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OTS recommends share schemes overhaul

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16th Jan 2013
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The Office of Tax Simplification (OTS) has published a new report calling for a complete overhaul of 'unapproved' employee share schemes.

Following a year-long review, the OTS has come up with a range of simplifications to encourage greater employee ownership and ways to reform tax complexities around share schemes.

John Whiting, tax director for the OTS said the current share schemes legislation was a “tangle of complexity”, created costs and pitfalls for companies and employees, and significant burdens for HMRC.

PKF’s Philip Fisher, who was on the OTS share schemes consultative committee, said the main recommendations would completely re-engineer the way in which employees are taxed on shares and provide massive protections.

“It means that they can take on shares without having to pay tax when they've got no money,” he said. “The typical situation with unapproved shares is that you've got to pay a tax liability when you can't sell the shares to make the money to pay tax or buy the shares necessarily. That could change completely, so there's little doubt that it would lead to much wider employee share ownership. It's just fairer, full stop.”

The key recommendations are:

  • Create a “marketable” security – instead of employees being taxed on the value of shares before they can sell them, employees are given the option of whether to pay tax on acquisition, or when the security can be sold for cash
  • Alignment of tax for international assignees – to help those companies with international employees, aligning the tax treatment of international assignees with the tax on other general earnings
  • Creation of an employee shareholding vehicle – to encourage wider employee ownership, the introduction of a vehicle to enable companies to better manage their employee share arrangements
  • Simpler valuation of shares – to address the confusion and uncertainty with valuation, increasing the availability of pre-transaction valuations, better provision of valuation information, and more flexibility for companies on non-recognised stock exchanges
  • Administrative simplification – simplifying PAYE deadlines and the main annual report, the Form 42

The OTS feels that implementing the full package would provide the greatest benefit, however it is now for the Chancellor and David Gauke to decide on how to take these recommendations forward.

On whether the government is willing to embrace the recommendations, Fisher added: “Having had a committee that is quasi-governmental and that had in attendance representatives of both the Treasury and HMRC, you would hope in that situation they weren't just wasting everyone's time for a year or more.”

Fisher also picked up on the proposed abolition of section 22, which he said would be a “very good thing”. At the moment if you get shares as an employee, and they're subject to PAYE, unless the PAYE is paid within 90 days you face a 'tax on tax' charge, even if the original tax is then repaid.

“So after 93 days, you do not get any kind of relief on that at all,” he said. “This is completely wrong, and is catching lots of innocent people, so the removal of that from employee shares would be wholly commendable and one would hope that does go through.”

On approved share schemes the government is going to reprieve the company sale option plan, and is not going to merge it with EMI - doing away with the pre-approvals requirement and obligations for several of the approved schemes. 

For the full OTS report on unapproved share schemes, visit the Treasury website.

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