Employee share scheme tax reform

POSTED BY Liz Buxton
13 September 2016

posted in Tax | Start-Ups | Employment | Employee share scheme | Employee incentive scheme



Employee share schemes are globally recognised as an effective way to recruit, retain and incentivise employees. The legal compliance requirements necessary to establish such schemes have recently relaxed with the introduction of the Financial Markets Conduct Act 2013. As a result, employee share schemes are becoming increasingly popular, particularly with start-up tech companies.

With employee share schemes growing in popularity, the Inland Revenue has turned its attention to whether income tax is being properly collected under the existing tax regime.

As we have previously reported (in IRD Warning on Employee Share Purchase Arrangements), the Inland Revenue has been closely scrutinising employee share purchase schemes.

Legislation relating to the collection of tax on employee share schemes has now also just passed, and wider taxation policy changes are currently under consultation.

Tax collection and reporting changes confirmed

It has previously been up to employees to pay tax on any income arising under share schemes in their annual tax returns. This required employees to self-report on share scheme benefits, resulting in a lack of reporting transparency and individuals incurring significant compliance costs in order to establish their tax obligations.

The following changes will take effect from 1 April 2017:

  • employers will be responsible for reporting share scheme benefits to Inland Revenue; and
  • employers may elect whether or not to withhold tax on income arising under an employee share scheme using the PAYE system. The employer may make this election on an employee by employee basis.

Companies operating employee share schemes should be aware of the new reporting requirements, and will need to consider whether or not to withhold tax.

Read more about the changes here.

Wider tax reform under consultation

Inland Revenue is also reviewing the fundamental taxation of employee share schemes.

Following submissions on the officials’ issues paper, Inland Revenue presented further proposals for consultation on 1 September 2016 (the proposals can be viewed here).

The proposal does not vary substantially from that outlined in the issues paper. Where shares are granted to an employee subject to future conditions (e.g. employment vesting conditions or a limited recourse loan from the employer), the shares will be taxed when those conditions have substantially fallen away. The employee will then be taxed on the market value of the shares at that time, less what the employee has paid for the shares.

Inland Revenue has proposed a three year transitional period, which will commence on the enactment of the new rules. Bearing in mind the long-term nature of employee share schemes, companies with existing share schemes should consider the new proposals when granting shares to employees now.

Please contact us if you would like to discuss making a submission to Inland Revenue, before the submission deadline of 30 September 2016.

Image courtesy of opensourceway.

POSTED BY Liz Buxton
13 September 2016

posted in TaxStart-UpsEmploymentEmployee share schemeEmployee incentive scheme



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