Share incentive plans ― an overview

By Tolley
Employment_tax_img4

The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Share incentive plans ― an overview
  • Introduction
  • Legislation
  • SIP trusts
  • Notifying HMRC
  • HMRC powers and penalties
  • Annual reporting
  • Eligibility
  • Similar terms
  • Scheme shares
  • Prohibited companies
  • Types of share
  • Holding period
  • Forfeiture
  • Disqualifying events
  • Withdrawal of shares
  • Tax treatment
  • Overall summary

Introduction

Share Incentive Plans (SIPs), originally known as ‘All Employee Share Ownership Plans’, were introduced at the same time as EMI. Since their introduction, the underlying rules and conditions have remained broadly the same, although in recent years various recommendations made by the Office of Tax Simplification (OTS) have led tothe removal of some unnecessary anomalies between SIPs and other tax-advantaged share schemes. Also, an SIP was originally one of the three types of tax-advantaged share scheme that required HMRC approval (the others being CSOPs and SAYE option schemes). From 2014/15 onwards the requirement for HMRC approval has been replaced with a system of self-certification. Existing approved schemes had tore-register with HMRC and self-certify toretain the tax advantages of the SIP uninterrupted.

Due tothe need touse a separate trust, the relative complexity of the arrangements and administration, as well as the requirement broadly tooffer similar share rights toall employees, SIPs have almost exclusively been utilised by large, publicly quoted companies.

Legislation

The SIP legislation is contained in ITEPA 2003, ss 488–515 and Sch 2. Further provisions are included in ITTOIA 2005, ss 382, 384–385, 392–396, 402–408 and 770.

HMRC has a section of its Employee Tax Advantaged Share Schemes User Manual dedicated tothe subject which can be found at ETASSUM20000 onwards.

SIP trusts

The trust must be constituted under UK law and all trustees must be resident in the UK. In addition, there is a legislative requirement that the trust instrument does not contain any terms that are neither essential nor reasonably incidental tocompliance with legislation.

ITEPA 2003, Sch 2, paras 70–80

As a result, a separate trust is usually needed tooperate these plans. This is a drawback, since many companies may have existing employee benefit or employee share trusts