25 Jan 2012

PAYE Regulations and impact on share-based payments to former employees

This update is about new PAYE rules affecting share-based payments made to former employees, which will take effect on 6 April 2012.

In our newsletter published in April 2011, we drew attention to the introduction of regulations making a significant change to the PAYE treatment of payments to former employees (Income Tax (Pay As You Earn) (Amendment) Regulations 2011 (SI 2011/729)), except in the case of payments in the form of shares and interests in shares. HMRC has now indicated that all payments to former employees should in future be treated in the same way and has published draft regulations for consultation.

Before 6 April 2011, income tax on payments to former employees was deducted only at the basic rate. Higher rate taxpayers met any additional liability under self-assessment.

For such payments on or after 6 April 2011, an employer must use the 0T tax code which applies on a “non-cumulative” basis. This means that none of an individual’s personal allowance is available and, for an employee who is paid on a monthly basis, only 1/12^th of the basic rate band (and if relevant, 1/12^th of the higher rate band) will be available in the month of payment. Any excess will be taxable at 50%.

If, therefore, a taxable payment of £20,000 in cash is made to a former employee, the first £2,916.67 will be taxed at 20%, the next £9,583.33 at 40% and the balance of £7,500 at 50% (resulting in a tax liability of £8,166.66, instead of £4,000 (£20,000 x 20%) under the previous rules).

Whether starting a new job or not, the employee can submit a claim to recover any overpayment of tax. There could, however, be a significant delay in securing reimbursement, especially if the payment from the former employment was made early in the tax year.

Following representations to HMRC that the 0T code could impose unfair levels of taxation, in particular on participants receiving shares under all-employee arrangements, such as HMRC approved Share Incentive Plans (SIP), special provisions were introduced regarding share-based payments. As a result, with effect from 6 April 2011, the BR tax code, rather than the 0T tax code, has applied to all payments to former employees in respect of shares or interests in shares (Income Tax (Pay As You Earn) (Amendment) (No. 2) Regulations 2011(SI 2011/1054)). This means that where a PAYE liability arises in relation to a former employee’s shares or interest in shares, tax will only be deducted at the basic rate, thus preserving the original position.

HMRC has now indicated, however, that, it has had discussions with employers and share scheme administrators, and identified a desire for a simple process and a single tax code. It is proposed, therefore, that, with effect from 6 April 2012, the 0T code should be used in relation to all share-based payments, thus aligning all post-employment earnings under the same tax code. Draft regulations (http://www.hmrc.gov.uk/drafts/tax-code-change.pdf) were published on 19 January 2012, and there is a four week period of consultation until 16 February 2012 during which interested parties are encouraged to provide feedback.

If you or your clients would like to discuss the impact of these provisions please contact us

Postlethwaite is a UK law firm specialising in employee share schemes. If you're interested in in setting up a share scheme in your company get in touch.

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18 Jan 2012

Does employee ownership help build better companies?

Deputy Prime Minister Nick Clegg has urged more companies to offer shares to their employees, saying it will improve productivity and unlock growth. Does he have any evidence to back up his claim?

Employee share ownership has fascinated academics in business management and organisational behaviour for many years, and there have been many pieces of research. Taken together, these do in fact show very clearly that employee owned companies have attributes that any ambitious company would value highly, and which translate into benefits both for the companies themselves and their employees.

Here is a digest of some of the most recent research focused on UK companies:

HM Revenue and Customs, 2008
Research carried out for HMRC into EMI option schemes found, amongst other things:

79% of companies with EMI option schemes believed they had improved staff motivation and helped them retain key or skilled employees, with 71% believing their EMI options had improved company performance

See http://www.hmrc.gov.uk/research/report41-summary.pdf

Further research into Save As You Earn options and Share Incentive Plans (SIPs) discovered that:

A majority of companies with an SAYE option scheme believed it had improved productivity and half of companies with a share incentive plan (SIP) saw a productivity improvement.

