The Employment-Related Shares & Securities Bulletin provides information and updates on developments relating to employment-related securities, including the tax-advantaged employee share schemes.

This bulletin contains articles on:

1. Autumn 2012 statement – changes to tax-advantaged employee share schemes
2. Changes to guidance on tax-advantaged employee share schemes
3. SAYE seven year contracts

Enquiries about the content of this bulletin should be addressed to:

Hasmukh Dodia

Employee Shares & Securities Unit

HMRC

Room G53

100 Parliament Street

London

SW1A 2BQ

Email: Shareschemes@hmrc.gsi.gov.uk

The Bulletin will be published as and when sufficient articles or updates are available, or when HMRC has an item that it wishes to bring to your attention quickly. We welcome any suggestions for future articles although we cannot guarantee publication.

A reference to ITEPA is a reference to the Income Tax (Earnings & Pensions) Act 2003 as amended.

1. Autumn 2012 Statement – Changes to Tax-Advantaged Employee Share Schemes

As announced in Budget 2012 and following consultation over the summer, legislation will be introduced to give effect to the Office of Tax Simplification's proposals to simplify aspects of the legislation for the tax advantaged employee share schemes: Share Incentive Plans, Save As You Earn Option Schemes, Company Share Option Plans and Enterprise Management Incentives. A summary of the responses to the consultation is available on the HMRC website.

Some of the changes are being implemented immediately as these do not require force of legislation. Most of those changes that can only be put in place by legislation are covered by the draft clauses for Finance Bill 2013 published on 11 December 2012.

2. Changes to Guidance on Tax-Advantaged Employee Share Schemes

The following ESSUM sections show the changes to be made in the guidance in red bold text, and come into effect from 11 December 2012.

Save As You Earn Non PAYE Contributions

ESSUM34210 - Linkage to Savings (Arrangement): Deductions from payThe Prospectus requires that the monthly contributions should normally be made through deductions from pay. The following exceptions have been allowed.

• Where the employer is a clearing bank and every employee has a current account with the bank, contributions may be made by standing order.
• If employees are paid weekly, monthly contributions may be made out of a “feeder account” for each employee (see ESSUM34200).
• If an employee is on maternity leave
• If an employee is on parental or adoption leave
• If an employee is a reservist called up for military service
• If an employee is on long-term sick leave
• If an employee is on secondment to another job or post in the same organisation
• If an employee is on sabbatical leave
• After cessation of employment the participant will normally be allowed to continue making monthly contributions direct to the savings body:
  • either for a period of up to six months to accumulate extra savings with which to exercise an option during that period
  • or for the remainder of the 36 (or 60) months to the maturity of the savings contract, if the ex-employee is unable or chooses not to exercise his or her share option.

If a person dies before he has completed the payment of 36 (or 60) monthly contributions, no further contributions can be made under his savings contract.

EMI - Attaching a Paper Copy of The Articles of Association to an Emi Option Agreement

ESSUM54300 - Requirements relating to options: Terms of option to be agreed in writing

The option must be in the form of a written agreement between the person granting the option and the employee.

The agreement must be retained by the company so that it can be inspected by HMRC if an enquiry is opened into the option.

The agreement must state:

• the date the option is granted
• that it is granted under the provisions of Schedule 5
• the number, or maximum number, of shares that may be acquired or the formula that will be used for calculating this
• the price (if any) the employee will pay to acquire the shares, or the method by which that price will be determined
• when and how the option may be exercised
• any restrictions on the shares
• any conditions such as performance conditions affecting the employee's entitlement, and
• whether there is a risk of forfeiture.

The option agreement can set out details of the restrictions on the shares, performance conditions or forfeiture conditions in the text of the option agreement itself. Alternatively, the details may be contained in another document attached to the agreement and incorporated into the agreement by reference to the document. Examples of other documents include:

• the Articles of Association
• the share scheme rules (where a formal scheme exists), or
• a shareholders’ agreement which an option holder is required to enter into as a condition of exercising his option (if this exists).

It is not necessary to include a hard copy of these documents with the option agreement but the agreement must state where participants can obtain or access a copy of these. Where the details are included by reference to a separate document, the option agreement will need to specify the title of the document, when it was dated or adopted and the dates of any amendments.

There are no requirements in Schedule 5 about the type of performance conditions that can be imposed or whether such conditions must be objective.

If the shares are subject to a risk of forfeiture, the agreement must contain details of the conditions. Shares are subject to risk of forfeiture if the interest in shares that may be acquired is only conditional within the meaning of s423 Income Tax (Earnings and Pensions) Act 2003. (Paragraph 37) (see ERSM30310)

Electronic Communications

1. CSOP & SAYE

ESSUM43480 and ESSUM33480 – Shares to be used: Directors’ discretionary veto

The existence of a directors’ discretionary power to veto share transfers is commonly found in Articles of Association based on Table A (the 2006 Companies Act refers to model articles) of the Companies Regulations.

