Module 6: UK Tax and National Insurance

Question 1

Who’s in charge of taxes in the UK?

Answer 1

HMRC is in charge of administration; Parliament create the legislation and HMRC are empowered by the Finance Act (which is voted on at least yearly by Parliament)

Question 2

What are the UK tax year dates and filing deadline?

Answer 2

UK tax year: 6 April - 5 April

Filing deadline: 31 Jan (Filed and Paid)

Question 3

Where are the rules about income tax?

Answer 3

ITEPA 2003: Income Tax (Earnings and Pensions) Act 2003
Hold most of the law relevant to employment income; Part 2 and Part 7 are most relevant for us
Generally; UK residents are required to pay income tax

Question 4

Who pays income tax?

Answer 4

All UK resident employees and non-resident employees who work here

Question 5

What is the tax free allowance?

Answer 5

£12,500 - earnings over £100k you lose £1 of allowance for every £2 earned

Question 6

What are the UK income tax rates?

Answer 6

20% basic rate
40% higher rate
45% top rate

Question 7

What are earnings? And where is this definition?

Answer 7

ITEPA section 62; earning are salary and cash bonus plus benefits in kind

Question 8

What are benefits in kind?

Answer 8

Anything that an employee gets, other than cash. It is rare for a share award to be taxed as a benefit in kind

Question 9

What is the relevant legislation about NICs?

Answer 9

Social Security Contribution and Benefits Act 1992
Social Security (Contributions) Regulations 2001

Question 10

What are NICs?

Answer 10

National Insurance Contributions; payable by both the employee and the employer

Question 11

What are the rates for employees and employers for Class 1 NICs?

Answer 11

Employees pay primary Class 1:
- 12% up to the upper earnings limit; 2% above that
Employers pay secondary Class 1:
- a rate of 13.8% with no upper earnings limit

Question 12

Do you have to pay NICs on benefits in kind or on shares?

Answer 12

Depends on the benefit in kind; there are complex rules
Shares are subject to NICs if they are “readily convertible assets” (so shares that can be sold; either bc they are listed or bc there is a trust available to buy the unlisted shares)

Question 13

How are NICs charged on shares?

Answer 13

Usually charged through PAYE and the amounts are usually the same as for income tax

Question 14

Can the employer their NICs charge to the employee?

Answer 14

This can be done on shares but there are limited cases where it happens; they then get income tax relief on teh amount they pay

Question 15

Where are the rules about CGT?

Answer 15

Taxation of Chargeable Gains Act 1992

Question 16

What is CGT?

Answer 16

A tax realised on disposal of assets; paid by UK residents; different rates for assets, property and carried interests

Question 17

What are the current CGT allowance and CGT rates?

Answer 17

Current allowance is £12,000 pa and the rate above this is 10% for basic rate taxpayers and 20% for higher rate/ additional rate taxpayers

Question 18

How do you calculate CGT gain?

Answer 18

Sale proceeds - base cost = gain

Base cost is usually the amount originally paid for the asset

Question 19

How do CGT and income tax interact?

Answer 19

There are rules in place to avoid double taxation; free shares are subject to income tax so if for example you pay £100 as income tax then the base cost is adjusted to £100 so that you only pay CGT if there is again above the £100

Question 20

How do you determine the bast cost/ gain when shares are bought/sold at different times?

Answer 20

There are a couple different ways to calculate; including by applying share identification rules and apply pooling

Question 21

How does taxation usually work for non- tax advantaged plans?

Answer 21

Usually there is income tax payable - if you sell on the same day as vesting there shouldn’t be CGT to pay bc you would have paid income tax instead

Basic rules for income tax are in Part 7 of ITEPA
NICs rules are mostly in Section 7 of the Social Security and contributions and Benefits Act 1992

Income tax is usually payable on the “market value”

Question 22

When do pooling rules for CGT apply differently?

