We will track here amendments to this resource that reflect changes in law and practice.
This practice note comments on the guidance in HMRC's Employment-Related Securities Manual on the taxation of shares (and other securities), securities options and other share incentives acquired by employees and directors who are "internationally mobile". This means individuals who move to or from the UK, or work both in and outside the UK, at a relevant time. This HMRC guidance was substantially revised in September 2008 to reflect Finance Act 2008, which introduced a new approach to the taxation of the share incentives of R/NOR (and non-domiciled) UK taxpayers.Close speedread
As described in Practice note, Non-domiciled tax reforms: impact on share incentive taxation from 6 April 2008 (www.practicallaw.com/7-380-8717), the taxation of share incentives awarded to employees and directors who are:
Not domiciled in the UK; or
Resident but not ordinarily resident in the UK (R/NOR),
changed substantially from 6 April 2008 as a result of Finance Act 2008 (FA 2008).
HMRC updated their main guidance on the taxation of share incentives granted to "internationally mobile employees" in early September 2008. This main guidance forms part of the HMRC Employment Related Securities Manual (www.practicallaw.com/5-362-6964) (ERSM) - see ERSM160000.
HMRC had previously released some stand-alone guidance on the effects of the remittance basis changes on share incentives - see HMRC guidance on impact of "non-dom" reforms on securities and options taxation (www.practicallaw.com/9-382-7630).
Internationally mobile employees include those:
Coming to work in the UK from overseas;
Leaving to work outside the UK; and/or
Resident in the UK with duties outside it (with or without UK duties as well).
In this practice note, we comment on the new ERSM International guidance. We do not aim to summarise the guidance, but to highlight notable points.
In ERSM160100, HMRC state that more ERSM international guidance on the new rules introduced by FA 2008 will be produced "over the coming months". In particular, they expect to add examples covering "less straightforward" situations.
Readers may wish to contact Jon Clarke at HMRC's Employee Shares and Securities Unit (ESSU) with any queries or suggestions they have about the new ERSM International guidance. Alternatively, if you let us have any comments, we will be happy to consider them and raise them with the ESSU.
ERSM160400 deals with this topic.
The amendments made by FA 2008 only apply to:
Shares (and other employment-related securities) acquired on or after 6 April 2008, except those acquired on exercise of a share option (or other securities option) acquired before that date; and
Share options (and other employment-related securities options) acquired on or after 6 April 2008.
ERSM 160400 points out that under an unamended provision of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), any new options granted to replace options granted before 6 April 2008 will also not be subject to the new regime (see section 483 of ITEPA 2003).
ERSM160500 deals with this topic. This section points out that HMRC is preparing further general guidance on the new rules about residence, domicile and the remittance basis.
This future guidance will be of relevance to the taxation of share incentives held by internationally mobile employees subject to the remittance basis. It will be particularly helpful if it contains a detailed explanation of HMRC's view of what constitutes remittance in the case of securities - see Non-domiciled tax reforms: impact on share incentive taxation from 6 April 2008: HMRC consider UK shares (and possibly options over them) will always be within the UK from issue or grant (www.practicallaw.com/7-380-8717).
ERSM160700 deals with this topic. For a discussion of "relevant period", see Practice note, Apportionment of securities and option income for R/NOR employees (www.practicallaw.com/7-382-9480).
The relevant period differs between different types of share incentive tax charge. These types of charge are specified by different chapters of Part 7 of ITEPA 2003. References in the rest of this note to "Chapters" are to relevant chapters of Part 7.
In ERSM 160710 HMRC state a general principle which may be useful in applying the remittance basis apportionment mechanism:
"The general intention is that the relevant period should represent the period in which the income is earned, or to which it most closely relates."
