Employee Reward Structures
Fourth Edition

Employee Reward Structures is a comprehensive guide to taxation of employment packages, from recruitment to termination of employment, including share ownership schemes and options, and pensions.

The new book has been updated for Finance Act 2011. It contains an analysis of how common employee reward structures are impacted by the new “disguised remuneration” legislation and pensions tax changes.

It covers the broad spectrum of employee reward structures, from the tax-efficient structuring of a termination payment to the complex anti-avoidance rules aimed at share-based remuneration. It provides guidance on the more common salary and benefit arrangements, as well as dealing with areas where unexpected tax charges can arise, particularly in the field of share options and other equity incentives.

The law in many of the areas covered by the book is in a state of almost constant change, and the fourth edition of the book has been updated to reflect developments in the last year, such as the revision of capital gains tax taper relief.

Checklists, flowcharts and a comprehensive glossary make this an invaluable aid for any practitioner.

1         Cash Bonus Plans, “Golden Hellos” and Phantom Shares. 1

1.1  Cash Bonus Plans. 1

1.2  Golden Hellos. 5

1.3  Phantom Share Plans. 6

2         Recruiting a New Executive. 9

2.1  Employment Status. 9

2.2  Why is the distinction between being employed or self-employed important?  10

2.3  Pros and Cons of being an employed earner. 12

2.4  Pros and cons of being a self-employed worker. 13

2.5  Contract of service/contract for services. 14

2.6  Employment tests. 16

2.7  Office-holders/non-executive directors. 20

2.8  Deemed employed worker. 22

2.9  IR35. 26

2.10  Agency Workers. 27

2.11  Construction Industry Scheme. 27

2.12  Practical Points. 28

3         Non-Cash Benefits. 31

3.1  Taxation of Benefits: General Rules. 31

3.2  Flexible Benefits. 32

3.3  Incentive Award Schemes. 33

3.4  Cars. 34

3.5  Healthcare and Medical Benefits. 34

3.6  Life Assurance. 35

3.7  Childcare Vouchers. 36

3.8  Workplace Nurseries. 37

3.9  Nurseries outside the Workplace. 38

3.10      Workplace Meals. 39

3.11      Mobile Telephones. 39

3.12      Vouchers. 40

3.13      Pensions. 40

3.14      Job-related Accommodation.. 40

3.15      Accommodation that is Not Job-Related.. 41

3.16      Recreational Facilities. 42

4         Registered Pension Schemes. 43

4.1  Introduction.. 43

4.2  Description.. 43

4.3  Disclosure. 44

4.4  Regulatory Treatment. 44

4.5  Tax Treatment of Member. 44

4.6  Summary of Benefits Payable from Registered Money Purchase Pension Schemes  64

4.7  Tax Treatment of Trustee/Scheme Administrator. 68

4.8  Tax Treatment of Employer. 70

5         Employer-Financed Retirement Benefits Schemes. 75

5.1  Description.. 75

5.2  Regulatory Treatment. 76

5.3  Tax Treatment of Member. 76

5.4  Tax Treatment of Trustee/Scheme Administrator. 83

5.5  Tax Treatment of Employer. 84

6         Employee Benefit Trusts and Disguised Remuneration.. 87

6.1  Uses of Employee Benefit Trusts. 87

6.2  Taxation of a Beneficiary. 88

6.3  Taxation of Company. 107

6.4  Capital Gains Tax. 109

6.5  Collection of NIC.. 110

6.6  Taxation of Individual Settlor. 111

6.7  Taxation of the EBT Trustee. 113

6.8  Company Law... 124

6.9  Frequently Asked Questions on Employee Benefit Trusts. 124

7         Unapproved Option Plans. 127

7.1  Description.. 127

7.2  Key Features of Share Options. 128

7.3  Company Law Issues. 128

7.4  Designing a Share Option Plan and Drafting the Rules. 129

7.5  Sources of Shares. 141

7.6  Accounting Treatment. 142

7.7  Summary of Advantages and Disadvantages of Share Options. 142

7.8  Taxation of Options. 142

7.9  Assignment or Release of Securities option.. 151

7.10      Frequently Asked Questions on Unapproved Share Options. 153

8         Tax-Favoured Share Plans: General 155

8.1  Overview... 155

8.2  Requirements common to SIP, SAYE and CSOP.. 155

8.3  Requirement common to SIP and SAYE: No Discouraging Features. 163

8.4  Requirements common to SAYE and CSOP.. 163

8.5  Requirement common to EMI, SAYE and CSOP.. 166

8.6  Requirement common to EMI and CSOP.. 166

8.7  Requirements common to EMI, SAYE, CSOP and SIP.. 166

9         EMI. 169

9.1  Description.. 169

