Comments on the Office of Tax Simplification review of taxadvantaged employee share plans

Prepared by Mike Landon

MM & K Limited 1 Bengal Court Birchin Lane London EC3V 9DD Tel: 020 7283 7200 Fax: 020 7283 4119 Web site: www.mm-k.com Authorised and regulated by the Financial Services Authority 23rd March 2012

Office of Tax Simplifications review of tax-advantaged share plans

On 6th March 2012, the Office of Tax Simplification (OTS) published the final report of its review of the four tax-advantaged employee share plans approved Share Incentive Plans (SIP), approved Savings-Related Share Option Plans (SAYE), approved Company Share Option Plans (CSOP) and Enterprise Management Incentives (EMI). This report represents an excellent start towards simplifying the complex tax legislation governing these plans.

Detailed improvements
During the first six months of its share plans review, the OTS have carried out some extensive research into how tax-advantaged plans are used, their effectiveness and the opinions of companies, their advisers and administrators about how they could be improved. This has resulted in a large number of detailed recommendations for improvements, which include: Good leavers: extending the range of circumstances in which employees who leave employment can exercise options or take shares out of the plan with income tax relief. Retirement: making the provisions for employees who retire consistent for the three approved plans. Features not reasonably incidental: removing vague references to undesirable plan features which allow HM Revenue & Customs (HMRC) to impose additional restrictions. Takeovers: allowing income tax relief when options have to be exercised or shares removed from the plan on a cash takeover. Tax charge on withdrawal from SIP: reducing the period before partnership, matching and free shares can be removed from a SIP tax-free from five to three years 1,500 limit on dividend shares: removing the upper limit on the amount of dividend which can be reinvested in a SIP in any tax year. EMI excluded activities: reducing the number of activities which exclude companies from offering EMI options. However, there is much more which could be done to remove the unnecessary detail from the share plan legislation. The OTS did not have time to carry out a more fundamental review of why there should be so many requirements for tax relief and of which ones are strictly necessary. Unfortunately, by issuing a final report at this stage, there is a danger that this once in a generation opportunity to modernise share plans will be lost.

MM&K Comments on OTS recommendations.docx

Future of CSOP
A worrying development is that the OTS have called into question the future of the CSOP, which is by far the simplest and most flexible tax-advantaged share plan and the only one available to many companies. Despite their extensive research, the OTS have found it difficult to identify clearly the types of companies using the CSOP. The report recommends that further work should be carried out to investigate whether the CSOP is still relevant for UK business. We therefore urge all companies with CSOPs to write to the OTS (at otsess@ots.gsi.gov.uk) to explain what they use them for and why they are a valuable tool for motivating and retaining your employees. Assuming that further investigation demonstrates that CSOPs are worth retaining, the OTS recommend that they should be merged with EMI to form a single discretionary share option plan. The current limit of 120,0001 to the value of shares under option will apply to companies which currently qualify for EMI and the current 30,000 CSOP limit will apply to other companies. Merging the two plans will result in some welcome improvements for CSOPs, for example: it will be possible to grant options at a discount or even at nil cost (though any discount at grant will be taxed at exercise, as for EMI) the three-year period before options can be exercised with income tax relief will be removed; and certain restrictions, imposed by HMRC, on the exercise of discretion by companies will be removed.

These useful improvements are, however, complicated by introducing them through a two-stage process and a continuing distinction between EMI-compliant and other companies. It could be much simpler just to amend the CSOP legislation instead. If the Government does decide to introduce a single tax-advantaged discretionary share plan, this should not be confined to share options, but should also include awards of the full value of shares, such as conditional and deferred share awards.