There are a few helpful clarifications about restricted securities charges (under Chapter 2) in ERSM160725:
the relevant period for restricted securities charges is the period from acquisition of the securities to the chargeable event; and
a restricted security may be subject to several successive chargeable events (depending on its terms and history) (see Practice note, Restricted securities (www.practicallaw.com/3-364-2007)),
more than one relevant period may apply (each for a different restricted securities charge) to a single holding of restricted securities.
The relevant period can include years for which the employee is ordinarily resident, in which the remittance basis is not available.
A joint election can be made under section 431(1) of ITEPA 2003 to take restricted securities out of the restricted securities regime - see Practice note, Restricted securities: Election to be taxed up-front on unrestricted market value (and take restricted securities out of the restricted securities regime) (www.practicallaw.com/3-364-2007). If an election of this type is made by an employee who can claim the new remittance basis, the rules about:
the period for which the securities are earned,
which will apply for the tax charge arising as a result of the election will be those which apply to general earnings.
In ERSM160740, HMRC confirm that the reforms have not changed their policy:
To impose liabilities under Chapter 3C (notional loans) when securities are obtained from the exercise of a securities option which was acquired before coming to work in the UK, if the move to the UK was already expected when the option was acquired. (Chapter 5 (securities options) will not apply because the option holder will be non-resident at the time of acquisition. This was also the position before the FA 2008 reforms.)
If remittance basis apportionment applies to a Chapter 3C (notional loans) charge of this type, the relevant period will be the period from acquisition of the option to the date on which it is first capable of exercise.
Not to impose a charge under Chapter 3C (notional loans) if there is no knowledge of the move to the UK when the securities option is acquired.
Usually, the relevant period for a Chapter 3C (notional loan) charge arising on securities not acquired under a securities option will be the tax year in which those securities are acquired (or part of it, if they are disposed of in the same year).
However, HMRC comment in ERSM160745:
"There may be circumstances in which the employment income that arises from the discharge of a notional loan under Chapter 3C could be said to be earned over a different period. For example, an employer might decide to release an employee from a genuine, deferred obligation to pay for shares because of exceptional performance in a particular year. In such circumstances, as long as the remittance basis applied for the year of acquisition, a just and reasonable override could be used to establish the fair amount of foreign securities income, given that the income might reasonably be regarded as having been earned in the year of the exceptional performance rather than the year in which the employee originally acquired the shares on deferred purchase terms."
For more on the "just and reasonable override" see Just and reasonable override (JRO), Practice note, Apportionment of securities and option income for R/NOR employees: Apportionment: Just and reasonable override (www.practicallaw.com/7-382-9480) and "Ask the Team": Just and reasonable override of statutory UK/foreign split for share option tax (www.practicallaw.com/2-383-4177).
Usually, the relevant period for a Chapter 3D (securities disposed of for more than market value) charge will be the tax year of the disposal.
However, as for Chapter 3C (notional loans) in ERSM160750 HMRC suggest circumstances in which the just and reasonable override (see Just and reasonable override for certain Chapter 3C (notional loan) charges) should be used with reference to a different period for a Chapter 3D (securities disposed of for more than market value) charge:
"....there may be examples of charges under Chapter 3D that can be linked to “earnings periods” that are different from the statutorily defined relevant period. A remuneration package involving the award of forfeitable shares might include a guaranteed “buyback” price at above market value at the time that the shares cease to be forfeitable. In those circumstances the market value of the shares at the time they ceased to be forfeitable would form the basis of a charge under Chapter 2 and the excess of the consideration received over the market value would be subject to a Chapter 3D charge. Here, it would seem reasonable to regard the period over which the Chapter 3D income was earned as identical to the relevant period for the Chapter 2 charge. Again, the just and reasonable override would operate to recognise this."
The relevant period for a securities option is the period from acquisition of the option to the chargeable event, or, if earlier, the date on which the option "vests", meaning when it is first capable of exercise.
In ERSM160760 HMRC:
Discuss securities options which:
Become capable of exercise in tranches (perhaps in respect of one fifth of the share under option per year over five years); or
Are subject to several performance conditions which will be tested on different dates, each in respect of a different part of the option.
