UK tax rules for IMEs (internationally mobile employees)

In broad outline, under the new rules, UK income tax will arise on a time apportioned basis for most types of share award. There will be some “winners” and some “losers” when compared with the previous rules.

The new rules enact recommendations made by the UK’s Office of Tax Simplification (OTS).

Having recognised complexities in the UK income tax treatment of share awards held by internationally mobile employees (IMEs), the OTS recommended that “all share plans that give employees shares or a right to receive share... should be treated consistently from a residence perspective”.

The previous position

Previously, if an individual was non UK tax resident on the grant of an award in the form of a share option or other legal “right to acquire” shares then, unless the award was made in contemplation of UK duties, no UK income tax would arise in respect of the award, even if the relevant shares were acquired when the individual had become tax resident in the UK.

Conversely, if an individual was UK resident on the grant of a share option, UK income tax would be due on the full value received on acquisition of the relevant shares, subject to the application of any double tax treaties, even if the individual was no longer resident in the UK at that time.

The new rules – now in force

The new rules are intended to reduce the inconsistencies in the previous tax treatment of IMEs’ share awards. From 6 April 2015, an individual’s residence at grant is not relevant. Instead, in the case of a share option or other “right to acquire” shares, a proportion of the employment income which arises when the shares are acquired will be subject to UK income tax if the employee was resident in the UK at any time during the “relevant period” in relation to the award.

Similar provisions govern other award types, for example “restricted shares”, where a proportion of the employment income treated as arising when the shares cease to be subject to any restrictions will be subject to UK income tax, by reference to the period of the employee’s UK residence during the “relevant period”.

There will be some “winners” and some “losers” when compared with the previous rules: • Previously, if the individual was UK resident at grant, an award would potentially have been subject to UK tax on its full value on vesting/exercise, depending upon the operation of any double tax treaty. Under the new rules, only the time-apportioned part of the overall award value will be within UK tax.

Previously, if the recipient was non UK resident at grant and there was no contemplation of UK duties, the UK would not generally seek to tax the award. Under the new rules, if the recipient comes into the UK during the “relevant period”, then a time-apportioned part of the overall award value will be subject to UK tax. These individuals potentially pay more UK tax under the new rules, although it will be important to confirm tax treatment in other jurisdictions involved to confirm whether there is any disadvantage overall.

Generally, awards which have “vested” for the purposes of this new legislation, or have been exercised, prior to 6 April, will not be affected by the change.

How to calculate the UK tax arising

Where a company has IMEs to whom the rules may apply, it will be necessary to:

• identify the “relevant period” for the award in question. For a share option or other right to acquire shares, this will generally be the period from grant until vesting – vesting refers to the earliest time at which an option may be exercised, meaning when all conditions other than time have been met;
• establish, in each of the tax years which overlap with the “relevant period”, the individual’s tax residence status for that period. Companies will need to take account of the UK’s statutory residence test and, if appropriate, the rules for “split year” treatment which can apply if an individual moves overseas for business reasons, or arrives in the UK to work. Note that particular rules apply for employees who are subject to the remittance basis for one or more tax years;
• if the individual is resident overseas but is performing UK duties for any part of the relevant period was not wholly overseas, consider the extent of UK duties so as to make a just and reasonable apportionment.

Having determined the proportion of the “relevant period” for which the IME was UK resident, the proportion of the employment income arising which is subject to income tax can then be calculated. The starting point for the calculation is a time-apportioned proportion, however, a different proportion can be used if it would be just and reasonable to do so.

Double tax treaties

The new tax treatment should generally reduce the need to rely on double tax treaties to claim relief for tax. However, in certain cases, if the IME pays foreign tax on the share award, there may be a continuing corresponding relief to claim against UK taxation and there can be differences in treatment under certain treaties, meaning that claims may still be relevant. Each case will need to be considered on its own particular facts.

National Insurance Contributions (NICs) and overseas equivalents

The new rules for UK NICs chargeable on share awards held by IMEs are intended to align the NICs position as much as possible with the income tax treatment. However, due to the differences between international social security agreements and double tax treaties, the former not allowing for apportionment of income, it will not be possible to align income tax and NICs completely in this area.

Action Points

Companies should act now to review their systems and processes in relation to the taxation of IMEs to ensure that these take account of the new UK rules.

In particular, companies should:

ensure they have relevant records in relation to residence status, including in relation to awards granted before 6 April 2015 but which will now be taxed within the new regime;

liaise with colleagues who deal with the administration and payment of taxes relating to share awards held by IMEs. Companies who have previously given any indication of tax treatment to IMEs in relation to their share awards should now review that information and, where appropriate, consider communicating any change in the overall tax position.

Although it will no doubt take a while for companies to become used to applying the new rules, in general they should be simpler to operate, with the part of the taxable gain which relates to UK duties being taxable in the UK and the part which relates to overseas duties being excluded from UK tax.