Abolition of the approval process

The other bold recommendation is to replace the current process for obtaining HMRC approval for SIP, SAYE and CSOP with a selfcertification process, as already applies for EMI. Companies will welcome any reduction in the time it takes to secure HMRC approval for plans, which has increased markedly over the last year due to reductions in the number of their share scheme advisers. However, many are reassured by the fact that their share plans have official approval. They will be alarmed by the OTSs related recommendation that if HMRC discover that plans do not in fact meet
1

In the Budget on 21st March 2012, it was announced that this EMI limit is to be increased to 250,000. 2

MM&K Comments on OTS recommendations.docx

the requirements for approval the companies will be liable for the underpaid income tax and will not be able to recover it from their employees. A better solution would be to reduce the requirements for tax relief even more radically to a few essential provisions, so that the approval process becomes straightforward. It is highly likely that this recommendation will be accepted by the Government because it will help HMRC to cut costs. However, we urge HMRC to retain its current share scheme advisers so that companies and their advisers will continue to be able to ask HMRCs views about points of uncertainty in the legislation.

Further details
The Appendix contains a full summary of the OTS recommendations and our detailed comments.

Next steps
In the Budget on 21st March 2012, the Government stated that it will consider the recommendations of the OTS review and will consult shortly on how to take a number of the proposals forward. We understand that HMRC will be issuing a consultation document in April 2012 and there are unlikely to be any changes to the legislation before the Finance Bill 2013.

MM&K Comments on OTS recommendations.docx

Appendix: Recommendations by the Office of Tax Simplification

Main recommendations
Issue being addressed A new approval process Companies must seek formal approval from HMRC before they can implement SIP, SAYE and CSOP. HMRC review the plan documents, including rules, enrolment forms, booklets and communication materials. This process can take a long time, partly because the share plan legislation is far more detailed and prescriptive than necessary and partly because it contains provisions which are open to interpretation by HMRC, for example plans must not contain features that are not reasonably incidental to the provision of shares. The delays have become worse over the last year or so because HMRC have considerably reduced the number of share scheme advisers who handle applications for approval. OTS recommendation HMRC should enter discussions with interested stakeholders to design a selfcertification process to replace the current approval process. This will be similar to the self-certification which already exists for EMI. Model rules, with a list of required features should be published by HMRC. There should be power for HMRC to recover tax benefits for plans which are found not to meet the requirements of the legislation. Payment should be by the company, not the employees unless they were knowingly involved in the default. MM&Ks Comments Companies will welcome anything that speeds up the approval process. However, most welcome the certainty which HMRC approval gives. If companies will potentially be liable to pay large tax refunds to HMRC, without the ability to reclaim this from employees, they may be more reluctant to introduce share plans. HMRC already publish model rules, but these usually need considerable amendment, for example to take into account recent employment and company law and the guidelines issued by institutional investors. The real answer to the problem would be to reduce radically the detailed requirements of the legislation and, in particular, remove provisions, such as the features not reasonably incidental one, which cause much of the delay in obtaining approval.

MM&K Comments on OTS recommendations.docx

Issue being addressed Further investigation into the relevance of CSOPs The use of CSOPs has declined significantly over the last 10 years. The OTS have found it difficult to identify clearly the types of companies using CSOPs.

OTS recommendation

MM&Ks Comments

Further work should be carried out to investigate whether the CSOP is still relevant for UK business. The aim would be to get a better picture of which companies currently use CSOPs and why.

This threat to the future existence of the CSOP is very worrying. CSOPs are currently the most flexible type of tax-advantaged share plan and have many fewer requirements to meet than the other three. The aim of tax simplification should be to move towards the CSOP by removing the detailed requirements from the other plans. Many companies cannot currently operate EMI because they do not qualify. Smaller companies, in particular, find SIP and SAYE too cumbersome and expensive to operate. The main reasons why CSOPs are used less than 10 years ago are that: The limits have remained frozen at 30,000 since 1996. There has been a trend away from share options towards the award of the full value of shares. EMI is used by companies which qualify for it because of the more generous limits. are

Despite this, more CSOP options granted each year than EMI ones.

The best way to make CSOPs more popular would be to extend the tax relief to conditional and deferred share awards.