HMRC say they will treat a securities option of this type as effectively vesting at different times in respect of separate parts of the option. So, different parts of the option will have different vesting periods.
However, HMRC do not explain how they will then identify which part of an option of this description is exercised or released (or gives rise to a benefit) if there is a chargeable event in respect of only part of the option. For example, an option may be exercised in respect of only some of the shares under option.
Discuss the meaning of "vesting" and the possibility of confusion between the date when an option is first capable of exercise (the statutory vesting date) and another date on which a condition precedent to exercise is met (such as a continued service requirement). However, this guidance seems rather unclear. We will write to HMRC requesting clarification.
Point out that the just and reasonable override (see Just and reasonable override for certain Chapter 3C (notional loan) charges) may be relevant:
"However, where the facts of any case suggest that the option gain has been earned over a different period than that from grant to “vest” ...... the just and reasonable override may be used to arrive at the fair result."
ERSM160800 deals with this topic.
For a share incentives tax charge subject to the new remittance basis apportionment, the portion of the taxable amount which relates to non-UK duties is described in the new statutory rules as "foreign securities income" or "FSI". Foreign securities income is taxable in the UK only if remitted. For more on this topic, see Practice note, Apportionment of securities and option income for R/NOR employees (www.practicallaw.com/7-382-9480).
In ERSM160815, HMRC explain that the pattern of UK and non-UK workdays in the relevant period will usually be the basis for determining foreign securities income. Their examples assume the relevant employees all work 48 5-day weeks in a year (with 4 weeks' holiday). Obviously, in any real case the taxpayer's own working pattern will need to be used to determine apportionment.
ERSM160820 - ERSM160835 deal with the new remittance basis rules for share incentives of non-domiciled (and ordinarily resident) taxpayers. For these individuals, share incentive income will only be foreign if the employment is with a foreign employer and the duties are performed entirely outside the UK. In other words, for a non-domiciled, ordinarily resident taxpayer claiming the remittance basis, share incentive income will generally either be entirely foreign or entirely not foreign.
However, there is a complication where a taxpayer of this description can benefit from the new remittance basis rules and also has an "associated employment" within the UK (under dual contracts (www.practicallaw.com/2-200-3185)). An "associated employment" is a separate employment, with at least some UK duties, with the same or an associated employer. Taxpayers in these circumstances may be subject to a statutory limit on the amount of any foreign securities income, to prevent foreign share incentives being used as a tax avoidance arrangement to keep employment income out of UK taxation. The amount of foreign securities income will be the amount which is just and reasonable given all the relevant circumstances.
Normally, taxpayers must be resident in the UK to claim the new remittance basis for a tax year. However, in some cases, a non-domiciled or R/NOR taxpayer will:
Have a share incentive award with a relevant period covering several tax years; and
Be non-resident for one (or more) of those years.
Securities income accrues evenly throughout the relevant period. But, only income that accrues in a tax year for which the remittance basis applies can be foreign securities income. For this reason, the remittance basis apportionment mechanism contains a special rule. This rule treats any tax year within a relevant period for which the taxpayer is non-resident as a year in which the remittance basis applies, despite the normal requirement for UK residence.
HMRC discuss this point in ERSM160860, which points out that the meaning of "not resident" in this rule is the meaning in UK domestic tax law. This special rule will not apply to a tax year in which the taxpayer is UK resident under domestic law, but treaty non-resident under an applicable double taxation agreement (www.practicallaw.com/8-107-6151).
The guidance includes an example with a non-resident year in the relevant period at ERSM160870.
Usually, the remittance basis apportionment of share incentive income for R/NOR taxpayers will reflect workdays in the UK in relation to workdays overseas. This may not be appropriate in all circumstances, so there is an overriding provision for a different "just and reasonable" apportionment if the normal rules produce an unjust and unreasonable result. For more details, see Practice note, Apportionment of securities and option income for R/NOR employees: Apportionment: Just and reasonable override (www.practicallaw.com/7-382-9480) and "Ask the Team": Just and reasonable override of statutory UK/foreign split for share option tax (www.practicallaw.com/2-383-4177).
