Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ICSA Course Part 2 > Module 7: All Employee Plans > Flashcards

Module 7: All Employee Plans Flashcards

1
Q

What year did SIP become available?

A

2000

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What year did SAYE become available?

A

1980

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are common features of a SIP and SAYE?

A
  • Must be registered with HMRC and self-certified
  • For all employees
  • Need to treat people on same/similar terms
  • Tax exemptions
  • Prescriptive legislation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Where is the legislation for SIP plans?

A

ITEPA (Ch 6 of Part 7 and Schedule 2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What does ITEPA stand for?

A

Income Tax (Earnings and Pensions) Act 2003

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the types of shares in a SIP?

A
  1. Free
  2. Partnership
  3. Matching
  4. Dividend
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a unique element of a SIP?

A

Employees are then shareholders on day 1 but the shares must be held in a special SIP trust

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Why does there need to be a SIP trust?

A

Because companies can’t give ‘give’ share for free (except through treasury or a trust); the SIP structure requires a holding vehicle; legislation has restrictions on the way the plan operates and the SIP trust needs to comply with these; the trust has to be in the UK and be able to fulfill these special requirements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Who can participate in a SIP?

A

All eligible employees of constituent companies

A company does not have to invite people:

  • who have not worked for the qualifying period (if there is one)
  • Non UK tax residents (but can choose to)
  • Employees participating in another group SIP at the same time
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Can people participate in 2 SIPs at once?

A

People only receive 1 SIP allowance so can participate in multiple but only get 1 allowance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the relevant rules for SIPs regarding parent and constituent companies?

A
  • Constituent company is a company in the parent company’s group
  • Parent company often the company that establishes the SIP but it might be the UK subsidiary company if the parent company is non-UK
  • There is legislation to prevent only the companies with higher paid employees being allowed to participate
  • Can sometimes include a JV but this is rare as might not be able to rely on the share schemes exemption
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

SIP: What shares can be used?

A
  • Ordinary shares; listed shares
  • Fully paid, not redeemable
  • Shares with restrictions only if employees notified
  • Not a service company
  • NEED TO WATCH OUT FOR ALTERATIONS TO SHARE CAPITAL/ DIFFERENT TREATMENT - this can jeopardize tax advantaged status
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

SIP: Can a company vary how many free shares they allocate to someone?

A

Yes, but there are rules. Can vary based on pay, length of service and hours worked

But you cannot have preferential treatment to senior staff members

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

SIP - Free Shares: Annual Limit? Are forfeiture or performance conditions allowed? Holding period and tax treatment?

A
  • Annual limit is £3,600 pa
  • Qualifying period is 18 months max
  • Company can choose whether there is a risk of forfeiture
  • Can use performance conditions (but have specific rules) but have to apply before the award is granted
  • Holding period of at least 3 years; completely tax free after 5 years (some tax to pay between years 3 and 5)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

SIP - Partnership Shares: Annual Limit? How often are contributions and from what salary? Forfeiture? Holding period and tax treatment?

A
  • Annual limit of £1,800 or 10% of salary (if lower)
  • Deductions made on monthly basis (or less frequently) from pre-tax salary
  • Not normally forfeitable but can be required to sell
  • Tax-free after 5 years
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

SIP: How are partnership shares acquired?

A

Either shortly after the deduction from pay at “market value” or at the end of an accumulation period (which cannot be longer than 12 months)
If using an accumulation period, you can use market value at start or end or instead say that you’ll use the lower of the two values (crafty)

  • Surplus cash normally carried forward
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Can you pause SIP contributions?

A

Yes, you can stop/restart contributions without a penalty but can’t top up

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

SIP - Matching Shares: Who gets them? Any limits? Forfeiture? Holding period and tax treatment?

A
  • Only for employees who purchase partnership shares
  • match of up to 2 for 1
  • Awarded at same time as partnership shares
  • Can be subject to forfeiture
  • Holding period of at least 3 years (up to 5); completely tax-free after 5 years
  • cannot sell before the holding period is up
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

SIP - Dividend Shares: Any limits? What happens to any surplus? Holding period and tax treatment?

A
  • No mandatory limit under legislation but company can impose a limit if they want to
  • Surplus usually carried forward
  • Can can choose to have DRIP or not (or could let participant choose)
  • Not normally forfeitable but may be required to sell
  • Tax-free after THREE years (tax consequences if taken out before)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What type of tax applies on the different types of SIP shares?

