The original rules to the legislation on “Disguised Remuneration” (employment income provided by a third party) have undergone a vast number of amendments since being published by HM Revenue & Customs (HMRC) on 9th December 2010.
The original rules sparked trepidation amongst many – especially since the new rules on “disguised remuneration” came into contact with employee trusts which are used for employee share schemes. Changes in the regulation would have led to up front tax charges on any cash or assets that an employee hadn’t yet received and indeed may never do so.
Fortunately, the Government took note and subsequently HMRC published FAQs to address these particular concerns. They have now included more exemptions to the rule. Meaning the original Finance Bill of 25 pages is now over 65 pages long. Conversely, the majority of companies should not have to change their existing practice of making and hedging employee share plan awards through employee trusts.
With these extra pages of complex legislation, a detailed look at the rules is almost a must! This is where Welbeck Solutions can help.
“The new ‘disguised remuneration’ legislation means that share schemes can still be able to be used in conjunction with employee benefit trusts (EBTs) without any adverse tax implications”
Introduction to remuneration:
The concept of disguised remuneration is very extensive. Under the rules, up-front income tax and National Insurance contributions charges may arise if a third party – primarily a company – allocates cash, assets, or shares, for an employee with the intention to possibly transfer the shares to the employee. Therefore, a tax charge could arise for the employee concerned even if the sum or asset is not formally awarded to an employee but is somehow allocated to them.
A number of exclusions and reliefs have since been included in order to exclude certain share plans from the disguised remuneration implications. It is essential to be sure measures for employees either fall outside of the new rules completely, or are within one of the stated exclusions. Both of these factors are dependent on whether the person in question may benefit from full relief – please do speak to your tax advisor for further clarification.
Deferral arrangements
The new rules could be applicable to deferral arrangements. There are exemptions to the rule which have been specifically targeted at deferred remuneration. For this reason there are a number of conditions needing to be met for these to apply.
Hedging share awards
Care needs to be taken over hedging arrangements to ensure that shares are not allocated or “earmarked” for particular employees. If shares have been earmarked, the employee will be liable to income tax and national insurance contributions NICs on the value of the shares at the date in which they are allocated – even if they have not yet been received.
Cashless exercise arrangements
If the trustee of an employee benefit trust, or other such third party, offers a cashless exercise facility, the employee will be liable to income tax and NICs on the value of the loan if it is not repaid within 40 days. Should they be offered by the employing company or a company within the same group, cashless exercise arrangements should be unaffected by the new rules.
Employee loans
On or after 6 April 2011, other loans granted to employees by an employee benefit trust or other such third party, are likely to be affected by the new rules.
No disguised remuneration tax charge will arise for loans granted between 9th December 2010 and 6th April 2011 provided the loan is repaid before 6 April 2012, even if it was granted by a third party. Loans made by an employing company or a company within the same group of companies should remain unaffected.
Sub-funds, Sub-trusts and family benefit trusts
If assets are allocated to an employee through any of these means, then the person in question is likely to be liable to an income tax on those assets at the date in which they are allocated.
For existing sub-funds and family benefit trusts, providing certain provisions are taken, no charge should arise. In any event, this can be complicated so specific advice would be beneficial.
In Conclusion:
The changes have now become law and there are some extremely difficult areas that will need careful review. For further information please speak to one of our introducers at Welbeck Solutions – we can guide you through these complex changes and help decide the best course of action for you.
