Under current UK legislation, there is significant complexity in determining the UK income tax and NIC treatment of share based incentives for internationally mobile employees. There can be different analyses depending on, for example, the type of award granted and whether the employee is inbound to or outbound from the UK. The income tax analysis will also in many cases be different to the NIC analysis. In their report on the taxation of unapproved share plans published in January 2013, the Office of Tax Simplification recommended, inter alia, that the UK taxation of share plans for mobile employees be simplified. Following a consultation process, the Government has adopted this recommendation. In essence, legislation will be introduced so that the amount liable to UK taxation will be based on the proportion of the total gain that accrued while the employee was working in the UK.
Who will be affected?
The measure will be relevant to all companies who have internationally mobile employees participating in share based incentive plans.
It appears that the legislation will apply to gains realised by employees on or after 6 April 2014. It is unclear whether any transitional provisions will apply and we await the draft legislation. However, our expectation is that the new rules will apply to gains realised post 6 April 2014, irrespective of the date on which the share award/option was originally granted.
This measure will be very welcome to many employers who currently have to spend time – and, in many cases, incur advisers’ fees - grappling with the complex rules that exist in this area.
As mentioned, it will be necessary to check what transitional provisions apply (if any). However, even if the new rules do apply to all gains post 6 April 2014 (irrespective of the date of grant of the award/option), there will still be uncertain areas including determining over what period the gain has accrued. In addition, specific social security rules – within the EU or under a social security bilateral agreement – mean that the NIC treatment will not necessarily follow that for income tax. However, the changes should be a significant step in simplifying the taxation of share based incentives for mobile employees.
There will be some winners and some losers from the proposed changes. Companies and employees should therefore consider the best course of action for them. For example, if an employee holds a vested share option, would it be more beneficial for the employee (or the company if the employee is tax equalised) to exercise the option before or after the new rules take effect?
The appropriate course of action will depend on the particular facts of each employee, and as this will also be an investment decision for the participant, companies and their employees will need to consider the provisions further. There may also be corresponding adjustments to the legislation which provides for UK corporation tax deductions on share plan gains.