Out-Law / Your Daily Need-To-Know

The UK government yesterday set out regulations to help companies who grant share options to their employees as part of their remuneration packages but who experience highly volatile share prices, as with many new media and e-commerce businesses.

The new regulations, which follow new legislation introduced in the summer, provides the process to enable employers to seek approval so that they may make an election with their employees, which transfers the liability for employer's National Insurance contributions (NICs) from the employer to the employee. This will solve accounting difficulties and also help smaller start-up companies with limited cash flow.

Financial Secretary Stephen Timms said:

"I am very grateful to those companies and their representatives whose contributions have helped develop the process under which share option elections can be made. Allowing employers and employees to make an election to transfer the National Insurance charge provides a technical solution by completely eliminating the unpredictability of the charge. I am also pleased that many companies have already made applications to use this solution."

The detail

Under new legislation introduced in the Child Support, Pensions and Social Security Act 2000 the employer and employee will be able to make a joint election under which the liability for all or part of the employer's NICs on share option gains is transferred to the employee. These regulations provide the supporting legislation to enable employers to make elections. An election will take effect after the Inland Revenue have approved the form of the election and the arrangements made for securing that any liability transferred by the election is paid.

Approval to applications for elections can now be made after which employers and employees can make an election in relation to any unapproved share option granted on or after 6 April 1999 where the gain has not yet arisen. Additionally, employers may also make elections covering options granted to their employees where the share option gain is made after 19 May but before the election is made provided that the election is made by the 27 October 2000.

This change should help companies with very volatile share prices that offer their employees substantial share options as part of their remuneration package. Transferring the charge to the employee should solve the accounting difficulties faced by companies, particularly in the US. These arise because of the need for companies to put a provision in their accounts for a NICs liability that is unpredictable since it depends on the company's share price at the time when the employee decides to exercise his or her option. It also helps smaller start-up companies which may have limited cash flow by moving the liability for the employer's NICs charge to the employee.

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