MM&K Comments on OTS recommendations.docx

Issue being addressed Merging CSOP and EMI CSOPs are in some ways more restrictive than EMI. For example, under a CSOP, options cannot be granted at a discount and they cannot normally be exercised with tax relief within three years. In addition, HMRC imposes additional restrictions on the exercise of discretion by companies, for example on the treatment of leavers and in determining the extent to which performance conditions have been met. The current 30,000 limit for CSOP and 120,0002 limit for EMI are not annual limits, but apply to all options which are still subsisting. This can be difficult to administer and encourages employees to exercise early so that they can be granted new options.

OTS recommendation Assuming that CSOPs are still considered to be relevant, CSOP and EMI should be merged. The more generous EMI individual limit should only be available to companies which currently meet the conditions for EMI (eg gross assets of less than 30 million) and the 30,000 limit would apply to other companies. These limits would only apply to options granted over a rolling three-year period; so that new options could be granted even if the original ones had not been exercised after three years. Like EMI, CSOP options could be granted at a discount (though income tax relief would only be given for any increase in the share value after the grant date, as for current EMI options). Also like EMI, they could be exercised with income tax relief less than three years after the grant date. However, the OTS have added an additional complication of making these changes a two-step process. Removal of the threeyear period before tax relief is available and the simplification of the limits will be deferred to the second step.

MM&Ks Comments These recommendations provide welcome improvements for CSOPs: very

The ability to grant options at a discount, or even at nil-cost, means that in effect full-value share awards can be made tax-effectively. The removal of the three-year period before options can be exercised with income tax relief means that companies will be able to decide their own provisions for allowing early exercise for leavers and on the occurrence of other corporate events, without having to make separate provisions for approved options. The introduction of a three-year rolling limit will allow CSOPs to be used more frequently and reduce the number of companies exceeding the limits by mistake.

It would have been much simpler, though, just to amend the CSOP legislation to make these improvements. If the Government does wish to introduce a single approved discretionary share plan the opportunity should be taken to allow for grants other than options, such as conditional and deferred share awards.

In the 21st March 2012 Budget, the Government announced that this EMI limit will be increased to 250,000. 6

MM&K Comments on OTS recommendations.docx

Supplementary recommendations common to all schemes

Issue being addressed Annual returns There are currently separate annual return forms which have to be sent to HMRC for each of the four tax-advantaged share plans, in addition to the very complicated Form 42 for unapproved share plans. Companies are also required to notify HMRC within 92 days of the grant of an EMI option, which is seen to be an unnecessary duplication. Online filing All annual returns are paper-based. The ability to file online would reduce paperwork, result in swifter completion of forms and minimise risks of errors. Introduce online filing for annual returns and for provision of any plan documentation required by HMRC. In the long term, real time recording should replace the annual return. HMRC has allowed share plan documents to be sent to them by email for quite some time. We understand that online filing of annual returns has been held up due to technical problems at HMRC. Real time recording may be of benefit to HMRC in due course, but could be an increased administrative burden for companies. OTS recommendation Create a single annual return form on which option grants and share awards under all four tax-advantaged plans can be recorded and notified to HMRC. The need to notify HMRC of the grant of EMI options within 92 days would be removed. MM&Ks Comments Any attempt to combine the reporting of all four share plans on the same document is likely to be a complication, not a simplification. The Form 42 for unapproved plans is very difficult to complete even for experienced share plan specialists because of the large number of potential chargeable events. Keeping a separate form for each plan would reduce the risk of mistakes being made on their completion.

MM&K Comments on OTS recommendations.docx

Issue being addressed Prescriptive rules regarding operation of schemes The legislation for tax-advantaged share plans contains a large number of detailed requirements to qualify. For SIP, in particular, they are far more prescriptive than necessary about how the plan must be operated. This limits companies flexibility on how to operate plans and means that plans operated by international companies have to be significantly tailored to meet UK requirements. It also makes the process for approval of plans by HMRC more complicated and time consuming. Retirement age The minimum specified retirement age is 50 for SIP, 55 for CSOP and 60 for SAYE. For SAYE, retirement can also be at any other age at which the participants are bound to retire in accordance with their employment contracts. However, the removal of the default retirement age for most employees has made this provision redundant. SAYE has the further disadvantage that the participant must retire exactly on the date when they reach the specified age; otherwise the option lapses. SIP and CSOP allow for retirement on or after the specified age.

