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Budget 2013 Outcomes and Real Time Information

Budget 2013 Outcomes and Real Time Information. GEO – UK Chapter Meeting 9 April 2013 Judith Greaves and Matthew Findley. 44612117. Introduction. This is a time of almost unprecedented change for employee share plans

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Budget 2013 Outcomes and Real Time Information

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  1. Budget 2013 Outcomesand Real Time Information GEO – UK Chapter Meeting 9 April 2013 Judith Greaves and Matthew Findley 44612117

  2. Introduction • This is a time of almost unprecedented change for employee share plans • Changes brought in as part of Budget 2013 and introduction of Real Time Information (or “RTI”) are very much part of that • Budget 2013 • Follow on from Office of Tax Simplification (“OTS”) review of HMRC – approved plans • Highlight key changes • Focus on those of more practical importance • Also look at some of the other things may have heard of and/or be asked about • The future? • RTI • What is it? • Issues for share plans • What if it all goes wrong?

  3. BUDGET 2013

  4. Budget 2013 – Summary of Changes (1) • Headline points • SIP • tax-free dividend reinvestment cap removed • more choice for employers using accumulation periods • SAYE • more flexibility during savings periods – e.g. deductions other than from salary • abolition of 7 year contracts • SIP, SAYE and CSOP • retirement rules harmonised • “good leaver” rules extended and harmonised • tax relief on cash takeovers

  5. Budget 2013 – Summary of Changes (2) • Ancillary points • ability to use “restricted” shares for SIP, SAYE and CSOP • material interest rules relaxed / abolished • Other things you may have heard of • statutory residence test • extension of “Entrepreneurs’ Relief” to EMI • “Employee Shareholder” status • the “General Anti-Abuse Rule” (or “GAAR”)

  6. SIP - Dividend Re-investment • Old position: • £1,500 limit • Carried forward amounts must be reinvested within 3 years • New position: • Unrestricted dividend reinvestment, unless company elects to impose a cap • Took effect on 6 April 2013 • Implications: • Good news for long term SIP participants in high dividend companies • No longer need systems to pay “excess” dividends in cash

  7. SIP - Accumulation Periods • Current position: • Participant acquires partnership shares at lower of price at the beginning OR price at the end • Employer bears cost of share price movements • What is changing? Employer will be asked to choose: • As now (Choice 1) • Fix at beginning (Choice 2) • Fix at end (Choice 3) • When? Royal Assent • Implications – ability to budget

  8. SIP-Accumulation Period Examples • Assume SIP partnership share monies £100k per month, 3 month accumulation period, share price at the outset is £1 • Company may fund SIP to buy 300,000 shares initially • Company could delay funding until after the end of the accumulation period, when price may be (a) 50p or (b) £2 • What happens at the moment? (Choice 1) • Outcome with Choice 2 • Outcome with Choice 3

  9. SAYE-Savings Contracts • Current position • 3, 5 or 7 years • 5 year savings period; leave for 2 years to earn (historically) higher tax free bonus • Bonus currently zero..... • Limited flexibility/lack of clarity around contributions other than from salary • What is changing? • 7 year option to be withdrawn • Prospectus to be revised • Sabbaticals and secondments - guidance already changed • When? Proposed amendments to the SAYE prospectus have been issued for consultation • Implications: • Revise what is offered • Update communications accordingly • Check procedures regarding contributions other than from salary

  10. SIP/SAYE/CSOP - Retirement (1) • Current position for tax favoured treatment: • SIP: withdraw shares on retirement on or after reaching specified age, not less than 50 (compulsory requirement) • SAYE: exercise within 6 months of leaving through retirement at specified age (60 to 75) or when ‘bound to retire’ under contract; early exercise opportunity at specified age for continuing employees (compulsory requirements) • CSOP: exercise within 6 months of retiring at specified age, not less than 55 (company choice)

  11. SIP/SAYE/CSOP - Retirement (2) • What is changing? • SIP: no income tax liability on shares ceasing to be subject to the plan by reason of the participant’s retirement • SAYE/CSOP: exercise within 6 months of ceasing employment by reason of retirement • SAYE: removal of right of exercise on reaching specified age without retiring (retained in respect of existing options) • In future, age not so directly relevant • Automatically read into rules

  12. SIP/SAYE/CSOP - Retirement (3) • When? Royal Assent • Implications: • HMRC have accepted OTS recommendation • Explanatory notes say companies will be able to use their own definition of retirement • Unclear whether this could/should be included in the plan rules • HMRC will publish guidance setting out: • circumstances in which retirement can be presumed • “normal and natural meaning” • not possible to retire for tax advantaged plan but not for “other purposes”

  13. SIP/SAYE/CSOP: Good Leaver Rules - General (1) • Current position: • CSOP/SAYE: no “tax free” early exercise on TUPE transfer (unless redundancy) or sale of employer company out of group • SIP: “tax free” withdrawal following TUPE transfer/sale of employer company out of group • What is changing? Alignment of good leaver circumstances qualifying for tax relief with current position for SIP: • injury, disability, redundancy, retirement, TUPE transfer and sale of employer company out of group

  14. SIP/SAYE/CSOP: Good Leaver Rules - General (2) • SAYE - automatically read rules • CSOP - no amendment to plan rules • When? Royal Assent • Implications - review and align rules and other documentation, due diligence and project planning on transactions may become simpler