Answer 22

Same day purchases and sales, purchases within 30 days of sale (bed and breakfasting); SIP shares; restricted share; some tax advantaged options

Question 23

What is “market value”?

Answer 23

DEFINE FROM NOTES

Question 24

How would you tax an unconditional gift of free shares?

Answer 24

Straightforward; find the market value of the shares and then this is the amount the employee has to pay income tax on; this is not a common award type

Question 25

How would you tax a conditional award of free shares?

Answer 25

Normally you would only be taxed when the employee has becomes unconditionally entitled to the shares (vesting); then you tax on the market value at that point; No CGT payable if you then sell immediately.

Question 26

How would you tax an option to acquire shares?

Answer 26

Similar to conditional gifts, there is no tax at grant; Here EXERCISE is the taxable event rather than vest; Tax is due on the market value - the option price (“the spread”) - common to have a cashless exercise where employee receives net shares and proceeds directly pay tax

Question 27

How would you tax restricted shares?

Answer 27

These shares are owned up front; they are seen to be worth less than unrestricted shares so you are initially taxed at grant on the ‘restricted market value’; there is then further tax payable when the restrictions lift on the ‘unrestricted market value’ and then the increase in value is also subject to CGT; can use 431 election in ITEPA to elect out of this and then can pay full tax amount on day 1 - generally better to pay all tax upfront

Question 28

How would you tax forfeitable shares?

Answer 28

These are restricted shares that you could lose; so you own them upfront but can lose your rights to them; there is no tax upfront if they are forfeitable in under 5 years (some tax payable if over 5 years); you can elect upfront but then don’t get tax back if they do forfeit; no tax if shares do forfeit

Question 29

What is the impact of clawback provisions and holding periods on these taxation arrangements?

Answer 29

Argument that this makes the shares ‘restricted’ and you might be subject to tax when the restrictions are lifted as well; Suggested to make a Section 431 election to ensure that you are only paying tax once

Question 30

What is a CSOP?

Answer 30

Company Share Option Plan; Discretionary plan Market value exercise price; legislation comes from ITEPA 2008; there is flexible legislation so you cannot assume that there is no income tax and NICs

Question 31

How would a CSOP be taxed?

Answer 31

There is income tax payable on exercise (no tax on grant) UNLESS an exception applies:

• At least 3 years after grant, or
• Within 6 mos of leaver as a good leaver, or
• Exercised by PRs of deceased optionholder, or
• Takeover w/ no rollover offer

HOWEVER, there will be tax regardless if it if over £30k limit at time of grant or if the exercise price is less than the market value at grant (but company will usually ensure they comply)

Question 32

What are the good leaver provision for a CSOP?

Answer 32

The rules could list more, but for tax purposes the provisions are:
Injury (not ill health), disability, death, retirement, redundancy, TUPE transfer, that the employing company leaves group

Question 33

How does the tax charge work for a CSOP?

Answer 33

If non tax-advantaged: income tax paybale on the option gain (market value at exercise less option price); this is collected through PAYE and often deducted through STC; unlikely to then have CGT charge if sold immediately as income tax already charged

If tax-advantaged (so no income tax) more likely to then pay CGT as base cost is lower

Question 34

Where is the PAYE legislation?

Answer 34

ITEPA Part 11
Income Tax (PAYE) regulations 2003 - the PAYE regs
Based on a concept called ‘coding’ - it takes your personal allowance and spreads it out across the year

Question 35

What is PAYE? What is the deadline? Who is primarily liable?

Answer 35

Collection mechanism - employers collect tax from employees and pay to HMRC; Deadline: 14 days (17 days if electronic) after the end of the tax month; employers are primarily liable for PAYE

Question 36

How are former employees treated with PAYE?

Answer 36

Don’t have a code after leaving, employer has to use OT, this means there’s no personal allowance and leads to an over deduction; reclaim it through self-assessment but at end of year

Question 37

Does PAYE apply to shares?