The JRO is introduced in ERSM160910. This section states:
"When HMRC staff find cases where the just and reasonable override has been used by the taxpayer or the employer, or where it has not been used but is felt to be appropriate by HMRC, the case should be referred to [HMRC's Employee Shares and Securities Unit] ESSU [HMRC's Employee Shares and Securities Unit]."
This suggests that taxpayers, employers or advisers should always review the circumstances of an R/NOR share incentive apportionment and ask themselves whether:
They match any examples published by HMRC in which a JRO is applied.
Even if they do not, whether there are any features which HMRC might think call for a JRO to increase UK tax.
If the answer to either of these questions is yes, it may be worthwhile to consult the ESSU and try to clarify the position.
Hopefully, HMRC's guidance on this point will soon become more detailed. If not, the possibility that a JRO may be applied could considerably increase uncertainty for taxpayers and employers.
In ERSM160910, HMRC confirm that a JRO will not always be available, even though circumstances may seem to call for one. For the new rules to be engaged, the remittance basis must apply in at least some part of the statutory relevant period. If for any reason the remittance basis does not apply in the relevant period (even if it does apply when the relevant tax charge arises), the statutory remittance basis apportionment mechanism will not apply at all. A JRO cannot be used to rectify this problem, as the JRO is a feature of the statutory mechanism.
The remittance basis apportionment mechanism specifies that the relevant period for restricted securities is the period from acquisition to the taxable event.
In ERSM160920, HMRC give an example of a JRO applied to alter the foreign securities income from forfeitable shares from 100% to 0% of the taxable amount. In the example, the executive/shareholder works outside the UK throughout the (rather short) statutory relevant period. However, he worked entirely within the UK in the year before acquiring the forfeitable shares and "On examination of the facts, it is clear that the shares were awarded ..... in recognition of ..... duties over the twelve months prior to" the acquisition, so none of the taxable amount is foreign securities income following the application of a JRO.
This is a rather alarming example. HMRC do not explain what features would lead them to conclude that an award of restricted securities recognises work before the award, rather than work during the statutory relevant period.
ERSM160930 sets out an example where a JRO is used to reduce foreign securities income where the employee:
Takes leave for most of one of three tax years in the relevant period.
Has an atypically high proportion of workdays outside the UK in the few days worked in that year.
Although HMRC do not point this out, a JRO could also be used to increase foreign securities income in a similar scenario, but instead with an atypically high proportion of UK days in the tax year affected by the leave.
ERSM160940 explains that a JRO will be required if there are no duties during a tax year within the relevant period spent outside the UK. This might happen where the employee leaves employment and returns to their home country before the end of the relevant period, but retains their incentive award. The example given discusses a share option which has not vested before the employment ends and the employee leaves the UK.
This need for a JRO arises because the normal rules require some duties during a tax year before any of the securities income accruing in that year can be foreign securities income.
PAYE and NICs are discussed in ERSM161000, including examples at ERSM161050 to ERSM161065.
For a discussion of PAYE and NICs and the new remittance basis apportionment mechanism, see Practice note, Non-domiciled tax reforms: impact on share incentive taxation from 6 April 2008: PAYE income tax and national insurance contributions (NICs) (www.practicallaw.com/7-380-8717) and Practice note, Remittance of securities income by R/NOR taxpayers: NICs and apportionment of securities income (www.practicallaw.com/0-383-0081).
The taxation regime for share incentives granted to non-domiciled and R/NOR employees changed with retrospective effect from Royal Assent to FA 2008 (given on 21 July 2008) to certain securities and options granted on and after 6 April 2008 - see Non-domiciled tax reforms: impact on share incentive taxation from 6 April 2008: The changes are not retrospective (www.practicallaw.com/7-380-8717).