  15. SIP/SAYE/CSOP - Cash Takeovers • Current position - no protection • What is changing? • Protection for early exercise/withdrawal for CSOP/SAYE/SIP in the case of certain cash takeovers • No ‘arrangements’ • Care where offer is not straight cash • No rollover offer – SAYE and CSOP • When? Royal Assent • Implications: share plans due diligence even earlier, especially for transactions this summer - query operation of SAYE/SIP in prohibited periods

  16. Budget 2013 – What should companies be doing? • Many of the changes have automatic effect • Housekeeping : update plan rules nevertheless • Practical aspects : administrators, intranets and portals, employee documentation and communication • HMRC approval : not required (or possible!) • Shareholder approval : unnecessary

  17. Budget 2013 – Other things…. • Statutory residence test • Came into effect on 6 April 2013 • Abolition of “ordinary residence” • Entrepreneurs’ Relief/EMI • Scope to reduce tax rate to 10% • Could be relevant on acquisitions • “Employee Shareholder” status • No capital gains tax on disposal of first £50,000 of shares • Deemed to pay £2,000 for shares • Give up certain employment rights, including right to redundancy payments and certain unfair dismissal claims • Effective from 1 September 2013, subject to political process… • The “GAAR” • Supposed to only extend to the most abusive arrangements • Ineffective against mainstream corporate tax planning • Application to share plans likely to be limited

  18. The Future - Move to self-certification • What requires HMRC approval currently? • Plan rules on establishment • Amendments to “key features” (but not Budget 2013 changes…) • What will change and when? Expected to be implemented in 2014 • Benefits and disadvantages: • Quicker • Safeguards needed? • Ability to check tricky points?

  19. The Future - Changes to Unapproved Arrangements • OTS report now published • Report highlights many of the areas consistently cited as sources of complication • Headline points: • “Safe harbour” EBT • Internationally mobile employees • Removal of requirement to use the “quarter up” price • Online filing of Form 42 • When? 2014 for minor changes and 2015 for any more significant changes

  20. Real-Time Information • What’s changing • Timeline - where are we up to? • Issues for share plans • What do companies need to do now?

  21. Real-Time Information • New PAYE reporting regime • Only affects administration • No change to: • Basis for calculation • Payment due dates 19 22

  22. Real-Time Information - Outline • Information relevant to employee’s tax position provided to HMRC in “real-time” • Required information will generally be submitted at (or prior to) taxable payment being made • Real-time rather than year-end information means more frequent reconciliations and better accuracy • Required to support new Universal Credit

  23. Real-Time Information – Timeline • Consultation during 2011/12 • Regulations for RTI came into force from 6 April 2012 • Pilot scheme undertaken • Full roll-out began on April 2013 • All employers switch to RTI by October 2013

  24. Real-Time Information – How it works • Employer sends “full payment submission” including details of tax + NICs when or before the payroll is run • Information is collected by payroll software and sent to HMRC automatically – no need for P14 (i.e. end of year summary) and P35 (i.e. employer annual return) • P45 (i.e. leaver statement) and P46 (i.e. new employees without a P45) no longer required as relevant information is collected under RTI • Detailed provisions deal with “non-standard” situations

  25. Real-Time Information – Guidance • New section of HMRC website dealing with RTI • Includes guidance for employers • Still being developed • HMRC welcomes input • Opportunity for companies to feedback on practical issues and share experiences

  26. Refresher – PAYE and Share Plans (1) • Income tax arises on delivery of shares following vesting/ exercise (unless tax-favoured arrangements) • Taxable amount = value of shares, less any option/exercise price • For listed companies, income tax collected under PAYE as a “notional payment” • Obligation on employer to operate PAYE in relation to “best estimate” of the taxable amount

  27. Real-Time Information - Share Plans (2) • Delivery of shares = date of “payment” for PAYE purposes • RTI regulations recognise that the information required may not be known in advance of “payment” - depends on share price on the day • So for “notional payments”, deadline for submission of RTI information is earlier of date tax is deducted and 14th day after end of tax month

  28. Real-Time Information - Share Plans (3) • This is helpful but problems still remain • When is tax “deducted”? • If date on which shares are sold to fund the tax, all relevant information may still not be known • e.g. company may sell upfront at flat 45% rate, but make detailed calculations later • Companies generally arrange for sale of shares immediately to fund the tax – this triggers RTI filing requirement although again, detailed information for submission may not yet be in place

  29. Real-Time Information - Share Plans (4) • Compare PAYE in-year penalty regime • Introduced from April 2010 • Risk of penalty arising if PAYE paid late in any month • Difficulties for many companies in relation to share plans – administration systems not set up to gather and deliver information within that timeframe • Awards vesting/options exercised close to tax month end – particularly difficult to comply with required deadlines

  30. Real-Time Information - Share Plans (5) • Lobbying and feedback to HMRC re in-year penalties • HMRC concluded that no special treatment would apply for share-based remuneration • “reasonable excuse” might assist in some cases • lack of certainty for companies even if using best endeavours to comply • HMRC acknowledged that this would need to be looked at in the context of RTI

  31. Real-Time Information - Penalties • A “soft landing” is expected • Common sense approach to “reasonable excuse”, including in the context of internationally mobile employees • Penalties do exist for late/inaccurate returns • Penalties linked to number of employees on payroll (not the number of defaults) • Two bites at cherry… • Tax geared penalties if return is more than 3 months late • 2013/2014 – have until 19 May 2014

  32. Real-Time Information – To Do List • Check in with payroll • Where are they up to with new systems? • Make sure they appreciate issues in relation to share plans • Check in with administrators • Can you streamline processes to help meet deadlines? • Review your plan rules • Make sure you have sufficient flexibility in tax indemnity/tax recovery clauses

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