See http://www.hmrc.gov.uk/research/report59-summary.pdf

Matrix Evidence (UK), for the Employee Ownership Association, 2010
Research by Matrix Evidence into UK companies with significant employee ownership found:

Stronger employee commitment and job satisfaction
Improved financial and other rewards for employees
Employee-owned businesses perform at least as well as those that are not employee owned and in some cases provide productivity gains
Employee-owned businesses may be better placed to survive difficult economic conditions
Employee-owned businesses may be better innovators as a result of having more committed employees

See: http://www.employeeownership.co.uk/publications/the-employee-ownership-effect-a-review-of-the-evidence/

Cass Business School, for the Employee Ownership Association, 2010
Professor Joseph Lampel, Dr Ajay Bhalla and Dr Pushkar Jha looked at the performance of employee-owned business and concluded, among other things that:

Employee ownership offers particular advantages to SMEs. Employee owned companies with fewer than 75 employees have significantly better profitability compared with non-employee owned companies of the same size.
Employee owned companies create jobs more quickly
Employee owned companies are more resilient – between 2008 and 2009 enjoying sales growth of 11.08% compared with 0.61% for non-employee owned companies

See: http://www.employeeownership.co.uk/publications/model-growth-do-employee-owned-businesses-deliver-sustainable-performance/

Professor Lampel and Dr Bhalla can be seen discussing their research at: http://www.youtube.com/watch?v=ro3e9eWG6eI

Professor Andrew Pendleton, University of York, 2011
Professor Pendleton has published extensively on employee share ownership. He has identified positive outcomes for companies where employees are able to participate in ownership compared to companies without such performance incentives.

For a full list of Professor Pendleton’s research see: http://www.york.ac.uk/management/staff/apendleton/

Richard Freeman and Alex Bryson, 2010
Bryson and Freeman, in their article ‘How Does Shared Capitalism Affect Economic Performance in the United Kingdom?’, found a clear improvement in productivity in companies with employee ownership.
See: http://www.nber.org/chapters/c8091.pdf

15 Dec 2011

Proposals for Finance Bill 2012

On 6 December 2011, HM Treasury published draft legislation for Finance Bill 2012 for consultation. Budget day will be on 21 March 2012.

Most of the published material had been the subject of previous announcements, but it may be helpful to summarise developments which might affect employee share schemes, participants in them and the entities which operate them.

HMRC has responded to the consultation on tax avoidance schemes. Although draft legislation to implement the proposed measures on high risk tax avoidance schemes will not be included in Finance Bill 2012, the Government has undertaken to continue discussing the issues with interested parties (such as professional advisers and the TUC) and will provide an update in the 2012 Budget.

Under the consultation, the most "contrived and aggressive" tax avoidance schemes would be added to an HMRC list, users would have to disclose the use of listed schemes and an additional tax charge would be imposed to counter the cash flow advantage to the taxpayer of retaining the disputed tax until the matter is resolved.

The Government also announced that it will introduce a new scheme (Seed Enterprise Investment Scheme (SEIS)) from April 2012 to encourage investment in new start-up companies.

SEIS will provide an enhanced version of the existing Enterprise Investment Scheme:

Income tax relief of 50% for individuals who invest in shares in qualifying companies, with an annual investment limit of £100,000.
Capital gains tax exemption on gains realised on disposals of assets in 2012-13 and invested through SEIS in that year.

There is to be a cumulative investment limit of £150,000 for the company, whose total assets, before investment, must be below £200,000.
The 50% rate of relief is more generous than many expected, since an earlier proposal was for 40% tax relief. In contrast, the investment limits may seem rather less generous than anticipated. The Government also confirmed that the 50% rate of relief would be available irrespective of the investor's marginal income tax rate.

For the tax year 2012-13, the capital gains tax annual exempt amount will be frozen at the 2011/12 level (£10,600 for individuals and personal representatives and £5,300 for trustees). The government has also confirmed that legislation will be introduced in Finance Bill 2012 to increase the annual exempt amount in future years automatically in line with the consumer price index.

The income tax personal allowance for 2012-13 will be increased from £7,415 in 2011-12 to £8,105. The basic rate limit will be reduced from £35,000 to £34,370. The additional rate threshold will remain at £150,000.

For 2012-13, the employee/primary Class 1 NICs upper earnings limit will remain at £817 per week and the employer/secondary threshold will be increased from £136 to £144 per week. There are no changes to the rates of NICs.

The ISA overall limit will be increased from £10,680 to £11,280 and the cash limit will be increased from £5,340 to £5,640).

Merry Christmas and Happy New Year!

29 Nov 2011

The Chancellor's Autumn Statement, 29 November 2011

In his Autumn Statement on 29 November 2011, the Chancellor of the Exchequer announced a variety of initiatives in response to the prevailing financial and economic environment. Although those initiatives do not relate to employee share schemes specifically, they may be relevant to many companies operating such schemes (especially small and medium-sized businesses).

