The provisions of the Finance Bill 2008 will, if enacted,
make significant changes to the way in which employees who are
resident but not ordinarily resident in the UK will be taxed in
the UK. The changes include the introduction of an alternative
basis of charge for tax purposes – the
"remittance basis": This briefing reports on the
impact of the changes in the context of employee share
plans.
Employee Share Options
Employees who are not both resident and ordinarily resident
in the UK on the date of grant of employee share options are
not currently taxed on the same basis as employees who are both
resident and ordinarily resident in the UK at that time in
respect of those employee share options.
Resident and ordinarily resident employees are currently taxed
under Chapter 5 of Part 7 of the Income Tax (Earnings and
Pensions) Act 2003 (ITEPA). As a result of the changes made by
the Finance Bill, employees who are UK resident but not
ordinarily UK resident will also be taxed under Chapter 5 in
respect of options granted on or after 6 April 2008. As a
result, such employees will be subject to a charge to income
tax on exercise of a non-HMRC approved employee share option on
the "option gain". Previously, the employee would
have been treated as receiving a notional beneficial loan equal
to the option gain and would therefore have incurred an annual
income tax charge until disposal of the shares acquired on
exercise of the option and, potentially, a further income tax
charge on sale of the shares.
It is not necessarily the case that all of the income arising
on exercise of the option will be subject to income tax. Where
the employee has elected to be taxed on the "remittance
basis", the income tax charge will depend on (a) the
extent (if at all) to which the duties of the employment are
performed in the UK; and (b) the extent to which the income
arising in connection with the employee's non-UK duties
(which is deemed to be "foreign income") is remitted
to the UK.
In circumstances where an employee who is not ordinarily
resident in the UK has chosen to be taxed on the remittance
basis and performs the duties of his employment wholly outside
the UK, the only taxable income arising from the exercise of
options relating to that employment will be any part of that
income remitted to the UK.
However, if the employee carries out his employment duties
both in and outside the UK, the income is likely to be
apportioned between his UK and non-UK duties on a "just
and reasonable basis". Where this applies, income
apportioned to duties in the UK will be subject to income tax
whereas the income apportioned to non-UK duties should only be
subject to UK income tax if remitted to the UK. Whilst the
apportionment rules limiting the UK income tax charge in
respect of "foreign income" appear helpful, it is our
understanding that HM Revenue and Customs (HMRC) will treat any
foreign income arising in connection with the exercise of
options in respect of shares in a UK incorporated company as
remitted in full to the UK, on the basis that the shares are
already within the UK when issued.
Amendments to the Finance Bill have clarified the extent to
which the employee's employer will be required to
operate PAYE on the amount that, on the basis of the best
estimate that can reasonably be made, is likely to count as
employment income of the employee after deduction of the amount
that, on the basis of such an estimate, is likely to be
"foreign income".
It is currently unclear whether the apportionment rules which
apply to income tax will also apply to any national insurance
liability that arises in respect of the exercise of employee
share options by employees who are resident but not ordinarily
resident in the UK.
All-Employee Share Plans
One of the key features of the two types of UK
"all-employee share plan", being the Savings Related
Share Option Scheme and the Share Incentive Plan, is that
participation in those plans must be made available to all
employees who meet certain statutory conditions and who are
both resident and ordinarily resident in the UK.
However, the changes to be made to the way in which employees
who are UK resident but not ordinarily UK resident will be
taxed in the UK as a result of the original draft of the
Finance Bill required that participation in these plans (both
of which are HMRC approved plans) be extended to include
employees who are resident but not ordinarily resident in the
UK.
These changes could have impacted on companies operating these
plans in two ways. First, to ensure that HMRC approval of the
plans is retained, companies may have been required to make
amendments to the rules of the plans. Second, companies
intending to issue invitations to participate prior to the date
of Royal Assent of the Finance Bill would have needed to
consider whether participation should be extended to employees
who are UK resident but not ordinarily UK resident if the grant
of options or acquisition of shares pursuant to those
invitations would have occurred after the date of Royal
Assent.
However, amendments have now been made to the Finance Bill
with the effect that participation in the Savings Related Share
Option Scheme and the Share Incentive Plan will not be required
to be extended to employees who are resident but not ordinarily
resident in the UK. Nonetheless, it may still be necessary for
companies operating these plans to review the rules of the
plans and make amendments to ensure that the company is not
required to extend participation to UK resident but not
ordinarily resident employees. This will be the case where, for
example, the rules provide that invitations to participate must
be issued to employees who are taxable under section 15 of
ITEPA.
Restricted Securities
As a result of the changes to be made in the Finance Bill,
employees who acquire securities subject to certain
restrictions (Restricted Securities), who are resident but not
ordinarily resident in the UK will now be subject to the income
tax regime which applies to employment-related restricted
securities in Chapter 2 of Part 7 of ITEPA. As such, in certain
circumstances these employees may wish to enter into a joint
tax election under section 431 ITEPA on acquisition of their
shares in order to limit the income tax liabilities which could
arise in future in connection with those shares. To be valid,
these elections must be entered into by the employee and their
employing company within 14 days of the date of acquisition of
the relevant securities.
Although the residence rules in the Finance Bill will apply to
restricted securities acquired on or after 6 April 2008 (other
than restricted securities acquired on exercise of an option
granted before 6 April 2008), until the Finance Bill receives
Royal Assent, any shares acquired by non-ordinarily resident
employees will not constitute restricted securities with the
result that a section 431 ITEPA tax election made in respect of
those shares may not be effective. However, as mentioned above,
given that a section 431 election must be entered into within
14 days of the acquisition of the shares, there was a concern
that employees who acquired shares during the period between 6
April 2008 and the date of Royal Assent could have been
disadvantaged if they were unable to enter into a valid section
431 ITEPA election in respect of their shares.
Amendments to the Finance Bill have addressed this concern
with the result that employees who are resident but not
ordinarily resident in the UK and who acquire restricted
securities on or after 6 April 2008 and on or before 31 July
2008 will be permitted to enter into a valid section 431 ITEPA
tax election in respect of those restricted securities at any
time before 15 August 2008.
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.
