Employment Incentives Comparative Guide -

1. Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern employee share plans in your jurisdiction?

The main legislative and regulatory provisions governing employee share plans in the United Kingdom are as follows:

The Companies Act 2006, together with the body of case law relating to company law, sets out the legal framework around the creation, issue and transfer of shares and other matters relevant to share plans, including, for companies whose shares are listed on regulated markets, a regime requiring shareholder approval for directors' remuneration.
The Employment Rights Act 1996 and the Equality Act 2010, together with the body of case law relating to employment law, impact on the way in which employee share plans can be operated (see question 9).
The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and the Income Tax (PAYE Regulations) 2003 contain the key tax-related provisions impacting employee share plans, including the conditions to qualify for, and the treatment of, several tax-qualified employee share plans (see questions 4.2 and 4.3).
The Prospectus Rules and the Financial Services and Markets Act 2000, together with secondary legislation made thereunder, contain a number of securities law rules and related regulations impacting the operation of share plans, including:
- requirements to publish a prospectus or provide other information where an offer of shares is made; and
- restrictions on financial promotions (see question 10.1).
Companies whose shares are listed on the London Stock Exchange main market must comply with the Listing Rules of the Financial Conduct Authority (FCA) and companies whose shares are admitted to trading on the Alternative Investment Market (AIM) must comply with the AIM rules (see question 8.1).
Companies whose business falls within the scope of the FCA and/or the Prudential Regulatory Authority (PRA) regulatory regimes must comply with various requirements in relation to remuneration (see question 1.2).

1.2 Do any special regimes apply in specific sectors?

Firms in the financial services sector – including asset managers, banks, investment firms and insurance companies – must comply with specific UK and EU financial service remuneration requirements.

The relevant UK requirements are set out in a number of remuneration codes, which are governed by the FCA and, for some larger firms (including banks, insurance companies and building societies), the PRA. Which remuneration codes will apply to a firm depends on how the firm is regulated and its size. A firm may be subject to more than one remuneration code and the FCA takes a proportionate approach to how firms are required to apply the remuneration codes based on the principle that a firm's remuneration policy must be appropriate and proportionate to the nature, scale and complexity of the risks that exist in the business model and activities of the firm.

The relevant remuneration codes are:

SYSC 19B – Alternative Investment Fund Managers Remuneration Code;
SYSC 19D – Dual-Regulated Firms Remuneration Code;
SYSC 19E – Undertakings for Collective Investment in Transferable Securities Remuneration Code; and
SYSC 19G – Prudential Sourcebook for Markets in Financial Instruments Directive Investment Firms (MIFIDPRU) Remuneration Code.

In terms of FCA-regulated investment firms, different provisions of the MIFIDPRU Remuneration Code will apply depending on the categorisation of the relevant firm (again determined on the basis of its size and the level of risk that the firm poses to its customers and the markets). The relevant categories of investment firm are as follows:

small and non-interconnected (SNI) firms, which are subject to basic requirements under the MIFIDPRU Remuneration Code;
non-SNI firms, which are subject to standard requirements under the MIFIDPRU Remuneration Code; and
large non-SNI firms, which are subject to extended requirements under the MIFIDPRU Remuneration Code.

In addition, certain large and designated investment firms are subject to prudential supervision by the PRA and, together with certain UK banks and building societies, may be subject to the Capital Requirement Regulation (CRR). Insurance firms will typically be subject to the UK Solvency II regime (which is currently under review). Both the CRR and Solvency II regimes include provisions in relation to remuneration.

The remuneration codes encompass a wide range of areas to ensure that firms' remuneration policies:

are aligned with sound risk management practices; and
do not encourage excessive risk-taking.

They include rules relating to:

the governance processes around remuneration (eg, the requirement to have a remuneration committee and to make certain disclosures); and
the structure and terms of remuneration, including:
- the balance between fixed and variable components;
- performance measurement;
- ensuring that performance-related pay is based on both financial and non-financial criteria; and
- the deferral of variable remuneration and payment in shares or similar instruments to align incentives with the long-term interests of the firm.

Additionally, the remuneration codes generally require the inclusion of malus and clawback provisions to adjust remuneration in the event of poor performance or misconduct.

1.3 Which bodies are responsible for enforcing the legislation? What is their general approach in doing so?

There is no specific body responsible for enforcing company law or employment law insofar as they relate to employee share plans. Companies House has the power to investigate certain failures and offences may be investigated by:

the police and the Crown Prosecution Service; or
the Department for Business and Trade.

Offences are most likely to be investigated following:

a company failure; or
complaints from an individual or other company.

His Majesty's Revenue & Customs (HMRC) is responsible for collecting taxes and enforcing tax compliance.

The financial services regimes are policed by the FCA and the PRA.

2. Providers

2.1 What types of companies typically provide employee share plans in your jurisdiction?

Any company with a share capital may operate an employee share plan in the United Kingdom. There is a lot of flexibility as to the types of employee share plan which any company may offer. However, the following points should be noted:

Companies with shares listed on the main market of the London Stock Exchange or traded on the Alternative Investment Market generally provide senior executives with annual awards of nil price options under a long-term incentive plan (LTIP). Such awards:
- will typically vest at the end of a three-year vesting period subject to the achievement of performance conditions based on earnings per share or relative total shareholder return; and
- may also be subject to a subsequent two-year holding period.
It may be possible to structure some or all of such awards in a more tax-efficient way using a joint share ownership plan. Listed companies will commonly also offer one or more statutory tax-qualified all-employee plans – that is, a Save as You Earn plan (SAYE) or a Share Incentive Plan (see questions 4.2 and 4.3).
It is very common for startups and high-growth companies to make discretionary awards under employee share plans to attract and retain talent and share the risks and rewards of entrepreneurship, especially in the technology sector. Where possible, such companies will generally offer tax-qualified Enterprise Management Incentive options, failing which they are likely to use growth shares or non-tax qualified options. Options may be granted on terms that they may only be exercised in the event of an initial public offering (IPO) or acquisition of the issuing company or they may be granted on the basis that they become exercisable at the end of a vesting period.
Private equity-owned companies (which cannot generally use the statutory tax-qualified plans) will typically offer 'sweet equity' shares or growth shares to senior executives. In order that they are aligned with the private equity owner, the participants will generally only be able to sell their shares in the event of an IPO or the acquisition of the issuing company. Such companies may offer less senior employees cash-settled 'phantom options' (sometimes operated in conjunction with an employee benefit trust).
Other privately owned companies may use any of the above approaches.