OTS recommendation

MM&Ks Comments

Allow companies to provide communications to employees online. Remove the requirement for companies to submit employee communication material as part of the approval process. Dispense with the requirement for a full paper copy of the companys articles of association to be attached to EMI option agreements. Permit companies to make their own decisions on administrative aspects of plans. Create one definition of retirement for the three approved plans. This common rule should allow companies to have their own definition of retirement. (If CSOPs are merged with EMI, tax relief will be available even if the options are exercised within three years of grant, so there will be no need for a retirement provision in the tax legislation.)

These proposals are a good start (though HMRC does already allow companies to provide communications online). But there is a quite considerable amount more that could be done to remove the detailed administration requirements from the legislation.

The first two recommendations appear to contradict each other. There is a much simpler solution, which is to make the retirement provision for SAYE exactly the same as it is for SIP. SAYE options should be exercisable on retirement on or after a specified age, which cannot be less than 50. Over the longer term, the concept of retirement will become less definite and so an alternative good leaver provision may need to be developed (see the next recommendation).

MM&K Comments on OTS recommendations.docx

Issue being addressed Good leavers The approved plans allow employees to be able to exercise options under SAYE and CSOP or withdraw their shares from a SIP without an income tax charge if they leave employment early in certain good leaver circumstances, which usually involve involuntary cessation. However, these provisions are more generous for SIPs which, for example, include TUPE transfers as good leaver circumstances. Cash takeovers Where there is a cash takeover, CSOP and SAYE options may usually be exercised, but no income tax relief is available if exercise is within three years of grant. Participants in SIPs may be obliged to sell their shares, which will result in an income tax charge for shares acquired in the previous five years. There is also an employers NICs liability (except for SAYE).

OTS recommendation The legislation should be changed so that all leavers will be treated for the purpose of income tax relief as good unless they leave through voluntary resignation or dismissal for cause. For CSOPs, companies would still be able to decide the circumstances in which options could or could not be exercised on leaving employment.

MM&Ks Comments This recommendation would help to reduce cases on when employees are unfairly treated on leaving employment because the reason for leaving does not come exactly within the statutory provisions. Over the longer term the distinction between retirement and voluntary resignation may become less clear, and so even this more relaxed provision may need to be rethought. This would be a welcome improvement, as employees are often unfairly penalised when there is a takeover, which is an event out of their control.

Allow income circumstances.

tax

relief

in

these

MM&K Comments on OTS recommendations.docx

Issue being addressed Features not reasonably incidental The legislation for SIP, SAYE and CSOP forbids the inclusion of features not reasonably incidental to the provision of shares. This allows HMRC to refuse to accept certain features in plan design, including the offer of cash alternatives or the integration of share offers within a broader bonus or flexible benefits arrangement. The provision creates considerable uncertainty and HMRCs interpretation of it has changed over the years. Material interest Participation in tax-advantaged plans is not allowed by any individual who has a material interest in the company, if it is a close company. Although this may seem reasonable, the definition of material interest includes holdings by family members and trusts and covers many pages of complex legislation.

OTS recommendation Replace with a setting out the consider should operation of the salary sacrifice. specified targeted clause key areas which HMRC be prohibited, eg the plan in conjunction with

MM&Ks Comments Removal of this very general provision is to be welcomed and will help to reduce much of the uncertainty about whether or not plans meet the requirements for approval. However, why should plans not contain these other features (including salary sacrifice), so long as tax relief is only given when shares are actually acquired by employees?

Remove material interest provisions for SIP and SAYE, but keep them for EMI and CSOP, aligning the definition to a 30% holding for both of these plans.

Removal from SIP and SAYE would be welcome and would be unlikely to reduce the tax collected materially. Hopefully, the material interest provisions for EMI and CSOP will at least be simplified.

