With effect from 6 April 2014, the approval process for companies wishing to establish three types of tax-advantaged employee share scheme has been withdrawn. Going forward, employers will, instead, self-certify that their schemes comply with the tax legislation.
This change was announced in the 2013 Budget, on the recommendation of the Office for Tax Simplification. It affects Share Incentive Plans (“SIP”), Save As You Earn schemes (“SAYE” – also known as “Sharesave” schemes) and Company Share Option Plans (“CSOP”).
Previously, a company wishing to establish one of these schemes needed to have the rules of the scheme and the ancillary documents supporting the scheme approved in advance by HMRC. While this process gave employers assurance that their plans did enjoy tax advantages, it also introduced a considerable element of delay and uncertainty into the implementation process.
Under the new rules, the onus will be on employers to ensure that the awards they make or the options they grant qualify for relief under the legislation; to give the correct notices to HMRC; and to make returns on time. If the scheme does not qualify for relief or if notices and returns are not made on time, employers will face charges and penalties.
Implications for employers implementing new share schemes
With effect from 6 April 2014, an employer wishing to establish a SIP, SAYE or CSOP will need to take the following steps:
- Ensure that the rules of the scheme and supporting documents comply with the legislation;
- Give notice to HMRC not later than 6 July following the end of the tax year in which the first awards have been made or first options have been granted under the scheme (referred to below as “Establishment Notices”);
- File an annual return by 6 July following the end of each tax year in which the share scheme is in operation.
The notices and annual returns set out above must be filed electronically and there is a penalty of up to £5,000 for failing to do so or for filing an inaccurate return. This is in addition to the existing penalties for late or inaccurate returns.
If an employer is late filing an Establishment Notice, their scheme will be treated as qualifying for tax favoured status only from the start of the tax year in which the notice is given. For example, if an employer establishes an SAYE scheme and makes the first awards under that scheme in August 2014, but only files the Establishment Notice on 10 July 2015, the first set of options granted under the plan would not qualify for tax-favoured status, and only awards granted after 5 April 2015 would qualify.
If any changes are made to a “key feature” of a scheme after it has been implemented then the employer has an obligation to notify HMRC about the change and the notification should be included in the company’s annual share scheme return. In this context, a “key feature” is any provision of a scheme that is necessary to meet the requirements set out in the legislation for the scheme to be treated as a qualifying SIP, SAYE or CSOP scheme.
Employers with existing schemes
Employers with schemes that have already been approved by HMRC are also subject to the new obligation to file future annual returns electronically. Likewise, future changes to previously approved schemes will no longer need HMRC sign-off and a change to a “key feature” of a scheme will need to be notified to HMRC, as set out above.
Enquiries and penalties
The legislation gives HMRC power to enquire into a share scheme in three situations:
- During the year to 6 July following the original deadline for the Establishment Notice to be given (and if the Establishment Notice were to be given late then this deadline would be extended);
- During the year to 6 July following the end of a tax year during which any changes have been made to a “key feature” of the scheme; and
- At any time that HMRC has reasonable grounds for believing that the scheme does not meet the qualifying criteria set out in the legislation or that the scheme is not being operated in accordance with the legislation.
If HMRC concludes that there is a remediable problem with the scheme, they will issue a notice instructing the employer to make changes to the plan and its operation and may impose a penalty of up to £5,000. In the event that HMRC conclude that the failure is more fundamental or the employer’s conduct is more culpable, they can issue a notice stripping the scheme of its qualifying status and impose a penalty of up to two times the value of HMRC’s estimate of:
- the value of the income tax that would otherwise have been paid by the employee participants or would have arisen in the future; plus
- the value of the employee and employer NIC that would have arisen.
Appeals against these decisions can be made to the Tribunal.
Self-certification represents a considerable simplification of the process required for implementing SIP, SAYE and CSOP schemes and should allow companies to offer their employees tax advantaged incentives without the uncertainties and delays associated with the HMRC approval process.
However, employers and their advisers need to be aware that the new arrangements now put the onus firmly on them to ensure that new and existing share schemes comply with the legislation, and with significant economic risks of failing to comply with the rules.
Gabelle has many years’ experience in advising on and implementing SIP, SAYE and CSOP for clients and would be able to assist with the entire “life-cycle” of a plan, from implementation, through operation to the final unwinding of a plan on the disposal of a business.
For further information about approved share schemes please contact the TaxDesk on 0845 4900 509 and ask for Thomas Dalby.