• The 1948 Companies Act veto on share transfers provides that the directors may, in their absolute discretion and without assigning any reason thereto, decline to register any transfer or any share, whether or not it is a fully paid share.
• The 1985 Companies Act only relates to transfers of shares which are not fully paid or on which the company has a lien. Where Articles are based on the 1985 Act the relevant provision is often taken not to apply and replaced with the standard all-embracing veto.
• The 2006 Companies Act requires that a reason must be given for any veto on share transfers

The existence of a discretionary power to veto transfers of shares does not amount to a restriction not attaching to all shares of the same class. But the exercise of a discretion in a discriminatory way might do so. Directors might choose to use this discretionary power if they disapprove of the intended purchaser of the shares.
Where Articles of Association contain such a provision, scheme advisors should seek a declaration from the company that the discretionary power will not be exercised so as to discriminate against the transfer of shares acquired through the approved CSOP scheme. The existence of such a declaration should be made known to the scheme participants.
This relates only to directors’ discretionary veto on share transfers. There may be other aspects of rights or restrictions on shares in the Articles of Association which are subject to directors’ discretion. Such directors’ discretion is likely to take one of two forms.

• As with the veto on share transfers, its effect may be to give the directors scope to impose a restriction on shares. If so, a declaration (made known to the scheme participants) that the directors will not use their discretion to impose such a restriction on scheme shares may be acceptable. Companies may notify participants electronically but they must ensure that all participants are notified.
• Or its effect may be to give the directors scope to remove from some shares a restriction which would otherwise have applied to all shares of the same class as the scheme shares. The existence of such a power to remove restrictions means that the restrictions concerned may not attach to all shares of the same class, as required by paragraph 19(1) (paragraph 21(1) for SAYE). A declaration that such discretion to remove restrictions will not be used to discriminate against scheme participants is therefore not sufficient to satisfy paragraph 19(1) (paragraph 21(1) for SAYE).

2. SIP

ESSUM24140 – Types of award: Free shares: Performance allowances: General requirements

Performance allowances are awards of free shares which are made only if a performance target is met or where the number or value of shares awarded depends on performance (paragraph 34(4)). The same terms rule does not apply to awards of shares linked to performance, provided the performance measures meet the requirements of the legislation.
The SIP code sets out two ways in which a performance measure may work:

• Method 1 (paragraph 41) - see ESSUM24150
• Method 2 (paragraph 42) - see ESSUM24160

A SIP will typically provide for both methods and the company can choose which will be used for a particular award of free shares.

A SIP which provides for performance allowances must

• make such provision for all qualifying employees in relation to a particular award (paragraph 38)
• set performance targets for performance units comprising one or more employees (paragraph 39(2))
• use performance measures which are
1. based on business results or other objective criteria and
2. fair and objective measures of the units to which they apply (paragraph 39(3))
• require the company to notify employees of the performance targets and measures (paragraph 40). Companies may notify participants electronically but they must ensure that all participants are notified.

Some of these requirements are considered in greater detail below.

ESSUM24380 – Types of award: Partnership shares - restriction on number of shares awarded

The rules of a SIP can allow the company to specify the maximum number of shares that may be included in an award of partnership shares (the ‘award maximum’). If there is such a provision, all partnership share agreements must contain an undertaking by the company to notify the employee of the restriction and the SIP must require the notices to be given

• before the deduction of the partnership money, if there is no accumulation period
• before the beginning of the accumulation period, where there is one (paragraph 53).

Companies may notify participants electronically but they must ensure that all participants are notified.

The SIP must provide that the number of partnership shares awarded to each participant is reduced proportionately when the award maximum would otherwise be exceeded. This process is usually referred to as ‘scaling back’.

The Model Rules include one example of an acceptable scaling back provision, at Rule 6.16. However, a company may construct their own provisions provided that these result in a proportionate reduction and otherwise conform to the requirements of the SIP Code (in particular, the ‘same terms’ requirement - see ESSUM21220).

If the rules of a SIP allow it, scaling back can be applied either

• when all applications to participate have been received and it is clear that the award maximum would be exceeded and/or
• when all deductions of partnership share money have been made in relation to a particular award and it is clear that the award maximum would be exceeded.

ESSUM27110 – Requirements relating to the trust and trustees of a SIP: Notification requirements

The trust deed must require the trustees to give various notices to participants as soon as practicable. The notice must contain specific information depending on the type of award. Trustees may notify participants electronically but they must ensure that notices are given to all participants.

ESSUM10000 – New section to be added

Electronic communications with participants

Companies and trustees have a number of information obligations when they offer HMRC approved share schemes to employees. The notifications can be made electronically, but companies and trustees must ensure that all participants are notified as specified in legislation relating to each scheme.

Giving information on a web portal will satisfy this requirement providing all participants are made aware of the information and updates given on the portal.

3. SAYE Seven Year Contracts

Under SAYE, an employee can save a fixed monthly amount up to £250 in a three or five year savings contract, and will be entitled to a tax free bonus on their savings at a rate set out in the SAYE prospectus issued by HMRC. At the end of their savings contract, the employee may withdraw their savings and any tax free bonus, or use these amounts to exercise share options. An employee who has completed a five year SAYE contract may retain their savings within the scheme for a further two years - in which case a higher tax free bonus may be payable, depending upon the bonus rates in operation at the start of their contract.

The seven year SAYE savings arrangements will come to an end in 2013, alongside implementation of other changes set out in the summary of consultation responses. HMRC intends to publish proposed amendments to the prospectus for consultation shortly.

Source: HMRC. www.hmrc.gov.uk. Copyright Acknowledged.