9.2  Checklist for Granting an EMI Option.. 169

9.3  Qualification Requirements for the Relevant Company and its Shares. 170

9.4  Tests applying to the Shares. 175

9.5  Qualification Requirements for the Optionholder. 175

9.6  Qualification Requirements for the Option.. 176

9.7  The Terms of the Option.. 180

9.8  Documentation and Registration.. 182

9.9  Taxation of the Employee. 183

9.10      Summary of Advantages and Disadvantages of EMI Options. 188

9.11      Frequently Asked Questions on EMI Plans. 189

10       CSOP.. 191

10.1      Description.. 191

10.2      Checklist for Implementation of a CSOP.. 191

10.3      Approval Requirements for the Shares. 193

10.4      Approval Requirements for Participating Companies. 193

10.5      Approval Requirements for the Optionholder. 193

10.6      Approval Requirements for the Plan.. 194

10.7      Approval Process. 198

10.8      Valuation Issues. 198

10.9      Tax Treatment of Employee. 198

10.10       Tax Treatment of Employer. 201

10.11       Accounting Treatment. 201

10.12       Frequently Asked Questions. 202

11       SAYE.. 205

11.1      Description.. 205

11.2      Checklist for Implementation of an SAYE.. 206

11.3      Approval requirements for the Shares. 208

11.4      Approval Requirements for Participating Companies. 209

11.5      Approval Requirements relating to Optionholders. 209

11.6      Approval Requirements for the Plan.. 211

11.7      Approval Process. 215

11.8      Selecting a Savings Carrier. 216

11.9      Valuation Issues. 216

11.10       Tax Treatment of Employee. 216

11.12       Accounting Treatment. 218

11.13       Summary of Advantages and Disadvantages of SAYE Options. 218

11.14       Frequently Asked Questions for SAYE.. 218

12       SIP.. 221

12.1      Overview... 221

12.2      Free Shares. 223

12.3      Partnership Shares. 225

12.4      Matching Shares. 227

12.5      Dividend Shares. 228

12.6      Checklist for Implementation of a SIP.. 228

12.7      Approval Requirements for the Shares. 232

12.8      Approval Requirements for Participating Companies. 232

12.9      Approval Requirements relating to Participants. 233

12.10       Approval Requirements for the Plan.. 236

12.11       Other Features of the SIP.. 240

12.12       Approval Process. 241

12.13       Selecting a Trustee/Administrator. 241

12.14       Valuation Issues. 242

12.15       Tax Treatment. 242

12.16       Accounting Treatment. 249

12.17       Summary of Advantages and Disadvantages of SIP.. 249

12.18       Frequently Asked Questions on SIPs. 250

13       Share Purchase and Award Plans: Overview... 251

13.1      Structure of this Section.. 251

13.2      Company Law Issues. 252

13.3      Common Ways of Providing Shares. 252

13.4      Unrestricted Shares. 252

13.5      Restricted Shares. 253

13.6      Convertible securities. 253

13.7      Nil-paid and Partly-paid Shares. 253

13.8      Ratchet Arrangements. 254

13.9      Value Freezing/Growth Shares/Hurdle Share. 257

13.10       Flowering Shares. 257

13.11       Joint Ownership Plans. 258

13.12       Share Appreciation Rights. 258

13.13       Discounted Share Offers. 259

14       Tax Treatment of Employee on Acquisition of the Securities. 261

14.1      Unrestricted Shares. 261

14.2      Restricted Securities. 262

14.3      Convertible securities. 264

14.4      Nil-Paid and Partly-Paid Shares. 264

14.5      Ratchet Arrangements. 264

14.6      Value Freezing/Growth Shares/Hurdle Shares. 265

14.7      Flowering Shares. 265

14.8      Joint Ownership Plan.. 265

14.9      Share Appreciation Rights. 266

15       Tax Treatment of Employee after Acquisition of the Securities. 267

15.1      Unrestricted Securities. 267

15.2      Restricted Securities. 268

15.3      Convertible securities. 276

15.4      Securities Acquired for less than Market Value. 279

15.5      Ratchet Arrangements. 283

15.6      Value Freezing/Growth Shares/Hurdle Shares. 284

15.7      Flowering Shares. 284

15.8      Joint Ownership Plan.. 285

15.9      Entrepreneurs’ Relief. 285

15.10       Income Tax Relief for Capital Losses. 286

16       Restricted Securities Elections. 287

16.1      The Elections. 287

16.2      Deciding to Make an Election.. 289

16.3      Reporting. 290

17       Legacy Rules. 291

17.1      Forfeitable Shares Acquired before 17 March 1998. 291