Answer 37

Yes, the taxable amount is treated as a ‘notional payment’ - the employer has to apply PAYE to it; this money usually comes from the sale of the shares; there is usually a provision in the rules allowing employer to withhold from proceeds of a sale

Question 38

What happens if there is a failure to deduct PAYE?

Answer 38

Employer sill has to pay; can be liable to charges if not paid on time; can ‘make good’ and say you’ll pay so you don’t get the penalties; Employee then has 90 days from the end of the tax year to pay back the employer (or potentially face extra fees)

Question 39

What is RTI Reporting?

Answer 39

“Real Time Information” Reporting - Gives HMRC power to find out about defaults; Employer obligation to HMRC

Question 40

How is tax avoidance prevented with tax advantaged plans?

Answer 40

legislation withdraws the benefit of exemptions if being used for tax avoidance; this covers NICs avoidance too

Question 41

What is “disguised remuneration”? What legislation covers it?

Answer 41

ITEPA Part 7A; Third parties were paying people to avoid income tax; includes FURBS (unapproved pensions) and Family benefit trusts; HMRC drafted wide legislation to combat this; Trusts have to be careful as they are a 3rd party

Question 42

What is “earmarking”?

Answer 42

Main practical issue relating to disguised remuneration; Where a third party is holding assets for a particular person - it’s better to have the trust be ‘blind’ and to not earmark at all (even though there are some exemptions; Can lead to an unintended dry tax charge; cannot tell them NAME + # OF SHARES

Question 43

What is GAAR?

Answer 43

General Anti-Abuse Regulation; Intended for serious and ‘abusive’ tax avoidance; could extend to share plans but usually wouldn’t due to nature of legislation; part of framework to identify, penalise and eliminate tax avoidance

Question 44

What is DOTAS?

Answer 44

Disclosure of Tax Avoidance Schemes; Need to tell HMRC if you are taking part in a scheme; Annual return has a spot for a DOTAS reference number; usually share plans wouldn’t need one

Question 45

What is corporation tax?

Answer 45

Tax paid by companies on profits and gains; Tax on profit (less deductible expenses); General rule requires a real expense (issuing shares doesn’t usually count)

Question 46

What is the statutory deduction for corporation tax?

Answer 46

Corporation Tax Tax 2009 Part 12 (P 11 for SIP) - deduction applies for ALL share plans (slightly diff for SIP) - amount deductible is the market value at time employee receives shares less the amount that the employee paid for them

To apply: Usually must be a UK company, shares must be in a listed company, EMPLOYEE MUST ACTUALLY GET THE SHARES

Question 47

What is transfer pricing and how does it relate to corporation tax?

Answer 47

Companies (esp Global) will try and move money around to benefit from low tax jurisdictions; increasing focus on this; need to be aware when allocating costs of share plans between parent and subsidiaries; cost of providing shares lands with issuing company while the employing company just receives the benefit so they will often have a recharge agreement; Transfer pricing ensures that this is done correctly

Question 48

What tax reporting is required for share plans? What is the filing deadline?

Answer 48

Need to report on all plans to HMRC, only need to self-certify tax-advantaged plans and say that they comply with ITEPA; have to do an annual return even if nothing happened (a ‘nil return’); Online annual returns filed by 6 July after the end of the tax year

Question 49

When do you need to register a tax advantaged plan? What are the consequences if you are late?

Answer 49

Before or on 6 July - the beginning of tax year before tax year in which company registered
After 6 July - Tax year in which company registered
If late, previous awards will not be tax advantaged unless there is a reasonable excuse

Question 50

How often does HMRC publish new guidelines?

Answer 50

Annually

Question 51

What are the penalties for failure to file an annual return with HMRC?

Answer 51

Initial: Fixed penalty of £100 per registration
Over 3 months: Fixed penalty of £300
Over 6 months: Fixed penalty of £300
Over 9 months: Discretionary £10 per day
Incorrect return: up to £5k fine per registration