A

Free, Matching, Partnership - Income Tax and NICs may apply

Dividend - dividend tax

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

SIP : How are Free and Matching Shares taxed? How would any income tax/ NICs charge be paid?

A

NO tax: at allocation, sale/withdrawal after 5 years, forfeiture

Tax: Sale/withdrawal within 3 years (market value on exit) or between 3-5 years (original market value or market value on exit, whichever is lower)

Tax collected through PAYE, usually from sale proceeds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

SIP : How are Partnership Shares Taxed?

A

NO tax: on buying the shares, on salary deducted, on sale/withdrawal after 5 years

Tax: Sale/withdrawal within 3 years (market value on exit) or between 3-5 years (the amount of salary deductions used to buy shares or market value on exit, whichever is lower)

Tax collected through PAYE, usually from sale proceeds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

SIP : How are Dividend Shares taxed? How would any dividend tax be paid?

A

If the dividends are taken as cash, there is a £2000 dividend allowance and then dividend tax is payable for any amount above that. If reinvested and held for 3 years, then they are tax-free.

Paid through self-assessment, rather than PAYE and payable at the dividend tax rates (7.5, 32.5, 38.1%)

24
Q

What are the different dividend tax rates for the different income brackets?

A

Basic rate tax payer: 7.5%
Higher rate: 32.5%
Additional: 38.1%

After £2,000 dividend allowance

25
Q

SIP: What happens when someone leaves the company?

A

All shares are treated as leaving the SIP trust

  • Free and Matching shares MAY be forfeited
  • Partnership and Div shares may be compulsorily sold

Unless: held for more than 5 years (or 3 years for div shares), good leaver provisions, certain takeovers

26
Q

SIP and SAYE: Who is a good leaver for tax reasons?

A

Injury, disability, death, redundancy, retirement, TUPE transfer, transfer of employing company outside of the group

Note: company could have other reasons but wouldn’t have tax favored status

27
Q

SIP: What happens if the company is taken over?

A

Either cash payment or a ‘share for share’ takeover where the SIP just continues

Exemption for income tax and NI given if the participant has to take cash ( no exemption if a choice is given)

28
Q

SIP: Do participants have to pay CGT?

A

Only if there is a gain after they exit the SIP trust (base cost is then the market value at EXIT from SIP trust); no CGT payable if sold directly from SIP trust; can also transfer to ISA within 90 days

29
Q

SAYE: Where is the legislation?

A

ITEPA 2003: Ch 7 of Part 7; Schedule 3

30
Q

SAYE: What is a SAYE?

A

It’s an option plan where employees can acquire shares for a fixed option price; there is a savings contract (with authorised carrier) in place to save a fixed amount per month via deduction from post-tax salary (up to 500pounds per month)

31
Q

SAYE: Who is eligible to participate?

A

All eligible employees and directors of constituent companies MUST be invited, except the following groups that companies can choose where to invite or not:

  • part-time directors
  • employees who haven’t worked for the qualifying period (if any)
  • Employees who are non UK tax resident
32
Q

SAYE: Does a constituent company have to be designated?

A

Yes, they are usually companies in the scheme organiser’s group and must be designated as constituent companies. Rarely includes JV companies; cannot do anything that gives preferential treatment to higher paid employees

33
Q

SAYE: What shares can be used?

A

Ordinary shares of the scheme organiser or its parent;
Listed shares or controlled by listed company;
Fully paid, not redeemable;
If restrictions on shares, need to notify employees
If more than on class of share, the shares must be either ‘open market’ or ‘employee control shares’

34
Q

SAYE: What is included in the invitation to participate?

A

Many companies have annual launch; need to ask employees how much they want to save per month (up to 500pounds); can also ask employee whether they want to save for 3 or 5 years (or company can just decide this)

35
Q

SAYE: How is the option price set?

A

Can have a discount of up to 20% to the market value on either the grant date or the invitation date (usually invitation); you can average over several consecutive days; easier to value for listed stock or may have to agree market value with HMRC

36
Q

SAYE: How long can you have the grant after the valuation date? What about if you scale down?

A

Grant must be no more than 30 days after first valuation date (42 days with scaling down)

37
Q

SAYE: What is scaling down?

A

Company can set a maximum number of shares; they can then reduce the savings or reduce the number of shares in various different ways; it needs to be fair and down on a similar term basis; can make 5yr schemes into 3yr schemes

38
Q

SAYE: Is a deed required?