17.2      Conditional Securities Acquired before 16 April 2003. 291

17.3      Removal or Variation of a Restriction on Securities Acquired Before 1 September 2003  293

18       Anti-Avoidance and Special Situations. 297

18.1      Pre-acquisition Avoidance Cases. 297

18.2      Securities that have been Artificially Depressed in Value. 297

18.3      Artificially Enhanced Securities. 300

18.4      Securities Disposed of for More than Market Value. 302

18.5      Post-Acquisition Benefits. 303

19       Corporation Tax Relief. 305

19.1      General Principles. 305

19.2      CTA 2009, Part 12. 306

19.3      Relationship between Part 12 and other deductions. 312

19.4      CTA 2009, s1288. 313

19.5      CTA 2009, sections 1290 to 1297. 314

19.6      Establishment and Operation of Approved Schemes. 316

19.7      Pension Contributions. 316

19.8      Cash Cancellation Payments. 316

19.9      Transfer Pricing and Anti-Arbitrage Issues. 317

19.10       Termination Payments. 318

20       NIC Recovery and Transfers. 319

20.1      Primary NIC.. 319

20.2      Secondary NIC Transfers. 319

21       Employment-Related Loans. 323

21.1      Prohibition on Loans to Directors. 323

21.2      Loans to Corporate Trustee. 323

21.3      Tax on Cheap Loans to Directors and Employees. 323

21.4      Consumer Credit Act 1974. 326

21.5      Loans to Acquire Shares in Close Companies. 327

21.6      Loans to Acquire Shares in an Employee-Controlled Company. 327

21.7      Loans to Participators in Close Companies. 328

22       Termination Payments. 331

22.1      Overview... 331

22.2      Summary. 331

22.3      Employment Rights. 333

22.4      PILONs. 335

22.5      Payments for Post-termination Restrictions. 338

22.6      £30,000 Exemption.. 339

22.7      Statutory Redundancy Payments. 340

22.8      Enhanced Redundancy Payments. 340

22.9      Payments from Registered Pension Schemes. 341

22.10       Approved Lump Sum Payments. 341

22.11       Overseas Pension Schemes. 342

22.12       Payments into Registered Pension Schemes. 342

22.13       Payments on Death, Injury or Disability. 342

22.14       Foreign Service Relief. 342

22.15       Long Service Awards. 342

22.16       Outplacement Counselling. 343

22.17       Legal Expenses. 343

22.18       Benefits in Kind.. 344

22.19       Special Rules for Directors. 345

22.20       Compensation for Loss of Option Rights. 345

22.21       Corporation Tax Issues. 345

23       Corporate Transactions: Effect on Share Plans. 349

23.1      Change of Control. 349

23.2      Sale of Business or Subsidiary. 351

23.3      Bonus issue and rights issue. 352

23.4      Demergers and Spinoffs. 354

23.5      Earnouts. 354

24       Overview of Share Valuation.. 357

24.1      Money’s Worth Valuation.. 357

24.2      Capital Gains Tax Valuation.. 357

24.3      Impact of Personal Restrictions. 358

25       Company Law Issues. 361

25.1      Public Offers of Securities. 361

25.2      Corporate Authority. 361

25.3      Issuing Shares for less than par. 362

25.4      Restrictions on Allotment of Shares. 362

25.5      Pre-emption rights. 362

25.6      Financial Assistance. 362

25.7      Definition of “Employees’ Share Scheme”. 363

25.8      Disclosure Requirements. 364

25.9      FSMA 2000. 365

25.10       Loans to Directors. 366

25.11       Interests in Contracts. 367

25.12       Membership of Holding Company. 367

26       Accounting Treatment. 369

26.1      Accounting for Employment Costs – General. 369

26.2      Accounting for Cash Bonuses and Share Appreciation Rights. 369

26.3      Accounting for Employment-related Securities and Options. 370

26.4      Accounting for Secondary NIC.. 375

26.5      Accounting for Corporation Tax. 375

26.6      Accounting for Employee Benefit Trusts. 375

27       Anti-Avoidance. 379

27.1      Background.. 379

27.2      PAYE Implications. 379

28       Meaning of “by reason of employment”. 381

29       Flowcharts and Checklists. 383

29.1      Readily convertible asset. 383

29.2      Corporation tax deductible share. 384

29.3      Attribution of EBT shares to beneficiaries. 385

29.4      Rollover of Approved options. 388

29.5      Rollover of EMI Options. 390

30       Form 42 Reporting. 395

31       Glossary. 397

32       Table of Authorities. 417

Websites. 434

Accounting Standards. 441

Index. 445