2.2 Can overseas employers provide employee share plans in your jurisdiction?

Yes, overseas companies may provide employee share plans to employees who are resident in or work in the United Kingdom. They may even be able to satisfy the conditions required for the statutory tax-qualified employee share plans.

It is generally possible to offer awards to UK participants under employee share plans operated by overseas companies without too much difficulty.

Although the operation of an overseas share plan in the United Kingdom will need to comply with UK securities laws and related regulation (see question 10.1), there are generally exemptions available in relation to awards which are made to employees (rather than non-executive directors or consultants).

It will also be necessary to ensure that the plan has suitable provisions to ensure that the employer can comply with any requirement to withhold or account to His Majesty's Revenue & Customs for tax in respect of the acquisition of shares (or the provision of other benefits) pursuant to the plan.

The operation of employee share plans in the United Kingdom by overseas companies will also need to comply with UK law, in particular employment law (see question 9).

Overseas companies will also need to consider the practical and administrative aspects of providing share plans to UK employees, such as currency and exchange rate issues and the need to translate share plan documents.

3. Participants

3.1 What kinds of employees are typically invited to participate in employee share plans in your jurisdiction?

The kinds of employees invited to participate in employee share plans in the United Kingdom will depend on the company and the type of plan:

Two of the statutory tax-qualified plans – Save as You Earn plans (SAYE) and Share Incentive Plans (SIPs) – must, broadly speaking, be offered to all employees of the issuing company and its designated group companies. Participants in those plans will therefore extend from the chief executive officer to the most junior employees. On the other hand, some employees are excluded from the statutory tax-qualified plans – for example, Enterprise Management Incentive (EMI) options may not be offered to employees who work less than 25 hours per week, unless they spend at least 75% of their working time working for the company.
Listed company long-term incentive plans or performance share plans are typically only offered to senior executives (eg, main board and executive committee level and perhaps their reports). This reflects the fact that those individuals have a high level of responsibility for and influence on the company's performance against the performance targets.
Plans which involve the holding of shares in a private company (eg, growth shares and 'sweet equity') tend to be limited to more senior/key employees. In addition to the desire to focus the incentives on employees who can drive performance and who will attribute value to the incentive, companies are often wary of having too many employees on their share register – largely due to the tax and administrative issues arising from having to deal with large numbers of leavers and joiners.
Phantom plans are often used by private companies that wish to offer a share-based incentive to a broad employee base. The tax treatment (although not particularly efficient) is straightforward and there is no need to buy shares back from leavers.
Company Share Option Plan (CSOP) options are not commonly offered on their own to senior executives in mature companies, as the statutory maximum value of shares which can be the subject of options granted to any one individual (currently £60,000 per employee) is commonly seen as being too low. CSOP options may, however, be granted to such individuals in conjunction with or in addition to awards under other plans.
Some plans – such as joint share ownership plans, growth shares and sweet equity management incentive plans – may be perceived as being too complicated to be understood and valued by less senior employees. Such plans may also require material upfront investment which may not be appropriate for all employees.

3.2 Can overseas employees participate in employee share plans in your jurisdiction?

Overseas employees can participate in employee share plans in the United Kingdom.

Where a plan established by a UK issuer is to be offered to overseas employees, it is common to include one or more separate schedules to the plan rules containing adaptations to the rules and/or award documentation which are necessary or desirable in order to operate the plan in overseas jurisdictions. These schedules typically include:

tax compliance and/or withholding wording appropriate for the relevant jurisdiction;
requirements for tax filings or elections in the relevant jurisdiction;
restrictions on the employees who may participate in the plan in that jurisdiction; and
requirements for securities laws filings or amendments to grant documentation to comply with financial promotion or securities law requirements.

3.3 Can contractors participate in employee share plans in your jurisdiction?

Contractors cannot participate in the statutory tax-qualified plans (CSOPs, EMIs, SIPs and SAYE), as these are restricted to employees.

Contractors may participate in other share plans. However, the following points should be noted:

It is necessary to ensure that the terms of the plan in question are appropriately drafted (eg, the leaver provisions envisage that participants can be contractors).
Where the plan takes advantage of company law or securities law exemptions for employee share plans:
- these will not extend to contractors; and
- the company will need to consider whether another exemption will be available.
Where the plan involves the receipt of benefits from an 'employee benefit trust', contractors will be unable to receive such benefits as they will not be within the class of beneficiaries.
The company should consider whether making awards to contractors might prejudice their status as contractors, rather than employees.
The tax treatment for contractors is likely to be very different from the treatment applicable to employees.

4. Types of plans

4.1 What types of employee share plans are typically offered in your jurisdiction? What factors influence the decision on which plans to offer?