A

No, just an Option Certificate
Do NOT need to execute as deed because there is consideration as the employee is entering into a savings contract and paying the option price

39
Q

SAYE: What are the terms of the savings contract?

A

Approved by HMRC;
Tax-free bonus/ interest (currently nil);
Savings usually deducted from salary (NET)
Can miss a max of 12 months (changed from 6)

40
Q

SAYE: How long does a participant have to exercise their options? Then what happens?

A

6 months from the bonus/maturity date and then they lapse

41
Q

SAYE: Process on Exercise - Paying the option price, transferring to ISA; taxation on exercise

A

Use savings to pay the option price (therefore there is no STC); can transfer to an ISA within 90 days; normally no income tax payable, never any NICs

42
Q

SAYE: Can a participant withdraw savings but then exercise later? Can they exercise multiple times?

A

Yes, they can withdraw savings and then exercise within the 6 months still; they can exercise in part/ multiple times if it is allowed in the plan rules

43
Q

SAYE: What happens on termination of employment?

A

Normally, would lapse and participant would get savings back; if a good leaver, then they can exercise up to 6 months after the good leaver event (but within 6 months of the bonus date); if bc of death the PRs have 12 months, rather than 6 (after date of death or bonus date, if on/after bonus date)

44
Q

SAYE: When does the savings contract terminate?

A

If the option lapses
If the participant misses more than 12 months’ savings (for less than 12 months, the contract is extended by that number of months)
Entitled to savings on termination

45
Q

SAYE: What happens if there is a takeover?

A

Either there is a time limit to exercise (usually 6 months but sometimes 20 days) or there is a rollover

46
Q

SAYE: Income Tax?

A

Exempt from income tax except in certain circumstances - when exercise is less than 3 years bc of takeover where rollover is offered or if there is a non-TUPE business transfer; this would only then incur income tax on exercise, NEVER on grant

No NICs would be payable and would be payable through self-assessment; tax on the option gain

47
Q

SAYE: CGT?

A

Usually no income tax, so therefore base cost if normally the option price; there is likely to be a gain on the sale of shares but this may be covered by the 12,000pound CGT allowance, above this CGT would be payable; this would be collected by self-assessment

Also could transfer to an ISA within 90 days

48
Q

How does registration/ self-certification of SAYE and SIP plans work?

A

Changed in 2014, now companies must self-certify rather than get approval from HMRC; use MRC’s Employment Related Securities online service; must notify and register all new tax advantaged plans separately; must declare legislative requirements have been met (self-certify)

49
Q

What is the deadline to register and self-certify SIP and SAYE plans with HMRC?

A

6 July after tax year in which the awards are first made

50
Q

What are the consequence of not registering your new SIP or SAYE with HMRC on time?

A

Previous awards will not be tax advantaged (unless there is a reasonable excuse)

51
Q

What are the penalties of failure to file with HMRC on time?

A 
Initially: 100 per registration
3 mos - 300
6 mos - 300
9 mos - discretionary 10 per day
if incorrect up to 5000 per registration
52
Q

Does HMRC have the right to enquire about your plan?

A

Yes, quite broad powers to enquire; within 12 months of reg deadline, longer if deadline not met or if there have been material changes made to the plan, and HMRC can enquire any time they think legislation is not being met

53
Q

What are the potential consequences if you do not comply with HMRC legislation for SIP and SAYE plans?

A

Serious non-compliance: Can no longer by tax advantaged, penalty up to 2x tax and NIC relief (tax relief for pre-existing awards is protected)
Less serious non-compliance: Company has 90 days to meet legislation, otherwise there may be more serious penalties

Punishments are trying to make sure employee is not penalised but the employer is

54
Q

SAYE: What documents are required?

A

Plan rules, savings contract, application form, invitation, booklet, option certificate (after grant), exercise notice

55
Q

SIP: What documents are required?

A

Trust deed and rules, invitations, application forms for free and partnership shares, free share agreement, partnership share agreement (depending on type of shares given); div reinvestment docs, booklet

56
Q

What is the launch process for a company who wants a new SAYE or SIP?

A
  1. design plan and create necessary documents
  2. obtain any necessary authority (eg shareholder approval)
  3. Adopt plan formally (for SIP trust deed must be executed by company and trustee)
  4. Deal with admin issues - designate constituent companies, identify eligible employees, launch plan and issue invitations
  5. register and self-certify

ICSA Course Part 2 (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions