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Session 2000-01
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Social Security Contributions (Share Options) Bill


 

These notes refer to the Social Security Contributions (Share Options) Bill
as introduced in the House of Commons on 20th December 2000 [Bill 8]

Social Security Contributions (Share Options) Bill


EXPLANATORY NOTES

INTRODUCTION

1. These explanatory notes relate to the Social Security Contributions (Share Options) Bill as introduced in the House of Commons on 20 December 2000. They have been prepared by the Inland Revenue in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a section or part of a section does not seem to require any explanation or comment, none is given.

SUMMARY AND BACKGROUND

3. The Chancellor announced in his Pre Budget report of 8 November 2000 a new National Insurance measure on employee share ownership. Commons Hansard 8 November 2000, Column 316 to 327.

4. National Insurance Contributions ("NIC") are charged on gains arising when share options are exercised outside an Inland Revenue approved scheme if the shares are readily convertible into cash. While employers can plan for NIC on regular pay, it is not as easy for them to plan for NIC on share options, particularly where the share price is volatile.

5. Legislation was introduced in summer 2000, and enacted in sections 77 and 81 of the Child Support, Pensions and Social Security Act 2000, to allow employees to agree that they will pay the employer's NIC when they make a gain on their share options. However, some companies have said that they cannot make such agreements with their employees if an option has already been awarded.

6. This Bill will help companies that granted options between 6 April 1999 and 19 May 2000. Companies may limit the liability to the gain attributable to the growth in company share price up to 7 November 2000. 6 April 1999 was the date on which gains on the exercise of unapproved share options became liable to NIC. 19 May 2000 was the date on which the Government announced the legislation allowing employees to agree to pay the employer's NIC.

Definitions

    Shares

    Those company shares or securities that are the subject of the option in question.

    Exercise

    The right to acquire shares is realised and the shares acquired in accordance with the company's share scheme rules.

    Assignment and release

    Occasions where share options are traded for a consideration.

    Roll-over

    The exchange of one share option for another option over shares e.g. following a company reconstruction.

    Replacement option

    An option into which the original option is rolled-over or exchanged.

    Special Contribution

    An employer only NIC liability.

    Special charge

    Has the same meaning as Special Contribution. The rate will be 12.2% which, is equal to the Class 1A employer NIC charge for the 2000-2001 tax year.

    Double tax deductions

    A situation usually encountered in an international context where the same income may become subject to two separate tax charges. The situation is usually remedied by one of the charges being waived. In international situations, one taxing authority will often waive its charging rights in favour of the other country.

COMMENTARY

Clause 1: Notices relating to share options acquired before 19th May 2000

7. Subsection (1) defines the share option gains to which the provisions may relate. These are options granted during the period beginning on 6 April 1999 and ending on 19 May 2000, and exercised, assigned or released after 7 November 2000. The options must fall within the provisions of subsection (2) and a notice of entitlement to use these provisions must be lodged with the Inland Revenue within 60 days of the enactment of this legislation. Where such notification is made, the National Insurance liabilities on gains arising is to be determined in accordance with clause 2.

8. Subsection (2) defines the options as those where the gain has or would be treated under section 4(4)(a) of the Social Security Contributions and Benefits Act 1992 (CBA) as remuneration from employment.

9. Subsection (3) specifies who is to provide the notice required by subsection (1) where the share option gain arises after the passing of this Bill. Where an election to transfer the liability from the secondary contributor - normally the employer - to the employee is in force in respect of the whole of the liability, the notice can be given by either the company or the employee. Where an election is in force to cover only a part of the liability, the notice must be lodged jointly by the employee and the employer. Where no election is in force, the notice is to be lodged by the employer.

10. Subsection (4) specifies who is to lodge the notice in the case of gains realised after 7 November 2000 and before the passing of this Bill. In these cases the notice is to be given by the person responsible for the secondary NI contribution, and, if the liability falls on more than one person, those people acting jointly.

11. Subsection (5) provides that the notice is to be given in writing or electronically in the form laid down by the Revenue, and once given is to be irrevocable.

Clause 2: Effects of notice under clause 1

12. Subsection (1) exempts from Class 1 contributions any gains arising from the exercise, assignment or release of options under circumstances described in clause 1: that is, options granted between 6 April 1999 and 19 May 2000, and exercised, assigned or released after 7 November 2000, for which a notification has been made. Instead, there shall be a deemed gain subject to a special charge - described in subsection (2) - payable by the person who lodged the notice described in clause 1.

13. Subsection (2) sets the rate of the special charge at 12.2%, which is the 2000/2001 employer National Insurance Contribution rate. The charge is payable on the deemed gain, if any, which would have arisen had the option been exercised, assigned or released on 7 November 2000.

14. Subsection (3) prevents the exemption allowed for in subsection (1) where an option is assigned or released for more than what the shares would be worth on the open market on exercise.

15. Subsection (4) provides that, if the special contribution is not paid within 60 days of Royal Assent, the normal rules for assessing the liability will apply. That is, Class 1 NIC will be chargeable under section 4(4)(a) of the Social Security Contributions and Benefits Act 1992 as now.

16. Subsection (5) allows the Inland Revenue to direct that the 60 day period be extended if it thinks that the person responsible for the payment had reasonable grounds for believing that the liability had been settled, or had reasonable excuse for failing to meet the deadline.

17. Subsection (6) provides that the direction to extend the 60 day deadline is to be given by an officer of the same description, and to be subject to the same right of appeal, as any other decision on the national insurance liability in question.

18. Subsection (7) provides that where Class 1 contributions have been paid on gains arising before the passing of this Bill, the secondary Class 1 contributions may be offset against the special contribution payable, and the remaining balance of Class 1 contributions, if any, returned.

Clause 3: Special provision for roll-overs

19. Subsection (1) defines the kind of roll-over to which these special provisions apply. It is an exchange of one option (the "original right") granted between 6 April 1999 and 19 May 2000, for another option (the "replacement right"). The roll-over can take place at any time, either before or after the enactment of this Bill.

20. Subsection (2) covers roll-overs taking place on or before 7 November 2000. In these cases, the new option is treated as if it was received between 6 April 1999 and 19 May 2000 and can be subject to the special charge described in clause 2.

21. Subsection (3) deals with roll-overs taking place after 7th November 2000. Here, a notice can be lodged with the Inland Revenue under clause 1 in respect of the original option, even though it has been replaced before the giving of the notice.

22. Subsection (4) disapplies subsection (1) of clause 2, which could have allowed an exemption from Class 1 contributions on gains arising on replacement options after the enactment of this Bill. Instead, the gain on the replacement option is to be assessed as if subsection (5) applied.

23. Subsection (5) provides that, for the purposes of clause 2(3) (amount received in excess of parity where there is a rollover), section 136(1) of the Income and Corporation Taxes Act 1988 (tax treatment of roll-over options) will not apply. The options are to be treated as if they had been exchanged for the full market value consideration.

24. Subsection (6) provides that the tax provision in sections 135 and 136 of the Taxes Act, and hence a Class 1 charge, will only arise on the gain on the exercise, assignment or release of an option to the extent that the shares were additional shares and that, for the purposes of sections 135 and 136, the amount given for the grant of the original right is to be deemed to have been nil.

25. Subsection (7) defines additional shares as those of the shares obtainable by exercising the replacement option which are equivalent to the excess in market value of the shares obtainable by the exercise of the original option.

26. Subsection (8) defines the market value of shares for the purposes of subsection (7) in terms of their value on the open market immediately after the grant of the option in question.

27. Subsection (9) provides for the situation where a replacement option may be exercised bit by bit. Where this occurs that part of the new right which relates to "additional" shares for the purpose of subsection (7) shall be considered to be exercised, assigned or released before the remainder of the option.

28. Subsection (10) prevents the treatment outlined in subsections (5) and (6) from applying for the purposes of determining any special contribution arising on the replacement option.

29. Subsection (11) provides that where Class 1 contributions have been paid on gains arising before the passing of this Bill, the secondary Class 1 contributions may be offset against the special contributions payable and the remaining balance of contributions, if any, refunded.