Enhanced EIS for Smaller Companies
In order to encourage investment in new start-up companies the Chancellor announced the launch of a new Seed Enterprise Investment Scheme (SEIS) with effect from April 2012. Under the SEIS, which in effect creates a special, enhanced form of EIS for smaller companies, individuals can claim income tax relief on 50 per cent of the money invested in shares (up to £100,000), and a capital gains tax exemption on gains realised in 2012-13 which are then invested through SEIS in the same year.

In this connection, it should be noted that the annual exempt allowance for capital gains tax will be frozen at £10,600 for 2012-13.

EIS Also Simplified
The Chancellor also announced that the Government will simplify EIS by relaxing the connected person rules and the definition of shares that qualify for relief. The Government will also tighten the focus of EIS and Venture Capital Trust (VCT) schemes by introducing a new test to exclude companies set up for the purpose of accessing relief. In addition to these changes that were consulted on, the Government will remove the £1 million investment limit per company for VCTs to reduce the administrative burdens of the scheme.

The current small business rate relief holiday is to be extended for a further six months from 1 October 2012. The Government will also give businesses the opportunity to defer 60 per cent of the increase in their 2012-13 business rate bills as a result of the RPI adjustment, to be repaid equally during the following two years.

As previously announced, draft legislation for Finance Bill 2012 will be published on 6 December, and we shall include in our next newsletter any issues arising which might affect employee share schemes and the companies which operate them.

23 Nov 2011

New ABI Guidelines on Executive Remuneration

This newsletter will be of interest if your company is listed, or if you advise listed companies.

ABI guidelines are relevant for all companies with a main market listing
The Association of British Insurers (ABI), which represents a significant number of UK institutional investors, has recently revised its guidelines on executive remuneration (Guidelines), which were last updated in 2009. These are relevant predominantly for companies with a main market listing.

The substance of the Guidelines has not changed to any great extent, but they do reflect the current political debate on the subject in commenting for the first time on the quantum of executive remuneration and recommending clawback provisions. They might be viewed as complementary to the discussion paper on executive remuneration published in September 2011 by the Department for Business Innovation and Skills.

The Guidelines include a set of over-arching principles as well as the guidance. These deal with the role of shareholders, the role of the board and directors, the remuneration committee, remuneration policies and remuneration structures.

In discussing the quantum of executive remuneration, the Guidelines state that “levels of pay that do not reflect corporate performance undermine the ability to reward success and represent excess rent extractions.....Shareholders are likely to object to levels of pay that do not respect the core principles of paying no more than is necessary and a linkage to sustainable long-term value creation.....Boards have a responsibility to ensure that [payment for failure]cannot occur both when negotiating new contracts and when agreeing any payments when contracts are terminated.”

Clawback provisions are recommended but the tax position is not free from doubt
The Guidelines go on to say that shareholders expect to see clawback provisions and a reduction in performance-related pay included in scheme designs and executive contracts, and for them to be enforced when appropriate. The income tax and National Insurance Contribution (NIC) position in relation to clawback is, however, not entirely free from doubt. Where remuneration has been paid and the income tax and NIC liabilities have been met, but the recipient is subsequently obliged to make a repayment under a clawback provision, there is no mechanism for the income tax and NIC liability to be adjusted. It seems unfair, however, that an employee should be liable for tax and NIC in respect of remuneration which has to be repaid. If clawback provisions become more widespread, it is to be hoped that HMRC guidance will be forthcoming which will clarify the tax and NIC position in such circumstances.

Listed companies should avoid adjusting remuneration to compensate for changes in personal tax position
A further comment in the Guidelines relates to changes in taxation, where the recommendation is for remuneration committees to avoid making changes to executive remuneration to compensate individuals for adverse changes in their personal tax position. This confirms concerns expressed by shareholders at the time when some companies were considering restructuring of remuneration arrangements in response to the introduction of the 50% tax rate in the 2010/2011 tax year.

The introduction of references to quantum and the renewed discussion on clawback clearly reflect the wider debate on executive remuneration at a political level. The FSA remuneration code already requires entities to which it applies to include clawback provisions in incentive arrangements, but the Guidelines indicate that the practice might now become more widespread among listed companies generally.

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