ERSM161020 discusses how employers should deal with any events that occurred between 5 April and 21 July 2008 that either:
Did not give rise to PAYE and NICs but would do so; or
Gave rise to PAYE and NICs but would not do so,
if they happened instead on or after 21 July 2008.
HMRC state that there is no obligation for employers to retrospectively collect any PAYE and NICs liabilities that did not apply at the time of the relevant event, but were imposed retrospectively:
"After Royal Assent, the employer is not required to revisit events prior to that date, even though the new law has retrospective effect from 6 April 2008."
However, where PAYE and NICs liabilities were imposed under the unamended law, but then removed retrospectively, employers should make adjustments. (HMRC gives an example which might cause this problem: an acquisition of restricted securities after 5 April and before 21 July that were not at the time subject to Chapter 2, because the recipient was R/NOR.)
"In some circumstances employers may have operated PAYE and NICs in respect of awards of securities or securities options that occurred between 6 April 2008 and Royal Assent that, following Royal Assent, should not have given rise to such charges. So, for example, where R/NOR employees acquired securities options or securities that were forfeitable within 5 years, since Chapters 5 and 2 of Part 7 of ITEPA did not apply, the exemptions in those Chapters from a money’s worth general earnings charge similarly did not apply. It might therefore be the case that an employer faced PAYE and NICs obligations on the award of an option or securities which, following Royal Assent, were removed, as the awards were exempt from an income tax charge by virtue of the rules of Part 7.
So, an employer might deduct PAYE tax on the award of, say forfeitable securities, in accordance with the old rules up to Royal Assent and, following the retrospective application of the new rules back to 6 April 2008, find that the income tax and NIC liability attached to that award has now been removed. In these circumstances the employer should make careful amendment of the pay record to remove the ‘non taxable’ payment. In the next tax period(s) the tax will then be repaid to the individual by an increase in their Net Pay per the tax tables and their tax code. A note should be made for auditing purposes.
If the employee has left the employment then the employer should not seek to re-issue a P45, but may want to make the ex-employee aware that tax was deducted on a non taxable figure. The employer should not repay the tax to the ex-employee. The ex- employee should then make a claim at a later point upon presentation of P45 to HMRC."
Although this guidance is quite clear on how to adjust PAYE income tax, it is not entirely clear on how employers should deal with employee and employer NICs in this situation. Employers and advisers who have this issue may want to clarify the position with HMRC.
The PAYE legislation has been adjusted to allow employers to estimate PAYE income tax liabilities taking remittance basis apportionment into account, where it applies (see Practice note, Non-domiciled tax reforms: impact on share incentive taxation from 6 April 2008: PAYE income tax and national insurance contributions (NICs) (www.practicallaw.com/7-380-8717)).
In ERSM161030, HMRC give some practical guidance on how they expect employers to do this:
"This means that, if the employer has sufficient information to calculate the amount of employment income which is foreign securities income (that is; the amount that is taxable on the remittance basis), then it is the net amount of employment income after deduction of the foreign securities income on which PAYE should be operated. Where the employer does not have sufficient information to calculate, using the best estimate that can reasonably be made, the amount of foreign securities income, then PAYE should be operated on the full amount of the employment income, subject to any apportionment the employer has sufficient information to make in respect of treaty exemption. (See ERSM161300).
An example where an employer could make a reasonable estimate of an employee’s foreign securities income would be where the employer knows that the employee is resident and not ordinarily resident for the year and has evidence, such as an assurance from the employee, that a claim to the remittance basis will be made. If the employee’s overseas duties are fairly regular from year to year, and/or the expected balance of his or her UK and overseas duties for the current year is known, then the employer could reasonably estimate the FSI on the basis of its expectation for the current year."
In ERSM161040, HMRC confirm their view that NICs liabilities are not at all affected by the changes to the PAYE legislation which allow employers to calculate PAYE income tax with remittance basis apportionment.
