David Tuch, Head of Share Schemes at KPMG, surveys the Chancellor’s options in advance of next week’s Budget announcements.
Employers’ national insurance contributions (NIC) on unapproved options
For unapproved options granted since 6 April 1999, companies face an unquantifiable and uncapped liability to employers’ NIC at 12.2% of the gain that the employee ultimately makes. This could act as a real barrier to companies (and particularly high tech/e-business companies) setting up in the UK and has already resulted in a number of companies reconsidering their policy on options. In contrast the US has a maximum for all remuneration liable to social security contributions (including option gains) of less than £50,000.
The ideal solution for companies faced with this problem would be to exempt option gains from employers’ NIC - ie go back to the position before 6 April 1999! Alternative solutions open to the Chancellor include introducing a cap on employers’ NIC on option gains and/or allowing companies to transfer the liability to the employee who is making the gain (in which case he may wish to reduce the rate of NIC on option gains to ensure the aggregate tax and NIC rate stays below 50%).
Enterprise Management Incentives
Draft legislation is already out. The main issues concern the restrictive nature of the draft legislation and the valuation issues for unlisted companies. In particular the gross asset limit of £15 million for qualifying companies is seen as being too low, the definition of qualifying company is seen as restrictive, and the limit of 10 participants is seen as too low. It is hoped that the Chancellor will continue to listen to the recommendations being made on these issues.
New all employee share ownership plan
Draft legislation is already out. Employees should be able to purchase ‘partnership shares’ out of an all-employee annual bonus rather than just on a monthly basis. Another problem is that companies may choose not to offer partnership shares, fearing the potentially unquantifiable and unlimited employers’ NIC liability which occurs if participants withdraw their partnership shares before the third anniversary.
We believe that free shares should be tax-free after three years (as originally proposed) rather than after five years as is currently proposed and that more flexibility is required on the two methods of linking appropriation of free shares to performance. Finally, the new plan is likely to be unavailable to many unlisted companies as the Chancellor has not yet taken the opportunity to remove many of the unnecessary restrictions on the class of shares which can be used for the plan.
Existing approved plans
The Chancellor has still not announced whether the existing approved plans will continue. Whilst it will probably not be an issue for most companies if Profit Sharing Schemes are abolished (provided there are adequate transitional arrangements) it is hoped that the Chancellor will be able to confirm the Savings Related Share Option Schemes (or SAYE schemes) are here to stay. Companies continue to get great benefit from these schemes and, in many cases, will wish to offer the new plan in addition. But we fear that QUESTs (Qualifying Employee Share Ownership Trusts), with their corporate tax deductions, may be abolished in the Budget.
For further information, speak to your usual KPMG tax contact.
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