Internationally Mobile Employees: New employment-related securities rules from 1 September 2014

Fri 07 Mar 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 1 September 2014. This includes ERSO acquired before 1 September by IMEs not UK resident at that time, which are not currently taxable.

The proposals are mainly helpful and generally include welcome improvements to align the UK tax treatment with international practice. Some of the changes resolve a number of current problems and inconsistencies.

The changes will however sometimes 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 is inconvenient because it falls part way through the tax year, unnecessarily adding to the potential for confusion and accidental misreporting.

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.

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

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 s41G) 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.

Note that it is not just the IME’s own position that is changing but there are also welcome changes to the corporation tax deduction available to the employer. The draft Finance Bill amendments will make the deduction available in relation to an employee of a non-resident employer that is not within the charge to UK corporation tax, if the employee carries out any duties in the UK for a UK-resident employer or a non-resident employer that is within the scope of the UK corporation tax for shares acquired or share options exercised by the employee and for post-acquisition chargeable events in relation to restricted shares held by the employee. This contrasts with the current position where a deduction is only available in relation to an IME of a foreign subsidiary seconded to the UK if the employer is within the charge to UK corporation tax at the relevant time.

This is a helpful and sensible change which brings the UK into line with other countries and should make the allocation of taxable income to the UK more intuitive.

Companies will have to keep accurate records of the movements of their IMEs in order to comply with their PAYE obligations.

There will be “winners and losers” from this change.

Examples of “winners” will be individuals who are granted options while resident in the UK but who move to a non-treaty country during the option vesting period. Currently the UK would seek to tax the whole of the option gain, but for options granted on or after the operative date (1 September 2014), the UK will limit itself to taxing the proportion of the gain that relates to UK residence or duties.

Examples of “losers” will be individuals who are granted options before becoming resident in the UK. Currently such options are normally outside the scope of UK taxation, but under the new legislation a proportion of the option will be brought into charge to tax.