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Unapproved employee share plans recommendations from OTS would bring welcome simplification

Recommendations made by the Office of Tax Simplification (OTS) in its review of so-called 'unapproved' employee share plans would bring "welcome simplification" if adopted, an expert has said.

Share plans expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, called on the Government to show that it was "genuinely committed" to increase employee share ownership, as indicated by recent announcements. The OTS has recommended (78-page /492KB PDF) simpler share valuation and PAYE processes, and the creation of an employee shareholding 'vehicle' or trust to enable companies to better manage share arrangements and encourage wider employee share ownership.

"Some of the changes, if implemented, would represent a significant change in the current tax regime, and it remains to be seen if the Government has the appetite for this," he said. "There is a concern that any 'half measures' by small amendments to existing rules would end up in further complexity rather than simplification."

Unapproved share plans are those that are not one of the specific types of tax-advantaged plans provided for in the tax legislation. In an interim report, published last year, the OTS said that technical difficulties and administrative burdens often discouraged businesses from using share ownership as a form of staff incentive; despite the advantages they brought in aligning employee reward with business performance and encouraging staff retention.

"The current share scheme tax legislation is a tangle of complexity," OTS director John Whiting said. "It creates costs and pitfalls for companies and employees, and significant burdens for HM Revenue and Customs (HMRC). We have spent a lot of time talking to the people that use the schemes, and found that while employers saw real benefits of offering share-based rewards, they had difficulties with managing the schemes within the tax rules."

"At the same time we have been very mindful of avoidance risks in this area. We think we have a balanced package of recommendations that will simplify processes, increase fairness and encourage employers to offer these ownership options without creating new avoidance opportunities," he said.

Among its recommendations, the OTS suggests changing the point at which employees are taxed on the value of shares. Employees could be given the option of whether to pay tax on acquisition of the shares, or at the point when the shares become marketable or are sold. This would end the current situation under which employees must pay tax on the shares they receive, even if they are not able to sell these shares on the open market.

The OTS calls for better provision of valuation information as a means of addressing current confusion and uncertainty in this area, as well as increasing the availability of pre-transaction valuations. It also recommends simplifying the 'Form 42' annual report, which employers must use to make returns about employment-related shares that fall outside of the 'approved' regime, and simplifying PAYE deadlines.

To address complexities relating to international employees, the OTS recommends aligning the tax treatment of international assignees with the tax on other general earnings. Matthew Findley said that the Government should act on this recommendation to simply a particularly complex strand of the current regime.

"While the use of equity plans by international companies is widespread, there are undoubtedly some companies who find it too difficult," he said. "If the UK Government wishes to emphasise that the UK is 'open for business' and to fulfil its policy objective of increasing employee share ownership, it should act on the OTS recommendations and make the UK an easier place to operate global equity plans."

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