The Office of Tax Simplification ("OTS"), (an independent office of HM Treasury established to advise the Government on ways in which the UK tax system can be simplified) has today published its final report on tax-advantaged employee share schemes. The report follows a six-month review by the OTS into ways in which approved share schemes (including EMI schemes) can be simplified to reduce the burdens placed on employers, employees and their advisers. The report contains a number of recommendations regarding the approvals process and the nature of the schemes themselves.
Summary of Recommendations
The OTS recommendations include:
- Approvals process - the OTS recommends abolishing the approvals process for SAYE, CSOP and SIP and establishing a self-certification process similar to that currently used for EMI options. Whilst this should speed up the approvals process, the report recognises the need to ensure employers have sufficient certainty over the tax-advantaged status of their schemes and HM Revenue & Customs ("HMRC") has sufficient powers to deal with non-compliant schemes. A number of the other recommendations made in the report go some way to addressing companies' concerns here.
- CSOP - although there had been some concerns that the OTS would recommend abolishing the CSOP altogether, it has declined to do so at this stage. However, the OTS highlights a reduction in the use of CSOPs over recent years and recommends that the CSOP should be investigated further (by either the OTS or HMRC) to determine whether it is still relevant. The OTS recommends that, if the CSOP is retained, it should be merged with EMI to create one scheme for all tax-advantaged discretionary share options. The OTS envisages that the merged scheme would still make a distinction between small and large companies, with smaller companies retaining the benefit of higher limits.
- Single annual return - the OTS recommends creating a single annual return for all approved schemes to replace the existing individual returns for each scheme. It also recommends introducing online filing for annual returns.
- Retirement - currently, SAYE, SIP and CSOP have different requirements for the retirement age which applies to each scheme. The report recommends having a standard retirement age across all three schemes.
- Good leavers - the good leaver rules (which allow leavers to retain their options or awards and not lose their tax advantages) vary across the schemes. The OTS recommends simplifying the arrangements by introducing a presumption that all leavers are good leavers unless they fall into certain categories, for example they are voluntary leavers or are dismissed for cause.
- Cash takeovers - the OTS recommends that participants should be allowed tax-free early exercise where there is a cash takeover before the minimum holding period has expired.
- Features not reasonably incidental - at present CSOP, SAYE and SIP rules must not contain any features which are not reasonably incidental to the scheme. This can cause problems when seeking approval of these schemes. The report recommends removing this requirement and replacing it with specific prohibitions.
- Restrictions on shares - currently, companies wishing to operate CSOP, SAYE and SIP arrangements can only allow restrictions on schemes shares in limited circumstances. The OTS recommends removing this requirement, although it also recommends that shares be valued as if they were not restricted.
- SIP - the report includes a number of recommendations specifically relating to SIPs. These include (i) reducing the holding period for SIP shares to three years, (ii) giving employer's 90 days to pay any PAYE due when shares leave the SIP and only imposing penalties after 90 days and (iii) removing the cap on dividend reinvestment.
- SAYE - among the recommendations relating to SAYE, the OTS recommends that the seven year savings period, which is rarely used, be removed. The OTS also recommends that, as part of its review into employee share ownership in small private companies, the Department for Business, Innovation and Skills take into account whether a separate approved savings arrangement is necessary.
- EMI - the OTS recommends that the period in which participants can exercise options following a disqualifying event without losing tax advantages be extended from 40 days to six months. It also recommends limiting the working time requirement to directors only (currently it applies to all participants) and reducing the list of excluded activities to be taken into account when determining whether a company qualifies to grant EMI options.
The Chancellor is expected to respond to the report in the Budget on 21 March 2012. It is unlikely that any changes will be made before the Finance Bill 2013 at the earliest.
Following its review of approved share schemes, the OTS will review ways in which unapproved share schemes can be simplified during the 2012/13 tax year.
A copy of the report is available here.
The OTS press release accompanying the report is available here.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 06/03/2012.