For an alternative analysis (for charges other than those under Chapter 5 (securities options), see Practice note, Remittance of securities income by R/NOR taxpayers: NICs and apportionment of securities income (www.practicallaw.com/0-383-0081)
In ERSM161100, HMRC discuss when securities and options (or the proceeds of their disposal) will be regarded as remitted to the UK under the new legislation. There is little detail, but they do confirm that in their view the shares of UK incorporated companies will always be remitted to the UK, as they are UK assets and so must be received or used in the UK. For more on this topic, see Practice note, Non-domiciled tax reforms: impact on share incentive taxation from 6 April 2008: HMRC consider UK shares (and possibly options over them) will always be within the UK from issue or grant (www.practicallaw.com/7-380-8717) and Practice note, Remittance of securities and options income to the UK and the treatment of UK shares (www.practicallaw.com/7-382-7749).
In ERSM161200, HMRC give guidance on the interaction of income tax on share incentives under the new remittance basis and subsequent capital gains tax (www.practicallaw.com/8-107-5849) liabilities.
In ERSM161300, HMRC give useful guidance (with examples) on the interaction of the new remittance basis apportionment of share incentives income tax and time apportionment under any applicable double taxation agreement (www.practicallaw.com/8-107-6151).
For more on this topic, see "Ask the Team": The new tax regime for expatriate employees' share options: The effect of any relevant double taxation agreement (www.practicallaw.com/5-383-3911) and "Ask the Team": The new tax regime for expatriate employees' share options where an OECD-style DTA applies (www.practicallaw.com/9-383-4466).
In ERSM161320, HMRC point out that the new remittance basis apportionment mechanism overturns their previous standard approach to international issues for restricted and forfeitable securities. (This is subject to the possible application of a JRO - see Restricted securities: JRO to reduce foreign securities income where the relevant period is inappropriate.) The new statutory relevant period for restricted securities is from the date of acquisition to the taxable event. However, previously HMRC usually treated restricted securities as relating to a period of service before acquisition. This is a significant change:
"Up until 6 April 2008, HMRC maintained that while, in general, the right to exercise an option was earned by future service from the date of the grant forwards, restricted securities (including forfeitable securities) should usually be regarded as a reward for service up to their award, but with a blocking period where the securities could be lost or before of which the recipient was unable to obtain the full benefit in cash terms. HMRC’s position was that for treaty relief, the reward from restricted securities was normally earned up to the date of the award and that the primary taxing rights belonged solely to the territory where the work was carried on up to the date of grant, not after it
Following the changes of Finance Act 2008 to the taxation regime for NOR and non- domiciled employees in receipt of employment-related securities, there is statutory recognition that, in general, the period in which a restricted or forfeitable security will be earned is the period between the award of the security and the lifting of the restriction or forfeiture condition. From 6 April 2008 HMRC will apply this approach to new and existing open cases for the purposes of treaty time apportionment, whether or not the rules of Chapter 5A of Part 2 of ITEPA 2003 apply and regardless of whether the securities were awarded before 6 April 2008.
This is the general approach. As with the new rules of Chapter 5A, where the facts of a case point to the conclusion that the reward relates to employment carried on during a different period than that between award and lifting of restrictions, say, for example a period from some time prior to the award to very shortly after it, then the earnings period would be regarded as that which accorded most closely with the facts."
HMRC offer a single piece of guidance on:
Employers' reporting obligations under Form 42 (www.practicallaw.com/7-378-9573), the annual return for share incentives without statutory tax-advantages; and
The new remittance basis apportionment mechanism,
in ERSM161400. They explain that although employers are responsible for reporting the exercise of a share option which is subject to remittance basis apportionment, they have no responsibility for reporting any subsequent remittance of foreign securities income arising from that exercise.
This section of the manual also states that further guidance on this topic will be produced "shortly".