MM&K Comments on OTS recommendations.docx

10

Issue being addressed Restrictions on shares The shares acquired through the three approved plans cannot be subject to restrictions (with very limited exceptions). SIP allows more restrictions than SAYE and CSOP. For private companies which wish to require employees to sell shares on leaving employment, some very specific requirements need to be put into the articles of association, which can be costly and not in the companys commercial interests. Requirements as to other shareholdings Again to protect employees, if a company has more than one class of ordinary shares, a majority of the class of shares offered under SAYE or CSOP must be held by persons other than employees or employee trusts or (for private company shares) associated companies. Alternatively, the company must be employee-controlled. This can cause particular problems for private companies with several classes of shares with different rights.

OTS recommendation The prohibition on offering shares with restrictions under SIP, SAYE and CSOP should be removed. Employees should be notified of any restrictions on the shares. For the purpose of the individual limits to the size of share options, the shares should be valued ignoring the restrictions.

MM&Ks Comments This will help to give some useful additional flexibility, which should encourage some companies which cannot currently offer approved share plans to adopt them. We recommend, however, that some safeguards should remain, so that there is some protection for employees against being offered worthless shares.

Permit companies with more than one class of shares to operate SAYE and CSOP.

Again, this will give additional flexibility, but safeguards to protect employees should remain.

MM&K Comments on OTS recommendations.docx

11

Issue being addressed Group schemes and companies

OTS recommendation associated Permit associated companies of the company which established the plan to participate in an approved plan if they are subsidiaries of the company whose shares are being acquired.

MM&Ks Comments

Employees can only participate in an approved plan if their employing company is the company which established the plan or one of its subsidiaries. Where the parent company (whose shares are used) is foreign, it is often more convenient administratively for a UK subsidiary to establish the plan. However, if other UK companies are not its subsidiaries, they cannot participate and may need to set up separate plans.

This will be a useful change for subsidiaries of foreign companies. They may be able to include all UK subsidiaries in the same approved plan, which will reduce administration costs and complications if employees are transferred between group companies.

MM&K Comments on OTS recommendations.docx

12

Recommendations specific to SIP

Issue being addressed Redundant legislation There is a provision which prevents shares transferred from qualifying employee share ownership trusts (QUESTs) from being awarded as partnership shares. However, the favourable tax treatment of QUESTs was removed from 2003 and so there is no longer any need for this provision. Partnership periods Shares accumulation Allow companies the choice of making the amount paid by employees any of: the price at the start of the accumulation period the price at the end, or the lower of the two prices. This will give companies useful additional flexibility to design SIPs to meet their particular requirements. There should be savings in administrative costs if share purchases are once a year instead of monthly. OTS recommendation Delete the relevant paragraph. MM&Ks Comments This will remove the requirement for an unnecessary clause in SIP Trust Deeds.

Instead of purchasing shares monthly, SIPs can provide that they will only be purchased at the end of an accumulation period of up to 12 months. The price paid by employees is the lower of the share prices at the start and end of the period. This is intended to be similar to US employee stock purchase plans. However, some companies are reluctant to introduce accumulation periods because they will effectively have to fund the equivalent of any increase in the share price over the accumulation period, which is an unpredictable amount.

MM&K Comments on OTS recommendations.docx

13

Issue being addressed Operation of PAYE When employees leave employment in certain circumstances, a PAYE liability is incurred based on the share value at the date of leaving. The Company must account for this by the 14th day of the next tax month. It is often impracticable for the SIP trustees to deduct the money from the shares they hold from departing employees within this timescale, which since April 2010 could result in PAYE penalty charges for the employing company. Tax-free holding period Employees are subject to income tax on their SIP shares either if they choose to withdraw the shares within five years of their acquisition date or if they leave employment in certain bad leaver circumstances during this period. Five years is considered to be an unreasonably long period given current employment patterns. There is also potential confusion with the three-year holding period during which free, matching and dividend shares cannot normally be removed from the plan and the forfeiture period of up to three years for free and matching shares.

OTS recommendation Penalties should not be chargeable for the late payment of PAYE if it is paid within 90 days of the leaving date.

MM&Ks Comments A good practical solution to this problem. It could also be applied to other taxadvantaged and unapproved share plans.

