UK: National Insurance On Share Options: New Government Proposals

Last Updated: 30 May 2000
Business Shows Little Support For Shifting NIC Liability To Employees

Government proposals issued late on Friday 19 May to allow national insurance liabilities on the exercise of share options to be transferred from employers to employees, by agreement, will do little to make the UK more attractive than our major competitors. Feedback from our clients shows the move has little support amongst UK business.

David Tuch, Head of Share Schemes, said: 'The Government has made a concession from its original plans, by allowing the NIC which is now to be levied on employees to at least be offset against their income tax bills, which is welcome. But we believe there are still significant problems with the final proposals.'

He added: 'Transferring the liability to the employee results in an effective tax rate for higher-rate taxpayers of 47.32%. This would originally have been 52.2% had the Government not made its concession, but many companies will still find the proposals unacceptable. And the supposed "solution" of simply granting more options just puts the additional cost back on to shareholders'.

Feedback from KPMG clients who run unapproved share option schemes showed a clear majority (85%) for simply removing employer's NIC from unapproved share options. There was far less support for any alternative.

The other possibilities considered were: the charge being imposed on the market value of shares on the date of the grant of option but collected when the option is exercised; a charge at a special, lower, rate; and the charge being capped at say, £50,000.

David Tuch said: 'Our feedback suggests most companies would prefer complete removal of employer's NIC from unapproved share options. While we accept that the Government will want to counter what it considers to be unfair tax avoidance, surely a more appealing idea - which would bring the UK into line with most of our major competitors - would have been to cap the gain that could be subject to employers' NIC, or alternatively just to go back to the position before 6 April 1999 with NIC levied on the options when granted. This would prevent companies being crippled with NIC bills when their shares are rising and, in particular, support the high-tech sector which has been rightly identified as crucial to the UK's future.'

Employment Bureaux And VAT

The DTI has been engaged in consultation on the regulation of employment bureaux. Customs & Excise are of the opinion that, in their current form, the proposed regulations will change the VAT treatment of charges made by bureaux. As a result, the VAT costs for any business hiring temporary staff could increase significantly. Under the proposals, the bureau will be treated as employing the temporary worker. Customs take the view that, in certain circumstances, VAT will be charged not only on the bureau's commission, as is currently the case, but on the worker's salary as well.

Partially exempt businesses such as banks and insurance companies which cannot fully recover their VAT will suffer increased costs.

It is understood that the regulations are likely to be finalised this month and debated in Parliament after that. They are likely to come into force towards the end of the year, probably in September - although this timetable could slip. For further information please speak to your usual KPMG tax contact.

US Moratorium On New Internet Taxes

The House of Representatives has voted by an overwhelming majority to extend the US moratorium on new internet taxes (which is set to end in October 2001) until 2006.

However, the Bill faces an uncertain future in the Senate. The Senate's view is likely to be that, as current legislation does not expire until October 2001, no legislation is required this year. There is also controversy over:

  • the length of time the moratorium should last;
  • how State sales taxing rights should be altered or protected; and
  • how the playing field should be levelled for traditional bricks-and-mortar retailers.

The US legislative process is not analogous to that of the UK. Proposed US legislation can change on almost a daily basis as the various constituencies have their say on the matter. Thus a Bill favoured by the House today may undergo substantial changes before the final Act is ultimately signed into law by the President. Since there appear to be significant differences between the House Bill and the one the Senate might pass, two Bills are likely to be returned for the House and Senate managers to reconcile the differences in conference. Any final Bill passed by both the Senate and the House would then need the President's signature before becoming law. For further information, please speak to your usual KPMG tax contact.

Press releases w/e 19.5.00

17 May 2000 - Inland Revenue -Corporation tax on chargeable gains: indexation allowance: April

Gives the figures to be used in calculating the capital gains indexation allowance for disposals by companies in April 2000.

17 May 2000 - Inland Revenue - Tonnage tax: further information published

Draft regulations and a draft Statement of Practice provide clarification on the details of the régime.

18 May 2000 - Customs & Excise - Business Brief 7/2000

Contains items dealing with:

  • the Court of Appeal decision on the VAT treatment of postage in the Plantiflor case;
  • Customs' revised view of when mains electrical wiring and lighting systems are within the conditions for zero-rating of approved alterations to a protected building;
  • the extent to which supplies of 'soft landscaping' (planting of trees, shrubs, grass, etc) can be zero-rated as supplies made in the course of construction of a dwelling;
  • the VAT treatment of vehicle clamping and tow-away fees; and
  • various new VAT publications.

19 May 2000 - Inland Revenue - National Insurance On Share Option Gains

See article above.

For further information, or assistance, please speak to your usual KPMG tax contact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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