject to PAYE/NIC instead of favourable rates of Capital Gains Tax (CGT).

Employers and their advisors will need to ensure they have procedures in place to minimise the risk of EMI notification falling through the cracks.

Get in touch

If you wish to discuss how the above changes will affect you, please get in touch with David Bareham, Share Schemes Director, or our Share Schemes team.

Get in touch