Reduce the period before shares can be withdrawn tax-free to three years.

This would be a useful simplification to the SIP legislation and is likely to encourage more employees to participate. It would also make SIP consistent with SAYE and CSOP for which options can be exercised without an income tax charge after three years. The amount taxable for withdrawals in the first three years should be the initial value of the shares on the original acquisition date ie not the market value at withdrawal unless the share price has fallen. (See the next recommendation.)

MM&K Comments on OTS recommendations.docx

14

Issue being addressed Uncapped PAYE and NICs liability on cash takeovers If employees accept a cash takeover bid for the company (or are obliged to sell their shares) within three years of acquiring them, they are subject to income tax and NICs on the full market value of the shares. The tax charged may be more than the tax saved at the original acquisition date. In addition, there is an employers NICs liability on this full market value. As this potential liability cannot be predicted at the award date, it can discourage companies from introducing SIPs.

OTS recommendation

MM&Ks Comments

Assuming the earlier recommendation that there should be no tax charge at all in these circumstances is not adopted, the taxable amount should be based on the value of the shares on the original acquisition date (or at the time of the takeover if this is lower).

This would be employees and circumstances.

fairer treatment for companies in these

However, the problem is even broader, in that the higher taxable amount also applies when an employee leaves in bad leaver circumstances within three years of acquiring the shares. For greater simplicity, the lower tax should apply whenever there is a tax charge during the first three years.

MM&K Comments on OTS recommendations.docx

15

Issue being addressed Dividend reinvestment Dividends received on shares held in a SIP may be reinvested to acquire dividend shares, which can be taken out of the plan after three years with no income tax charge. However, there is a limit of 1,500 to the value of dividends which can be reinvested in any tax year. Given that many SIPs have now been operating for more than 10 years, this 1,500 limit is now frequently exceeded. Any dividends which cannot be used to buy a whole number of shares must be carried forward (except in the case of some plans using foreign shares which allow fractions of shares to be acquired). If the dividends are not reinvested within three years, they must be returned to the employees.

OTS recommendation Remove the 1,500 cap so that all dividends can be reinvested. Remove the forward. three-year limit on carry

MM&Ks Comments These proposals would help remove some unnecessary administrative complications in operating SIPs. The 1,500 figure has clearly become out of date. There could be further simplification if SIPs were able to hold fractions of shares on behalf of employees, as there would then be no need for carry forward of uninvested dividends (or of money contributed by employees to buy partnership shares). We do not understand why the OTS have dismissed this possibility.

Recommendations specific to SAYE

Issue being addressed Different savings periods SAYE plans can offer employees the choice of three, five and seven year options. Seven year options are now offered by a small proportion of plans and are rarely taken up by employees. OTS recommendation Remove the choice of seven year options. MM&Ks Comments It is unlikely that many people will mourn the disappearance of seven year options. However, it is arguable that the objective of simplification should be to increase flexibility for companies, not reduce it. Why should companies not be able to offer any option period that they choose (as they can for CSOP and EMI)?

MM&K Comments on OTS recommendations.docx

16

Issue being addressed Prescriptive rules on contributions

OTS recommendation non PAYE Allow companies to permit savings to be made otherwise than from salary in a broader range of circumstances.

MM&Ks Comments

Employee savings into an SAYE plan must normally be by deduction from salary. HMRC permit employees on maternity leave to make payments directly to the savings account, but this is not available, for example, for employees on secondment or sabbatical leave, which may mean that their options will lapse. Approved savings carrier Very few smaller companies offer SAYE options partly because the current savings carriers are not able to offer their services at low enough cost.

This would remove an restriction currently being HMRC.

unnecessary imposed by

This issue should be taken into account by BIS in their longer-term review into the wider application of employee ownership among smaller private companies.

Companies could reproduce many of the features of an SAYE plan (though not the tax-free 20% discount) by using CSOP or EMI options instead. This is another good reason for keeping the CSOP legislation.

