Residence and Domicile – Share Incentive Plan and Sharesave Scheme Changes
The Government has reversed proposals to require companies which operate Revenue-approved Share Incentive Plans (“SIPs”) and Sharesave (“Sharesave”) plans to offer participation to all UK resident employees who meet the company’s specified eligibility criteria.
As explained in our previous Law-Now article “Residence and Domicile - Changes to the Taxation of Employee-Held Shares and Options”, new rules were proposed to take effect on 6 April 2008 changing the taxation treatment of awards under employee share plans held by employees who are UK resident but are not long-term resident (i.e. employees who are not "UK ordinarily resident" or "UK domiciled") when awards are made with effect from 6 April 2008. One of the changes proposed was to require companies to treat all UK resident employees who participate in SIPs and Sharesave plans in the same way – they would no longer be able to exclude non-ordinarily UK resident employees, as had been the case since the plans were introduced.
However, the Government has responded to representations and the current position will be allowed to continue. This means that companies can choose to invite non-ordinarily UK resident employees to participate, but will not be required to.
Plan rules still need to be checked through as the precise wording of some plan rules could mean that some minor drafting changes are still needed.
The original proposals contained in this year’s Finance Bill provided that employers operating SIPs and Sharesave plans would be required to offer these plans to UK resident employees even if they were not UK ordinarily resident. The rationale for this change was that, since this group of employees is now being fully brought within the UK tax net for share schemes, as part of the wider changes to be introduced from 6 April 2008, they should automatically benefit from its exemptions.
The new proposed amendments follow representations made to the Revenue by employers and advisers (including CMS Cameron McKenna) that the SIP and Sharesave changes were unduly burdensome whilst being of little benefit in practice. Whilst the number of employees likely to benefit from the originally proposed changes was small, it was difficult and disproportionate to track the movements of these employees and include them in the plans and employees themselves may be reluctant to participate because they would not be intending to stay in the UK for more than three years (the minimum normal tax free maturity period) and so would not realise the key tax benefits.
As a result of those representations, the Revenue has announced amendments which reverse the effect of original proposals. For the majority of employers operating SIP and Sharesave plans, the current position should therefore (subject to the amendments being passed) continue.
However, employers should still review how their plan rules define the class of employees to whom participation in the scheme should be offered. If the rules define the class of participants by reference to section 15 Income Tax (Earnings and Pensions) Act 2003, the rules may still need to be amended because section 15 is itself to be amended by the Finance Bill to include all employees who are UK resident. These plans may not, therefore, benefit from the proposed amendments to the Finance Bill as intended. However, representations are still being made to the Revenue to address this point.