Various distinctions can be made between the different types of employee share plans which may be offered in the United Kingdom:

Some employee share plans (eg, growth shares, restricted shares, jointly owned shares and statutory tax-qualified Share Incentive Plans (SIPs)) involve the acquisition of shares (or an interest in shares) upfront, while others give a right to receive shares (an option or restricted stock unit (RSU)) or a payment calculated by reference to the value of shares (a cash or 'phantom' plan) in due course. The choice between an option-based plan and a share-based plan will typically be based on the following factors:
- whether the issuer company is happy to have employees on its share register and deal with them as shareholders. For example, with a share-based plan if leavers are to lose their shares, it will be necessary to purchase their shares from them, whereas options can simply lapse;
- whether the issuer company would like the participant to make an upfront investment, in which case a share-based plan will generally be more appropriate (although it is possible to pay for the grant of an option); and
- the tax treatment – using options will usually defer the tax point but may mean more tax is ultimately payable. The choice of plan may also affect whether National Insurance contributions (NICs) are payable and whether the operation of the plan will generate a corporation tax deduction.
Some statutory tax-qualified employee share plans (SIPs and SAYE) must be extended to all employees of the issuing company and its designated group companies. They will not be appropriate if only a limited number of employees are to participate. All other plans can be operated on a discretionary basis (unless operated in conjunction with an employee ownership trust).
Where options are offered, they may vest:
- over time;
- on satisfaction of performance conditions; or
- only when an event such as a sale or initial public offering (IPO) occurs (an 'exit-only' option).
Exit-only options will be preferred if the company does not want to have to deal with employee shareholders until an exit – perhaps because of the issues involved in dealing with leavers or managing the 'dry' tax charge which arises on exercise of options in a situation where the option holder cannot sell the resulting shares to cover the tax.

4.2 Share option plans

(a) What option plan structures are available in your jurisdiction?

There are three statutory tax-qualified option plans which are available to issuers with UK employees:

Company Share Option Plans (CSOPs);
Save as you Earn plans (SAYE); and
Enterprise Management Incentive plans (EMIs).

Each of these is subject to a number of qualifying conditions and limitations. Companies which do not satisfy the conditions or wish to grant options in excess of the statutory limits may grant non-tax qualified options.

(b) What are the advantages and disadvantages of each?

Each of the statutory tax-qualified plans gives the potential for income tax (and NIC) free exercise. EMI options may give the additional benefit of a reduced rate of capital gains tax (CGT) when the resulting shares are sold.

CSOP and EMI options may be offered on a discretionary basis to selected employees. Where an SAYE plan is operated, options must be offered to all employees of the issuing company and its designated subsidiaries.

The tax benefits available pursuant to the statutory tax-favoured plans are only available if the options are exercised in accordance with the plan rules and the relevant legislation. In particular:

options granted under a CSOP will only benefit from tax-qualified treatment if the options are exercised:
- more than three years after the date of grant:
- by a good leaver (as defined in the Income Tax (Earnings and Pensions) Act (ITEPA)); or
- in connection with a change of control;
options granted under an SAYE plan will only benefit from tax-favoured treatment if the options are exercised:
- at the end of the three or five-year vesting period;
- by a good leaver (as defined in ITEPA); or
- in connection with a change of control; and
where an SAYE option is exercised early, it may only be exercised to the extent of the savings accrued in the linked savings account.

Where amendments are made to the terms of CSOP, SAYE or EMI options which have already been granted, they may lose their tax-qualified status.

Although non-tax qualified options give rise to income tax and potentially NIC (including apprenticeship levy where applicable) on exercise:

they may be used by any company (with appropriate stakeholder consent);
there are very few restrictions as to the terms and conditions which may be applied to them; and
they can generally be amended (subject to stakeholder consent and the terms of the plan) without tax consequences.

(c) What rules and requirements apply to these structures?

The more material of the rules and requirements applicable to the three statutory tax-qualified plans are set out below. In order to qualify for the tax advantages, the company must:

register the plan with His Majesty's Revenue and Customs (HMRC) by means of an online notification; and
in the case of EMI options, notify the grant of options on or before 6 July in the tax year following the year of grant.

SAYE:

SAYE options may only be offered by:
- companies whose shares are listed;
- companies which are not controlled by another company;
- companies which are controlled by an 'employee ownership trust'; and
- companies which are controlled by a company whose shares are listed and which is not a 'close company' (or would not be close if it were resident in the United Kingdom).
When options are to be granted under an SAYE plan, the issuer company must, broadly speaking, offer all UK resident employees and full-time directors of the issuing company (and its designated group companies) the opportunity to elect to participate on similar terms.
Employees who choose to participate elect to save a fixed amount each month over the course of a three or five-year vesting period in a savings account established in connection with the plan. They are then granted an option with an aggregate exercise price equal to the amount expected to accrue in the savings account. The exercise price must be no lower than a 20% discount to the market value of the shares at the time of grant.
The shares subject to options must be non-redeemable and fully paid (and further requirements apply where the company has more than one class of share).
If the share price is below the exercise price at the end of the vesting period and the option holder chooses not to exercise the option, he or she will receive his or her savings back (plus potentially tax free interest).
The maximum value of shares which may be subject to SAYE options is effectively limited by the fact that the amount of monthly savings is restricted to £500 per month. This means that the maximum value of shares which may be put under option for someone who chooses to save the maximum amount for three years is £22,500 plus accrued interest (assuming that the grant is at the maximum 20% discount).

EMI:

EMI options may only be offered by independent companies – which, broadly, means companies which are not subsidiaries of and are not controlled by another company (although if the company is controlled by a company which is the trustee of an 'employee ownership trust', this does not lead to a loss of independence).
In addition, EMI options may not be granted if there are arrangements in place which may lead to a loss of independence.
EMI options may only be granted by companies which:
- are (or have within their group) trading companies with a permanent establishment in the United Kingdom which carry on a 'qualifying trade'. Certain activities are excluded from being qualifying trades, including banking, insurance, property development and trading in shares and other securities on own account;
- have gross assets of less than £30 million; and
- have fewer than 250 employees (on a full-time equivalent basis).
The following rules apply for groups:
- The issuing company must have only qualifying subsidiaries, meaning that:
- - the EMI company must hold more than 50% of the ordinary share capital of any company which it controls (on its own or with its connected persons);
  - no other person must have control of any such companies; and
  - there must be no arrangements in place by virtue of which either of those requirements would cease to be met.
- If the company does have qualifying subsidiaries, the tests for gross assets and number of employees must be met by the group as a whole.
The maximum value of shares which may be subject to EMI options (based on the value at the time of grant) is limited to £250,000 per person and £3 million in aggregate.
The shares subject to options must be non-redeemable and fully paid (and there must not, at the time of exercise of the option, be any outstanding undertaking to pay cash to the company, meaning that care must be taken where 'cashless exercise' is proposed).
Selected employees and directors can be invited to participate in the plan provided that:
- they work for the company at least 25 hours per week or, if less, at least 75% of their working time; and
- they do not have a 'material interest' in the company which, broadly, means:
- - an interest of 30% or more of the company's ordinary share capital; or
  - an entitlement to more than 30% of its assets on a winding up.

CSOP:

CSOP options may only be offered in respect of shares in companies which are listed or are not controlled by another company (unless such other company is the trustee of an employee ownership trust).
The maximum value of shares which may be subject to CSOP options (based on the value at the time of grant) is £60,000 per person.
CSOP options must not be granted with an exercise price which is below market value.
The shares under option must not be redeemable and must be fully paid up.
Selected employees and full-time directors may be granted CSOP options, provided (similar to EMI options) that they do not have a material interest in the company.

4.3 Share award plans

(a) What award plan structures are available in your jurisdiction?

The main award plan structures are conditional awards/restricted stock units (RSUs) and SIPs.

(b) What are the advantages and disadvantages of each?

They are two very different types of plan.

Conditional awards/RSUs are a simpler alternative to an option, under which shares are provided to the participant automatically on vesting (whereas under an option structure, the participant is required to deliver an exercise form and potentially pay an exercise price). The tax treatment is the same as an option. They may be attractive to the issuer company as there is less administration involved due to the automatic vesting. However, this does mean that the participants are unable to time the acquisition of their shares and therefore the tax charge in the same way they could with an option.

The statutory tax-qualified SIP is an extremely tax efficient, all-employee plan under which employees may be offered the opportunity to receive free shares and/or purchase shares out of their pre-tax salary, which purchase may be linked to an opportunity to receive further free shares (known as 'matching shares'). Following the award, the shares are held on behalf of the participants in an employee trust established for the purpose.

The main advantages of the SIP are the tax benefits. No tax or NICs arise on the acquisition of the shares, whether they are free shares, matching shares or shares purchased out of pre-tax salary. No tax will arise when the shares are taken out of the SIP, provided that they remain in the SIP for at least five years; and for capital gains tax purposes, the base cost of SIP shares is their value when they are taken out of the SIP. Where the shares are taken out of the SIP within five years, some income tax (and potentially NICs) will arise depending on the type of shares held and the length of time they have been in the SIP, as shown in the table below.

	If shares are withdrawn from SIP during first 3 years	If shares are withdrawn from SIP during years 3 to 5	When shares are withdrawn from SIP after 5 years
Purchased shares	Income tax and NICs payable on the market value of the shares when they are withdrawn from the plan. Free and matching shares are generally forfeited if employees leave within three years.	Income tax and NICs payable on the lower of: the pay used to buy the shares; and the market value of the shares when they are withdrawn from plan.	No income tax or NICs payable.
Free and matching shares	Income tax and NICs payable on the lower of the market value of the shares at the time they were acquired; and when they are withdrawn from the SIP.
Dividend shares	Dividends used to buy shares are taxed as a dividend in the year the shares are withdrawn from the plan.	No income tax or NICs payable.

If shares are withdrawn from SIP during first 3 years

If shares are withdrawn from SIP during years 3 to 5

When shares are withdrawn from SIP after 5 years

Purchased shares

Income tax and NICs payable on the market value of the shares when they are withdrawn from the plan.

Free and matching shares are generally forfeited if employees leave within three years.

Income tax and NICs payable on the lower of:

the pay used to buy the shares; and
the market value of the shares when they are withdrawn from plan.

No income tax or NICs payable.

Free and matching shares

Income tax and NICs payable on the lower of the market value of the shares

at the time they were acquired; and
when they are withdrawn from the SIP.

Dividend shares

Dividends used to buy shares are taxed as a dividend in the year the shares are withdrawn from the plan.

No income tax or NICs payable.

The disadvantages of a SIP are as follows:

It must be offered to all employees of the issuing company and its designated group companies;
It is necessary to establish a separate employee trust to operate in conjunction with it (although the terms of such trusts are relatively standard);
The extent to which bespoke leaver, vesting and performance conditions can be applied is limited; and
Statutory annual limits are low and the full tax benefits are only achieved by employees who remain in employment and keep their shares in the SIP for at least five years.

(c) What rules and requirements apply to these structures?

There are no specific rules or requirements for a conditional award/RSU plan. The issuer company has flexibility as to eligibility, vesting period and any performance conditions.

The statutory tax-qualified SIP is subject to various conditions and limitations, the most material of which are as follows:

A SIP must be operated in conjunction with a UK resident trust established by the issuer company. The trust instrument must not contain any terms which are not essential for or reasonably incidental to operating the SIP in accordance with the relevant legislation.
Shares acquired pursuant to a SIP remain registered in the name of the trustee, who holds them on behalf of the employee on the terms of the SIP until such time as the employee can and does remove them from the SIP.
The shares must be fully paid up and non-redeemable.
All UK resident employees and full-time directors of designated group companies must be invited to participate in the SIP on similar terms (although employers have discretion to exclude employees with less than 18 months' service).
The value of shares which may be offered to employees annually is limited to:
- £3,600 of free shares;
- £1,800 of purchased shares (or, if lower, 10% of the employee's salary); and
- £3,600 of matching shares (based on the maximum 2:1 matching ratio).
Like SAYE plans, a SIP may not be operated by a company which is controlled by another company unless the shares that are subject to the SIP or the controlling company's shares are listed (or the controlling company is the trustee of an employee ownership trust).
Free shares and matching shares must be retained in the SIP for a holding period of at least three years.
Shares must be taken out of the SIP when the participant ceases to be employed by the issuer (or a group company).
HMRC must be given notice of the establishment of a SIP for it to qualify for the tax advantages.

4.4 Share purchase plans

(a) What share purchase plan structures are available in your jurisdiction?

A number of employee share plans involve the acquisition of shares (or an interest in shares), whether free or for consideration, on terms that restrict the ability to sell the shares until:

the expiry of a vesting period;
completion of an initial public offering; or
a sale or change of control of the issuer company.

Such plans will generally include leaver provisions under which employees who cease to be employed while they hold the shares can be required to sell them at a price which typically depends on:

the reason for their departure; and
the length of time they have held the shares.

Examples of such plans include the following:

Growth share plans: A growth share plan involves the creation of a separate class of share which only participates in future growth in value above a 'hurdle' which is set when the growth shares are issued. For example, a company whose ordinary shares are worth £100 million in aggregate may create a class of growth share which collectively participates in 10% of the equity value in excess of £125 million. Alternatively, the hurdle could be set at £100 million initially but increase at, say, 8% per annum.
Forfeitable shares: Where the value of the issuer company's ordinary shares is sufficiently low that employees can afford to acquire them by paying (or paying tax on) the market value – for example, in a startup or early stage company – the company may simply give employees the opportunity to acquire shares which rank pari passu with its ordinary shares but are subject to vesting and leaver provisions (whether included in the share rights by creating a separate class of shares or simply included in a subscription or shareholders' agreement).
'Sweet equity': Private equity owned companies typically operate management incentive plans under which senior employees purchase ordinary shares alongside the private equity investor. The private equity investor will provide most of its funding in the form of loan notes or preference shares, which (in each case) rank ahead of the ordinary shares but deliver only a fixed percentage return on its investment. The result of this debt (or debt-like) funding (together with any third-party debt) is generally that the ordinary shares have a low initial value but with the potential, due to the gearing effect, to deliver high multiples of the amount invested if the company's growth and cash flow are sufficient to repay the debt together with the accrued interest.

A SIP under which employees are offered the opportunity to purchase 'partnership shares' is also a 'share purchase plan'. Many SIPs are operated on the basis that only partnership shares are offered, as this is a low-cost way of offering employees a tax-efficient way of investing in the company. See question 4.3(e) for the advantages and disadvantages of SIPs.

(b) What are the advantages and disadvantages of each?

From a tax perspective, these plans (other than the SIP) are similar. Provided that the participant pays the unrestricted market value for the shares at the time of acquisition:

no income tax or NICs will arise at that time; and
the gain realised when the participant sells the shares (the proceeds of sale less the acquisition cost) should be subject to CGT (the rates of which are generally lower).

(c) What rules and requirements apply to these structures?

There are no specific rules that apply to any of these structures and each gives scope for flexibility as to the commercial terms. The key is that the shares have a sufficiently low value to be affordable while still being perceived as an attractive incentive.

4.5 Phantom share plans

(a) What phantom share plan structures are available in your jurisdiction?

There are no structures prescribed by statute – companies have flexibility to design a bespoke plan which suits their commercial requirements. Typically, phantom plans pay out based on:

the value of a share at the relevant date (a phantom share plan); or
the value above a notional exercise price (a phantom option plan).

(b) What are the advantages and disadvantages of each?

A phantom option plan will only pay out if the value of the company's shares increases above the exercise price, so is more focused on growth. Although there is a risk that a phantom option plan may become 'underwater' and therefore lose incentive/retention effect, phantom option plans can generally be amended without any negative tax consequences.

The main advantage of phantom plans in general is that they are flexible and easy to implement and amend. The main disadvantages are the tax treatment and the fact that the employee does not become a shareholder and may therefore feel the plan is less attractive.

(c) What rules and requirements apply to these structures?

There are no specific rules or requirements applicable to phantom plans.

4.6 What other types of long-term incentives are available in your jurisdiction? What are the advantages and disadvantages of each?

A company could fund an employee benefit trust to acquire shares or other assets which will be held for the benefit of current and former employees (and their dependants) on the basis that the trustee may from time to time choose to allocate value to beneficiaries whom it determines should receive awards (usually following a recommendation from or discussion with the settlor company). Any value received by UK beneficiaries will as a general rule be subject to income tax and NICs deducted via PAYE.

Consideration should be given as to the accounting treatment and the extent to which a corporation tax deduction may be claimed in respect of the operation of the employee benefit trust. It is also necessary to manage the trust carefully to ensure that tax charges do not arise as a result of an 'earmarking charge' under the 'disguised remuneration' legislation in Part 7A of ITEPA before payments out are made from which the tax may be deducted.

4.7 What rules and requirements apply to discretionary plans? In the case of recurring discretionary plans, is it possible to argue under any circumstances that these have become mandatory contractual entitlements?

Save for certain statutory tax-qualified plans which must be extended to all employees, employee share plans may be offered on a discretionary basis to selected employees. Where that is done, the employer must take care to ensure that:

the selection process is reasonable; and
the criteria used do not discriminate against any employees with protected characteristics (eg, age or sex).

It is possible for participants to argue that they have a contractual right to be considered for participation in or receive awards under an employee share plan, even though they have no express right to participation under the terms of the plan or their employment contract. The argument, which has succeeded in the UK courts on a limited number of occasions, would be that the facts and circumstances give rise to an implied contractual right.

4.8 Are any types of plans prohibited in your jurisdiction?

There are no UK laws that expressly prohibit the use of any particular employee share plan.

5. Awards

5.1 Can awards involve the following features in your jurisdiction? What key concerns and considerations should be borne in mind in relation to each?

Deferral: It is generally possible in the United Kingdom to include provisions in employee share plans under which:

the participant can decide to defer the receipt of shares or cash; or
the delivery of shares or cash is automatically deferred for a period after the vesting and performance conditions have been satisfied.

The income tax and National Insurance contribution (NIC) charge will generally be deferred until the participant receives the shares or becomes entitled to payment of the cash, with the tax rates applicable being the rate at that time. However, care is required for participants who are directors, as their tax liability may arise earlier. In addition, the company should consider the accounting implications of deferring awards, including how and when to recognise the expense.

Performance or time-based vesting conditions: Time-based vesting is common. Companies whose shares are illiquid need to consider how participants will pay the exercise price and/or the 'dry' tax charges which may arise when they acquire shares on vesting or exercise and are unable to sell them.

It is possible to include performance conditions in all employee share plans, subject to certain restrictions in the case of statutory tax-qualified Save as You Earn plans and Share Incentive Plans.

There are no general legal restrictions on the types of vesting or performance conditions which may be used. However, the following points should be noted:

Listed companies will have regard to best practice as reflected in any relevant corporate governance guidelines.
In the context of Share Incentive Plans or awards made in conjunction with employee ownership trusts, the performance conditions must be operated on the basis that all employees participate on similar terms.
The Prudential Regulatory Authority (PRA)/Financial Conduct Authority (FCA) remuneration regulatory regimes can impose strict rules around the timing of vesting and deferral of payments (see question 1.2).

Care should be taken where performance conditions are used in the context of statutory tax-qualified plans (or where the conditions are built into share rights), as a waiver or amendment of the condition may:

result in the loss of the tax-qualified treatment; or
give rise to a tax charge at the time of the amendment.

Leaver provisions: It is usual to include leaver provisions in all employee share plans. There are no restrictions in the United Kingdom on the commercial terms which may be included. For example, leavers may as a general rule be required to forfeit shares for no consideration (although of course participants who are within the company's definition of 'good leaver' would usually get better treatment than that).

In the context of the statutory tax-qualified plans, certain leavers will receive better tax treatment than others (assuming that the terms of the plan provide for them to receive value in that situation). For example, the holder of a Company Share Option Plan option who exercises it within three years of grant in a situation where he or she has ceased to be an employee due to retirement may benefit from income tax-free exercise (whereas someone who resigns for other reasons would not).

From an employment law perspective:

leaver terms should not be drafted or operated in a discriminatory manner; and
the use of discretion in connection with leaver provision should be exercised carefully (see question 9.4).

Forfeiture: Forfeiture provisions are generally permitted under UK law; although where the forfeiture is a consequence of a breach of contract, there may be an argument that it is a penalty and therefore not enforceable.

Where the employee paid or was taxed on the unrestricted market value of the shares – that is, the value ignoring restrictions such as forfeiture provisions – he or she will have paid tax in respect of the shares which he or she will be unable to recover if the forfeiture provisions are ultimately triggered (although that will likely result in a capital loss which may be offset against other capital gains).

Post-vesting/post-employment holding periods: Listed companies:

are generally expected to require participants in their discretionary share plans to hold shares for a period after their award vests; and
will generally have requirements for executives to retain some shares post-employment.

Income tax and NICs will generally be payable on the exercise of options or vesting of conditional awards/RSUs. Therefore, either:

the participant should be given the ability to sell sufficient shares to pay the tax; or
the award should be structured such that shares are not actually delivered until the end of the holding period (deferring the tax charge).

Malus and clawback provisions: Companies which are subject to the remuneration regulatory regimes of the FCA and/or the PRA are likely to be required to include:

malus provisions, under which awards lapse:
- in the event of misconduct by the participant;
- in the event of risk management failures; or
- in certain other circumstances; and
clawback provisions, under which amounts received pursuant to share plan awards must be repaid in similar circumstances.

It is usual for listed companies to include similar provisions, particularly in relation to awards made to executive directors as required under the UK Code of Corporate Governance. Although under no requirement to do so, it is now increasingly common for other companies to consider including malus and clawback in their share plans for commercial reasons.

Loans provided to employees in connection with the employee share plan: Loans are commonly provided to employees to:

fund the acquisition of shares or the payment of the exercise price; or
pay tax arising in connection with the operation of a share plan.

Where loans are to be provided to employees, it is necessary to consider tax, company law and regulatory issues.

Tax: If the loan is at an interest rate which is lower than the His Majesty's Revenue & Customs official rate from time to time (currently 2.25% per annum), it will potentially give rise to income tax for the employee and NICs or the employer. Further tax consequences may arise where:

the company is 'close' for tax purposes; or
the loan is made by a third party (which should generally be avoided).

See question 7 for further details.

Company law: For listed companies, the company law restrictions on financial assistance must be considered. Whether or not the company is listed, it may also have to obtain shareholder consent for a loan to a director.

Regulatory issues: If a company proposes to make loans, or extend credit in some other way, to its employees for any purpose, it will need to consider whether those loans involve entering into a regulated credit agreement as lender by way of business in the United Kingdom.

Unless an exemption from the consumer credit regime applies, the company will need to:

comply with various requirements relating to the form of the agreement and the provision of the loan; and
consider whether it would need to be authorised by the FCA to provide consumer credit.

The exemptions include:

agreements extending credit to high-net-worth individuals;
low interest rate agreements which satisfy certain criteria; and
interest-free loans with a limited number of repayments.

6. Formal and regulatory requirements

6.1 What reporting, filing or other administrative requirements apply to (a) the rollout of and (b) participation in an employee share plan?

Company law:The establishment and operation of an employee share plan may give rise to the need to:

make filings at Companies House; and
update the issuing company's statutory registers – for example, in relation to the creation and issue of shares.

Accounting: The costs associated with the operation of an employee share plan must generally be reflected in the issuing company's accounts and certain details of awards may have to be specifically disclosed.

Tax: The employer company must notify His Majesty's Revenue & Customs (HMRC) when a new employee share plan is adopted. There is then an annual obligation on the employer to complete and submit a share plan return online to HMRC giving details of any grants and other reportable events (even if no such events have occurred). The annual return must be completed by no later than 6 July each year.

On the establishment of a Company Share Option Plan, a Share Incentive Plan or a Save as You Earn plan, the notice to HMRC must include a declaration that the plan complies with the relevant statutory requirements.

In the case of Enterprise Management Incentive options, a failure to notify grants to HMRC using the appropriate notification form by 6 July in the tax year after they were granted will result in loss of the preferential tax treatment from which they would otherwise benefit.

It is generally possible to agree a valuation with HMRC in connection with the grant of tax-qualified options and awards.

Where the shares acquired are 'readily convertible assets' (RCAs), Pay as Your Earn will apply, meaning that the employer company will be responsible for:

accounting to HMRC in respect of any income tax and employee National Insurance contributions (NICs) which arise; and
paying to HMRC any employer NICs and apprenticeship levy.

will generally be RCAs where they are listed or traded on a stock exchange or there are other arrangements in existence (or likely to come into existence) under which they may be sold; and
will be deemed to be RCAs if they are not corporation tax deductible.

The result of this deeming provision is that shares in a company which is controlled by another company will generally be RCAs.

Where tax is payable under self-assessment – for example, on any gain arising on a sale at market value of shares acquired pursuant to an employee share plan – it will be the employee's responsibility to include the details in his or her self-assessment tax return.

6.2 What formal and substantive requirements apply to (a) the rollout of and (b) participation in an employee share plan?

Company law: The establishment and operation of an employee share plan:

should be approved by the company's directors; and
may also require shareholder approval under the company's constitution or company law.

This may require:

the preparation and circulation of an explanatory circular; and
a notice convening a general meeting or a shareholders' resolution.

The establishment and operation of an employee share plan may give rise to the need to:

make filings at Companies House; and
update the issuing company's statutory registers – for example, in relation to the creation and issue of shares.

Tax: Where the underlying shares are RCAs, the employer company will be required to pay to HMRC an amount equal to the amount of income tax and employee NICs which arise in respect of awards. Such payments must be made by the 22nd day of the next tax month. Further tax may arise unless the company recovers the amount paid from the employee, whether by deducting from salary payments or otherwise.

Regulation and other consents: The securities laws and other regulations relating to the offer of shares to the public, the other transactions in shares which occur in the context of the plan and the communications published in relation to them are dealt with in question 10.

In certain sectors (eg, financial services), there are regulatory requirements around the acquisition of certain levels of shareholdings and rules around remuneration which impact on the operation of employee share plans.

The issuing company should also consider whether it is subject to any contractual restrictions which would impact on the establishment and operation of an employee share plan – for example, in a shareholders' agreement or financing documents.

Where the company has a works council or arrangements with unions, consultation with employees and/or their representatives may be required.

7. Tax And Social Security Issues

7.1 What are the tax and social security implications for the company:

(a) On grant or award?

Share options and conditional awards/restricted stock unit (RSUs): No liability to account for income tax or NICs under Pay as You Earn (PAYE) will generally arise for the employer in respect of the grant of an employment-related share option or RSU award.

Where the option is not over new issue shares and is to be granted or satisfied by a third party (ie, not the employer), it will be necessary to consider its capital gains tax (CGT) position and the disguised remuneration regime, which can impose income tax and NIC liabilities at the time of grant, on the basis that shares are 'earmarked' for the option holder. Exemptions may be available and it may in any case be possible to ensure no earmarking arises by 'blind hedging', which involves ensuring that the third party is not aware of the identity of the option holder.

Share plans: Where an employee acquires shares under a share plan (generally, in the employer company or its parent company) by reason of the employment and the shares are readily convertible assets (RCAs) (see question 6.1), the employer will be liable to account for employment income tax and for employee and employer NICs (and apprentice levy where applicable), on earnings under PAYE – generally on the amount (if any) by which the market value of the shares exceeds the price paid for them by the employee. If the shares are growth shares, their initial market value will be substantially diminished by their being excluded from the value in the company below the hurdle.

If the shares are restricted shares, the reference to market value is a reference:

to actual market value (taking account of the restrictions); or
if the employee and the employer make a joint election under Section 431 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) (a 'Section 431 election'), to unrestricted market value (ie, what the market value of the shares would be if they were not subject to restrictions).

If the employee does not, within 90 days of the end of the tax year in which the shares are acquired (4 July in the next tax year), 'make good' to the employer (typically, by reimbursement, although it may be sufficient to have given an indemnity under which he or she agrees to pay any such amount), the amount of PAYE income tax for which the employer has had to account to His Majesty's Revenue & Customs (HMRC), that amount is treated as earnings from the employee's employment and, accordingly, the employer is liable to account for employer and employee NICs on the deemed earnings under PAYE. It is therefore important that share plans include provisions requiring the employee to put the company in funds to pay the income tax (and employee NICs) which arises.

If existing shares are transferred to the employee under the share plan (eg, by an employee benefit trust), the transferor will be treated as disposing of the shares, for CGT purposes, for a consideration equal to their market value. The transferor will, therefore, realise a chargeable gain or incur an allowable loss depending on whether the market value of the shares exceeds or falls short of the transferor's CGT base cost in the shares.

If the grantor issues new shares to the employee, there will be no CGT implications, as it will not be treated as making a disposal of the shares for CGT purposes.

As an exception to the general rule, where the shares acquired are subject to forfeiture provisions (or provisions for compulsory transfer for less than market value) which fall away within five years of acquisition and no election is made, the income tax (and NIC) charge will generally be deferred until the forfeiture provisions fall away. When the forfeiture provisions fall away or, if earlier, the employee sells the shares, income tax and NICs will be charged (assuming that there was no acquisition cost) on the unrestricted market value of the shares at that time, less (in the case of a charge when the forfeiture provisions fall away) the value of any outstanding restrictions.

