Disguised Remuneration and Employee Incentive Plans - Olswang

Disguised Remuneration and Employee
Incentive Plans

Disguised Remuneration
and Employee Incentives
Plans: how to protect
against a tax charge
Under the "disguised remuneration" legislation, which came into full effect from 6 April 2011, income tax
and NICs charges can arise where a third party either pays, transfers or makes available an asset for an
employee's benefit or "earmarks" an asset for an employee (each described as a "relevant step" under the
legislation) or makes any form of loan to an employee. It is therefore particularly relevant for a company
that operates its employee incentive plans via an employee benefit trust ("EBT") or another third party.
The impact of the legislation can be severe: if a tax charge arises, the employer must account for income
tax on the value of the relevant step via PAYE, and pay class 1 NICs, regardless of whether the
employer is aware that a relevant step has been taken, and must recover the income tax from the
employee within 90 days of the relevant step or the PAYE amount will itself be treated as a further taxable
benefit.
The charge where a third party earmarks an asset for an employee raises particular concerns, as it can
trigger tax for the employee and employer long before the employee receives any benefit and regardless of
whether an actual benefit is ultimately delivered.
What can companies do to protect against a charge?
The legislation now includes a number of complex exclusions in relation to incentive arrangements, and a
company which operates a standard form employee share plan may well be able to rely on one of these,
rather than it and its employees facing a tax charge. Nevertheless, care must be taken when relying on
any exclusion, as its availability will depend upon the specific terms of the company's incentive plan, and
the exclusion may also cease to apply if the plan is administered in a certain way. Therefore, there are still
a number of ways in which a company can unwittingly trigger a charge under the legislation. In order to
protect as far as possible against this occurring in relation to their incentive plans, companies should aim to
do the following:
Be careful with the wording of any communications with its EBT trustee: An inadvertent earmarking
can occur in a wide range of circumstances, including where the EBT trustee agrees to apply a specified
amount of money or other asset in order to satisfy a particular employee's future entitlement.
Avoid the grant of awards by a third party unless an exclusion applies: If the EBT trustee (or any
other third party) grants an option or award over shares or other assets, this is likely to involve an
earmarking and tax will therefore arise unless an exclusion is available.
Take additional steps when an unapproved award lapses: An earmarking charge can apply if
earmarked cash or assets which previously qualified for an exclusion cease to be held under the terms of
the relevant plan but continue to be "earmarked" for an employee. Therefore, when an award lapses (for
example, when employment ends), appropriate communications with the EBT trustee may be needed in
order to prevent this.

Check leaver provisions under unapproved share plan rules: Unless the plan normally only permits
vesting of awards on an exit event of the company, an exclusion from the earmarking charge will only be
available if there is a reasonable chance that the award will not vest. Companies may need to amend the
leaver provisions in their share plan rules in order to be able to meet this requirement and benefit from an
exclusion.
Monitor the numbers of shares / other assets held for the purposes of satisfying awards: If an
exclusion from the earmarking charge is being relied upon, in certain cases the number of shares or other
assets held must not exceed the maximum number "which might reasonably be expected to be needed"
for that plan, otherwise the exclusion will not apply.
The above is a high level summary of key issues relevant to standard form share incentive plans and
bonus arrangements. However, the legislation is complex and imposes tax charges in a wide range of
circumstances, including in relation to employee loans. The information above is intended as a general
review of the subjects featured and detailed, specialist advice should always be taken before taking, or
refraining from taking, any action.
How can we help?
If you would like detailed advice on how the legislation is relevant to your company's arrangements then
please contact either your usual Olswang contact or Andrew Quayle on +44 (0) 20 7067 3739
(andrew.quayle@olswang.com).
OLSWANG LLP
www.olswang.com

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