TAX YEAR END PROCEDURES

Tax Year End Procedures

Tax Year End Procedures

On a recent visit home (yes, I am a Brit), I felt the impact of the Value Added Tax (VAT) rate increase to 20%, making my dollars disappear quicker than they used to.  It made me realize how happy I was to have hopped across the pond to settle in America. Not only do our friends in the UK have to incur a consumer tax of 20%, but they also are subject to a 50% income tax rate for incomes more than £150,000. To top it all off (and this is much less publicized), National Insurance Contributions (NIC) are increasing by 1% to 12% for income less than £42,888 and 2% for income above for employees, and to 13.8% for employers, as of April 6, 2011. While enjoying a cup of English breakfast, I thought about this more -- wondering what companies were doing or can do for themselves and their employees to ease this high tax burden in the UK.

An opportunity to push remuneration into a tax-efficient regime is to award stock options under an Her Majesty's Revenue and Customs (HMRC) approved Company Share Option Plan (CSOP). The plan is a discretionary scheme which can be either broad based or target key employees who are in the high income tax brackets. After a minimum three-year wait, employees will be able to exercise their options free of income tax and NIC, subject to HMRC limits. This plan will also result in a sigh of relief from the payroll department as there will be no requirement to account for any income tax/NIC through Pay As You Earn (PAYE), if the options are exercised in an approved manner. The broader based the CSOP grants, the more the company and employees save on taxes. The benefits are multifaceted, as these tax advantages can be an attractive tool for recruitment and retention of key talent, concerns for many human resource professionals. The minimum three-year period from the date of grant before the employee can receive the tax benefits from the CSOP option is a powerful retention device.

I can imagine that there may be some trepidation from U.S. headquarters to diverge from a global strategy of a uniform share plan for all employees whether home, abroad, or in between. CSOPs do have some distinct conditions and limitations in this regard such as it does require formal approval from HMRC, only £30,000 worth of unexercised options can be awarded at any one time, and the company must comply with a tight legislative framework.

An alternative way to generate employer NIC savings is to enter into NIC agreement or election to transfer the employer NIC of 12.8% (set to increase to 13.8%) to the employee on exercise of a stock option. This transfer will provide the employer with relief from a company tax cost for equity-based compensation, but is less attractive for the employee as they will see fewer proceeds after ...