Internationally mobile employees’ employment-related securities

Tue 01 Apr 2014

Finance Bill 2014 will change the rules taxing employment-related securities (ERS) and employment-related securities options (ERSO) of internationally mobile employees (IMEs).

The biggest effect of the change is that income on ERS acquired when non-resident will become taxable as from 6 April 2015. This includes ERSO acquired before 6 April 2015 by IMEs not UK resident at that time, which are not currently taxable. The original proposed commencement date of 1 September 2014 has sensibly been deferred so that the new rules will now take effect from the start of the 2015/16 tax year.

The changes aim to put IMEs on an equal footing with full-time UK-resident employees in relation to ERS and ERSO earnings. Where ERS earnings arise to a UK-resident employee the full value will be chargeable but usually subject to “just and reasonable” reductions in respect of the period(s) of overseas employment during which those earnings accrued.

The changes are generally helpful but may cause practical difficulties and in some instances will increase tax liabilities because:

• they will apply to most ERS and ERSO-based remuneration of UK-resident employees including taxable events in relation to ERS and ERSO received when non-resident; at present ERS are generally only taxable if the employee receives them when UK-resident;
• UK-resident non-dom employees of non-UK resident companies will be unable to claim remittance basis because their ERS will be UK-situs and so deemed to be remitted to the UK on receipt; and

• implementation of the new measure from 1 September 2014, as originally proposed, was always going to be inconvenient because it fell part way through the tax year, unnecessarily increasing the potential for confusion and accidental misreporting. Therefore deferring commencement to 6 April 2015 is welcome.

Chargeable events occur when an employee:

• acquires ERS at an undervalue;
• disposes of ERS;
• obtains a post-acquisition benefit; or
• disposes of an option over ERS.

The Bill also sets outs the position for ERSO and how vesting is dealt with in relation to the exercise of the ERSO.

Changes to Income Tax (Earnings and Pensions) Act 2003

The draft legislation adds a new Chapter 5B into Part 2 of ITEPA 2003 in which ERS and ERSO income is classified as a new type of “specific chargeable income” (ITEPA 2003 s 10) which may need to be apportioned over the “relevant period” (new ITEPA 2003 s 41G) between periods of UK and non-UK duties as is just and reasonable.

“Chargeable foreign securities income”, is ERS and ERSO income from foreign employer where the duties are performed wholly outside the UK in the year (or non-resident part of a split year), of a non-dom UK-resident who claims remittance basis (new ITEPA 2003 s 41H).

“Unchargeable foreign securities income” is foreign securities income earned in a period of non-residence (new ITEPA 2003 s 41H).

Both chargeable foreign securities income and unchargeable foreign securities income form part of the employee’s “Securities income” (all income from ERS and/or ERSO). The amount on which a person is taxable is:

            securities income

less      chargeable foreign securities income and unchargeable foreign securities income

plus     remittances of chargeable foreign securities income.

The legislation sets out details in relation to the different apportionment treatments that will apply when calculating the constituent securities income classification amounts.

Contact Liz Hunter, share schemes director, for further details.