Budget 2013 Outcomes and Real Time Information

1. Budget 2013 Outcomesand Real Time Information GEO – UK Chapter Meeting 9 April 2013 Judith Greaves and Matthew Findley 44612117

2. Introduction • This is a time of almost unprecedented change for employee share plans • Changes brought in as part of Budget 2013 and introduction of Real Time Information (or “RTI”) are very much part of that • Budget 2013 • Follow on from Office of Tax Simplification (“OTS”) review of HMRC – approved plans • Highlight key changes • Focus on those of more practical importance • Also look at some of the other things may have heard of and/or be asked about • The future? • RTI • What is it? • Issues for share plans • What if it all goes wrong?

3. BUDGET 2013

4. Budget 2013 – Summary of Changes (1) • Headline points • SIP • tax-free dividend reinvestment cap removed • more choice for employers using accumulation periods • SAYE • more flexibility during savings periods – e.g. deductions other than from salary • abolition of 7 year contracts • SIP, SAYE and CSOP • retirement rules harmonised • “good leaver” rules extended and harmonised • tax relief on cash takeovers

5. Budget 2013 – Summary of Changes (2) • Ancillary points • ability to use “restricted” shares for SIP, SAYE and CSOP • material interest rules relaxed / abolished • Other things you may have heard of • statutory residence test • extension of “Entrepreneurs’ Relief” to EMI • “Employee Shareholder” status • the “General Anti-Abuse Rule” (or “GAAR”)

6. SIP - Dividend Re-investment • Old position: • £1,500 limit • Carried forward amounts must be reinvested within 3 years • New position: • Unrestricted dividend reinvestment, unless company elects to impose a cap • Took effect on 6 April 2013 • Implications: • Good news for long term SIP participants in high dividend companies • No longer need systems to pay “excess” dividends in cash

7. SIP - Accumulation Periods • Current position: • Participant acquires partnership shares at lower of price at the beginning OR price at the end • Employer bears cost of share price movements • What is changing? Employer will be asked to choose: • As now (Choice 1) • Fix at beginning (Choice 2) • Fix at end (Choice 3) • When? Royal Assent • Implications – ability to budget

8. SIP-Accumulation Period Examples • Assume SIP partnership share monies £100k per month, 3 month accumulation period, share price at the outset is £1 • Company may fund SIP to buy 300,000 shares initially • Company could delay funding until after the end of the accumulation period, when price may be (a) 50p or (b) £2 • What happens at the moment? (Choice 1) • Outcome with Choice 2 • Outcome with Choice 3

9. SAYE-Savings Contracts • Current position • 3, 5 or 7 years • 5 year savings period; leave for 2 years to earn (historically) higher tax free bonus • Bonus currently zero..... • Limited flexibility/lack of clarity around contributions other than from salary • What is changing? • 7 year option to be withdrawn • Prospectus to be revised • Sabbaticals and secondments - guidance already changed • When? Proposed amendments to the SAYE prospectus have been issued for consultation • Implications: • Revise what is offered • Update communications accordingly • Check procedures regarding contributions other than from salary

10. SIP/SAYE/CSOP - Retirement (1) • Current position for tax favoured treatment: • SIP: withdraw shares on retirement on or after reaching specified age, not less than 50 (compulsory requirement) • SAYE: exercise within 6 months of leaving through retirement at specified age (60 to 75) or when ‘bound to retire’ under contract; early exercise opportunity at specified age for continuing employees (compulsory requirements) • CSOP: exercise within 6 months of retiring at specified age, not less than 55 (company choice)

11. SIP/SAYE/CSOP - Retirement (2) • What is changing? • SIP: no income tax liability on shares ceasing to be subject to the plan by reason of the participant’s retirement • SAYE/CSOP: exercise within 6 months of ceasing employment by reason of retirement • SAYE: removal of right of exercise on reaching specified age without retiring (retained in respect of existing options) • In future, age not so directly relevant • Automatically read into rules

12. SIP/SAYE/CSOP - Retirement (3) • When? Royal Assent • Implications: • HMRC have accepted OTS recommendation • Explanatory notes say companies will be able to use their own definition of retirement • Unclear whether this could/should be included in the plan rules • HMRC will publish guidance setting out: • circumstances in which retirement can be presumed • “normal and natural meaning” • not possible to retire for tax advantaged plan but not for “other purposes”

13. SIP/SAYE/CSOP: Good Leaver Rules - General (1) • Current position: • CSOP/SAYE: no “tax free” early exercise on TUPE transfer (unless redundancy) or sale of employer company out of group • SIP: “tax free” withdrawal following TUPE transfer/sale of employer company out of group • What is changing? Alignment of good leaver circumstances qualifying for tax relief with current position for SIP: • injury, disability, redundancy, retirement, TUPE transfer and sale of employer company out of group

14. SIP/SAYE/CSOP: Good Leaver Rules - General (2) • SAYE - automatically read rules • CSOP - no amendment to plan rules • When? Royal Assent • Implications - review and align rules and other documentation, due diligence and project planning on transactions may become simpler

15. SIP/SAYE/CSOP - Cash Takeovers • Current position - no protection • What is changing? • Protection for early exercise/withdrawal for CSOP/SAYE/SIP in the case of certain cash takeovers • No ‘arrangements’ • Care where offer is not straight cash • No rollover offer – SAYE and CSOP • When? Royal Assent • Implications: share plans due diligence even earlier, especially for transactions this summer - query operation of SAYE/SIP in prohibited periods

16. Budget 2013 – What should companies be doing? • Many of the changes have automatic effect • Housekeeping : update plan rules nevertheless • Practical aspects : administrators, intranets and portals, employee documentation and communication • HMRC approval : not required (or possible!) • Shareholder approval : unnecessary

17. Budget 2013 – Other things…. • Statutory residence test • Came into effect on 6 April 2013 • Abolition of “ordinary residence” • Entrepreneurs’ Relief/EMI • Scope to reduce tax rate to 10% • Could be relevant on acquisitions • “Employee Shareholder” status • No capital gains tax on disposal of first £50,000 of shares • Deemed to pay £2,000 for shares • Give up certain employment rights, including right to redundancy payments and certain unfair dismissal claims • Effective from 1 September 2013, subject to political process… • The “GAAR” • Supposed to only extend to the most abusive arrangements • Ineffective against mainstream corporate tax planning • Application to share plans likely to be limited

18. The Future - Move to self-certification • What requires HMRC approval currently? • Plan rules on establishment • Amendments to “key features” (but not Budget 2013 changes…) • What will change and when? Expected to be implemented in 2014 • Benefits and disadvantages: • Quicker • Safeguards needed? • Ability to check tricky points?

19. The Future - Changes to Unapproved Arrangements • OTS report now published • Report highlights many of the areas consistently cited as sources of complication • Headline points: • “Safe harbour” EBT • Internationally mobile employees • Removal of requirement to use the “quarter up” price • Online filing of Form 42 • When? 2014 for minor changes and 2015 for any more significant changes

21. Real-Time Information • What’s changing • Timeline - where are we up to? • Issues for share plans • What do companies need to do now?

22. Real-Time Information • New PAYE reporting regime • Only affects administration • No change to: • Basis for calculation • Payment due dates 19 22

23. Real-Time Information - Outline • Information relevant to employee’s tax position provided to HMRC in “real-time” • Required information will generally be submitted at (or prior to) taxable payment being made • Real-time rather than year-end information means more frequent reconciliations and better accuracy • Required to support new Universal Credit

24. Real-Time Information – Timeline • Consultation during 2011/12 • Regulations for RTI came into force from 6 April 2012 • Pilot scheme undertaken • Full roll-out began on April 2013 • All employers switch to RTI by October 2013

25. Real-Time Information – How it works • Employer sends “full payment submission” including details of tax + NICs when or before the payroll is run • Information is collected by payroll software and sent to HMRC automatically – no need for P14 (i.e. end of year summary) and P35 (i.e. employer annual return) • P45 (i.e. leaver statement) and P46 (i.e. new employees without a P45) no longer required as relevant information is collected under RTI • Detailed provisions deal with “non-standard” situations

26. Real-Time Information – Guidance • New section of HMRC website dealing with RTI • Includes guidance for employers • Still being developed • HMRC welcomes input • Opportunity for companies to feedback on practical issues and share experiences

27. Refresher – PAYE and Share Plans (1) • Income tax arises on delivery of shares following vesting/ exercise (unless tax-favoured arrangements) • Taxable amount = value of shares, less any option/exercise price • For listed companies, income tax collected under PAYE as a “notional payment” • Obligation on employer to operate PAYE in relation to “best estimate” of the taxable amount

28. Real-Time Information - Share Plans (2) • Delivery of shares = date of “payment” for PAYE purposes • RTI regulations recognise that the information required may not be known in advance of “payment” - depends on share price on the day • So for “notional payments”, deadline for submission of RTI information is earlier of date tax is deducted and 14th day after end of tax month

29. Real-Time Information - Share Plans (3) • This is helpful but problems still remain • When is tax “deducted”? • If date on which shares are sold to fund the tax, all relevant information may still not be known • e.g. company may sell upfront at flat 45% rate, but make detailed calculations later • Companies generally arrange for sale of shares immediately to fund the tax – this triggers RTI filing requirement although again, detailed information for submission may not yet be in place

30. Real-Time Information - Share Plans (4) • Compare PAYE in-year penalty regime • Introduced from April 2010 • Risk of penalty arising if PAYE paid late in any month • Difficulties for many companies in relation to share plans – administration systems not set up to gather and deliver information within that timeframe • Awards vesting/options exercised close to tax month end – particularly difficult to comply with required deadlines

31. Real-Time Information - Share Plans (5) • Lobbying and feedback to HMRC re in-year penalties • HMRC concluded that no special treatment would apply for share-based remuneration • “reasonable excuse” might assist in some cases • lack of certainty for companies even if using best endeavours to comply • HMRC acknowledged that this would need to be looked at in the context of RTI

32. Real-Time Information - Penalties • A “soft landing” is expected • Common sense approach to “reasonable excuse”, including in the context of internationally mobile employees • Penalties do exist for late/inaccurate returns • Penalties linked to number of employees on payroll (not the number of defaults) • Two bites at cherry… • Tax geared penalties if return is more than 3 months late • 2013/2014 – have until 19 May 2014

33. Real-Time Information – To Do List • Check in with payroll • Where are they up to with new systems? • Make sure they appreciate issues in relation to share plans • Check in with administrators • Can you streamline processes to help meet deadlines? • Review your plan rules • Make sure you have sufficient flexibility in tax indemnity/tax recovery clauses

35. Combining the experience, resources and international reach of McGrigors and Pinsent Masons Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority, and by the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who is a lawyer with equivalent standing and qualifications. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP and affiliated entities that practise under the name ‘Pinsent Masons’ or a name that incorporates those words. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2012 For a full list of our locations around the globe please visit our websites: www.Out-Law.com www.pinsentmasons.com