MM&K Comments on OTS recommendations.docx

17

Recommendations specific to EMI

Issue being addressed Disqualifying events Employees must exercise their EMI options within 40 days of the occurrence of a disqualifying event, which includes ceasing employment and certain changes to the companys ownership, trading activities or share capital. It is sometimes impractical to meet this deadline. In any case, it is much less than the six months allowed for good leavers to exercise SAYE and CSOP options with tax relief. Working time requirement To be eligible to be granted an EMI option, employees must be contracted to work for the business at least 25 hours per week, or 75% of their total working time. Ceasing to meet this condition is then a disqualifying event. This discriminates against employees with flexible hours or who have more than one employment. The equivalent CSOP provision only applies to directors and then only at the date of grant. Amend the working time requirement so that it only applies to directors. This is a helpful amendment which should mean that only non-executive directors would be excluded from receiving EMI options. For consistency with CSOP, the EMI rules should also be changed so that the working time requirement only applies at the grant date and ceasing to meet it is not a disqualifying event. OTS recommendation Extend the 40-day period to six months. MM&Ks Comments This is a good practical solution to the problem. Perhaps the list of disqualifying events could be reduced as well. For example, a holder of a CSOP option could exercise the option with income tax relief at any time between the third and tenth anniversaries of grant, even if he had left employment many years earlier (assuming, of course, that the plan rules permitted this).

MM&K Comments on OTS recommendations.docx

18

Issue being addressed Qualifying trades and activities

OTS recommendation excluded Reduce the list of excluded activities.

MM&Ks Comments

Companies cannot grant EMI options if they carry out certain excluded activities, including certain financial services, property development, farming and shipbuilding. The precise confusing. rules are complex and

This will be welcomed by many of the small companies which would otherwise qualify to grant EMI options; though some of the exclusions may be required by EU state aid regulations.

MM&K Comments on OTS recommendations.docx

19

Issues beyond simplification

Issue being addressed EMI and entrepreneurs relief Before capital gains tax (CGT) taper relief was abolished in 2008, EMI option holders were able to benefit from an effective CGT rate of 10% (or even less for basic rate taxpayers). They were deemed to have acquired their shares at the date of grant of the option and could claim full taper relief for a disposal of shares not less than two years later. The entrepreneurs relief which was introduced instead provides similar tax benefits but only applies to individuals who have held a minimum of 5% of the ordinary share capital and voting rights for at least one year before they dispose of the shares. Scheme limits The limits to participation in SAYE have not changed since 1991, for CSOP since 1996 and for SIP since they were introduced in 2000. This has reduced to the attractiveness of these plans and, in particular, has probably been one reason for the reduction in the use of CSOP. The limits should be reasonably regular basis. reviewed on a This could give a good boost to employee share ownership. Simplification of the CSOP and EMI limits, as discussed above, would also be welcome and reduce the risk of the limits being exceeded by mistake. OTS recommendation The position of EMI shares in relation to the CGT tax rate needs to be considered in the light of the eligibility criteria for entrepreneurs relief. MM&Ks Comments The Government have already announced acceptance of this proposal in the 21st March 2012 Budget. However, it seems that the shares will need to be held for at least 12 months after the EMI option has been exercised, which will mean that options whose exercise is linked to exit events may not qualify. In addition, the position of other employee shareholders with holdings of less than 5% should be considered, as they also used to qualify for the business assets rate of taper relief.

MM&K Comments on OTS recommendations.docx

20

Issue being addressed Eligible organisations The requirements for tax-advantaged share plans exclude certain types of company from offering them for example, venture capital owned companies and mutual societies. The FSA Remuneration Code requires the remuneration packages for senior employees of financial institutions to include bonuses deferred in part into shares or similar capital instruments.

OTS recommendation This issue is noted for future consideration.

MM&Ks Comments The rules restricting shares in subsidiary companies being used for share plans could be relaxed provided there were safeguards included to prevent employees from benefiting from artificial manipulations of share values. Extending tax-advantaged plans to mutuals would require innovative new solutions and a major change of approach by the Government. Some companies have dealt with this issue by entering into contracts for differences with employees.

MM&K Comments on OTS recommendations.docx

21