Clause 4: Consequential changes to tax relief provisions

30. Subsection (1) applies where the employer has previously agreed with the employed earner to transfer the liability for secondary contributions to the employed earner and a notice is given under clause 1 of this Bill to make a special contribution in respect of the share option right.

31. Subsection (2) ensures that tax relief will continue to be available to the employed earner, under section 187A of the Income and Corporation Taxes Act 1988, in respect of the employee's liability for special contributions on a share option right arising under this Bill, as it would have applied for any employee's liability to a secondary contribution on a gain on the exercise, assignment or release of that right. This subsection continues to allow the tax relief to be given at the time a gain is made on exercise, assignment or release of the share options included within the notice to pay the special contribution.

32. Subsection (3) prevents double tax deductions. It prohibits tax relief from being given for a secondary Class 1 liability that has arisen when that liability is replaced by a special contribution under this Bill. It also prevents tax relief from being given for a special contribution where the payment following a notice is not made within 60 days from the passing of this Bill. In the latter case Section 187A of the Income and Corporation Taxes Act 1988 would allow tax relief for the employee's secondary Class 1 liability that is not displaced.

33. Subsection (4) disapplies the provisions of Section 203FB(6A), in relation to relief for special contributions. This disapplication is required because relief for the special contribution is given at the time of option exercise and not at the time of payment of that special contribution. It is not therefore practical for the relief to be given through PAYE because of this timing difference.

Clause 5: Interpretation

34. This clause contains interpretation provisions.

34. Clause 6: Short title and extent

35. This clause extends the provisions to Northern Ireland.

EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER

36. This measure will provide certainty for business by allowing them to settle their NIC liability early by reference to the share price on the 7 November. The National Insurance Fund (NIF) will initially therefore, receive higher revenue in the year of settlement, followed by reduced revenue in the years when the share options are actually exercised. The effect on the NIF was identified in the Pre-Budget Report as:

    2001/2          2002/3          2003/4          2004/5          2005/6

    £200m          -£230m     -£80m          -£30m          -£15m

37. Most companies grant options which are exercised over a five year period after the grant and consequently, the effect on the NIF after the fifth year is expected to be minimal.

38. The options will need to settled and processed by the Revenue during the period of 60 days after Royal Assent. Consequently, the effect on public service manpower is negligible.

SUMMARY OF THE REGULATORY ASSESSMENT

39. The Regulatory Impact Assessment (RIA) was agreed on the 28 November. The RIA demonstrates that the measure is beneficial to business. Allowing the employer to settle their NICs liability on these specific options will save the employer NIC in relation to any further upward movement of share prices which should will more than outweigh any regulative costs that this measure would generate. The measure is in response to requests from employers and will help them to remove the NIC provision and uncertainty from their balance sheet once the NIC has been paid.

40. Copies of the RIA can be obtained from Hasmukh Dodia at Capital & Savings, Room 138, New Wing, Somerset House, Strand, London, WC2R 1LB.

Impact on small business

41. Ministers and the Inland Revenue have had a period of informal consultation where they have met with small businesses and trade organisations. Representations to Ministers and officials strongly indicated a need for a specific measure to deal with the options granted during the period between 6 April 1999 and 19 May 2000 where the impact on small companies of the NIC provision was causing particular difficulties.

42. The intention of this measure is to help all businesses that are having difficulty with the unpredictable NIC charge that will follow a share option gain. It is likely that those businesses involved in the high-tech industry, where there are many small, but growing companies, and where equity remuneration is favoured, will benefit significantly from this measure.

43. Small businesses not involved in equity remuneration will be unaffected by the measure, but in a few cases it may be argued that start-up businesses without share options may have to consider their remuneration practices to retain staff.

EUROPEAN CONVENTION ON HUMAN RIGHTS

44. Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement, before second reading, about the compatibility of the provisions of the Bill with the Convention rights (as defined by section 1 of the Bill). The Chancellor of the Exchequer has made the following statement:

    In my view the provisions of the Social Security Contributions (Share Options) Bill are compatible with the Convention rights.

COMMENCEMENT

45. The Bill will come into force on the date of Royal Assent.

 
 
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Prepared: 21 December 2000