UK: HMRC publishes FAQs on the draft disguised remuneration legislation

On 9 December 2010 HMRC released draft legislation in the Finance Bill 2011 designed to "tackle arrangements involving trusts and other vehicles used to reward employees which seek to avoid, defer or reduce tax liabilities". After being inundated with responses to the draft, HMRC have now released this first set of FAQs aimed at providing answers to some common queries on the draft disguised remuneration legislation. A link to the FAQs is provided here.

Following the consultation, a number of areas have been identified where the Government recognises the need to make refinements. Not all of the questions raised during the consultation have been addressed in the first FAQs as HMRC are still considering the responses.

Revised legislation is still awaited, following which we will circulate a further briefing.

Of particular interest to employee incentives, HMRC have addressed the following issues:

• Deferred cash and conditional allocations will need to (i) be subject to conditions which, if not met, will cause the awards to lapse, (ii) vest within five years of the date of grant and (iii) be subject to income tax on vesting/payment. No charge will arise in these circumstances even if the employer has ring-fenced funds to satisfy these awards.
• An exemption is already available in the draft legislation for the grant and vesting of share options and forfeitable securities, for HMRC approved employee incentive arrangements and for arrangements offered to a substantial proportion (i.e. more than 50%) of the employees.
• Group companies will be excluded from the definition of a "relevant third party" which will avoid many transactions entered into between employees and a non-employing group company for "commercial and otherwise innocent purposes". This might include loans from a parent or other group company and cashless exercise facilities used on the exercise of options. The Government is also considering introducing a short-term loan exemption for specific transactions which would assist companies that operate cashless-exercise facilities via a third-party financing arrangement.
• Where shares are earmarked to meet share plan liabilities for specific employees (such as under back-to-back agreements and share hedging arrangements) no charge will arise providing the arrangements are structured so that the employees will not receive the shares if the vesting conditions are not satisfied, the vesting conditions do not extend beyond five years and the shares will be subject to income tax on vesting.
• Where shares and/or funds are contributed to a discretionary trust to meet future share plan liabilities but are not earmarked for specific employees (such as general share hedging arrangements) no charge will arise.
• Employees will be able to claim credit for the market value of an asset it has sold to a "relevant third party". This will avoid a charge, for example, where a trust buys shares from an employee at or below market value on cessation of employment.
• In relation to employee sub-funds in EBTs, any gains or income accruing on contributions which have been earmarked for particular employees will not themselves be treated as "earmarked". What is not clear is whether the re-investment of such income or gains in other assets will give rise to a charge. The FAQs state that the re-investment of dividends by a trustee at the suggestion of the employee will not be caught where no value leaves the trust in favour of the employee and seem to suggest that other reinvestments may not be caught. Further guidance may therefore be needed in this respect.

A link to our recent pensions e-briefing on disguised remuneration is provided here.