(b) On vesting (which, for an option, means the option becoming exercisable)?

Share options and conditional awards/RSUs: No liability to account for income tax or NICs under PAYE arises for the employer in respect of the vesting of an employment-related share option (and no liability arises in respect of a conditional award/RSU until the shares are acquired in accordance with its terms).

Share plans: The vesting of restricted shares acquired by an employee can have employment income tax and NIC implications for the employer. These are dealt with at question 7.1(d).

(c) On the exercise of a share option or vesting of a conditional award/RSU?

Where shares which are RCAs are acquired pursuant to the exercise of an employment-related share option by an employee or in accordance with the terms of a conditional award/RSU, the employer will be liable to account for employment income tax and employer and employee NICs, under PAYE on an amount equal to the market value, or a best estimate of the market value, of the shares, less the exercise price and certain 'deductible amounts', including any amount paid to acquire the option and any employer NICs recovered from the employee (which is possible in the case of options and conditional awards/RSUs, contrary to the usual prohibition, provided this is agreed and documented in the plan or other award documentation).

However, in computing the amount liable to NICs, there is no deduction for any amount of employer's NICs recovered from the employee; and, if the employee and employer jointly make a Section 431 election for relevant restrictions to be disregarded in valuing the shares acquired, the charge to employment income tax and NICs will be on the unrestricted market value of the shares.

The employer must deduct the employment income tax and NICs payable on the share acquisition from payments to the employee of other cash earnings in the same tax month. To the extent that the employee's cash earnings of the same tax month are insufficient to discharge the employment income tax and NICs payable under PAYE on the share acquisition in full, the employer must account to HMRC under PAYE for the residual employment income tax and NICs. It is therefore important that the plan includes provisions requiring the employee to put the company in funds to pay the income tax and employee NICs which arise.

If the employee does not, within 90 days of the end of the tax year in which the shares are acquired (4 July in the next tax year), 'make good' to the employer (typically by reimbursement – although it may be possible to protect against this additional tax by entering into an appropriate indemnity) the amount of PAYE income tax which the employer should have withheld, that amount is treated as earnings from the employee's employment and, accordingly, the employer is liable to account for employer and employee NICs on the deemed earnings under PAYE.

If, on an employment-related share option being exercised by the employee, the shares are transferred by a third party such as an employee benefit trust or a shareholder, CGT may be payable by the transferor. If the employer issues new shares to the employee, there will be no CGT implications for the employer, as it will not be treated as disposing of the shares for CGT purposes.

(d) On the holding of shares acquired under a share plan or a share option?

Restricted securities regime: The restricted securities regime applies to restricted shares acquired by an employee by reason of employment and imposes charges to employment income tax and NICs on chargeable events during the employee's holding of the shares, including the vesting of the shares.

Where the shares are RCAs and their initial unrestricted market value exceeds the amount paid by the employee for the shares plus the amount charged to tax as earnings in respect of the acquisition (the 'excess amount'), the employer will be liable to account for employment income tax, and employer and employee NICs, under PAYE on its estimate of the proportion of the unrestricted market value of the shares at vesting that the excess amount bears to the initial unrestricted market value of the shares. For instance, if:

the shares have an initial restricted market value of £80 and an initial unrestricted market value of £100 (so the restriction discount is 20%),
the employee does not pay for the shares and, accordingly, is liable to an earnings charge on £80 on the acquisition of the shares, and
the unrestricted market value of the shares is £200 at vesting,

there will be a restricted securities charge on £40 (£200 x 20%) on vesting.

However, the employer and the employee can jointly elect, when the shares are acquired, for the employee to pay employment income tax (and, if the shares are RCAs, employee NICs) on the acquisition of the restricted shares by reference to their initial unrestricted market value. The charging provisions of the restricted securities regime do not apply if the employer and employee make a Section 431 election, in the form prescribed by HMRC, before or within 14 days after the employee acquires beneficial ownership of the shares. Furthermore, whether or not a Section 431 election is made, no tax will arise under the restricted securities regime if the employee paid at least the unrestricted market value for the restricted shares.

Post-acquisition benefits from employment-related shares: If an employee receives a benefit in connection with employment-related shares, the employer will, if the shares are RCAs or the benefit is in the form of cash or RCAs, be liable to account for employment income tax, and employer and employee NICs, under PAYE on its estimate of the amount or market value of the benefit under the post-acquisition benefits regime. 'Benefit' connotes some reward, advantage or bounty and, in HMRC's view, may include an operation by which the value of an employee's employment-related shares is enhanced (eg, by amendments to the articles of the issuing company). The regime does not apply to a benefit that is otherwise chargeable to income tax, unless tax or NICs avoidance is involved.

Employment income tax (and potentially NICs) may also arise where the value of employment-related shares is increased (by more than 10%) by something which is done otherwise than for genuine commercial purposes.

(e) On the disposal of shares acquired under a share plan or a share option?

Disposal of employment-related shares for consideration exceeding their market value: If an employee disposes of employment-related shares for consideration exceeding their market value at that time, and the shares are RCAs or the consideration for the sale is cash or an RCA, the employer will be liable to account for employment income tax, and employer and employee NICs, under PAYE on an amount equal to its estimate of the amount of the excess under the 'disposal for more than market value' regime. A typical example is where:

the employee has a right (outside the terms attaching to the shares) to sell the shares for a fair value or net asset value price without any discount for lack of control or illiquidity; and
if the shares were available for sale in the open market, they would not sell for a price that disregarded that kind of discount.

(f) In relation to any loans provided to participants within the framework of the employee share plan?

Loans to participators: Where a closely controlled company makes a loan or advances money to an employee who is a participator in the company (typically, a shareholder), there is due from the company to HMRC, as if it were an amount of corporation tax chargeable on the company, an amount equal to such percentage of the amount of the loan or advance as corresponds to the dividend upper rate. The tax is payable nine months after the end of the accounting period in which the loan is made, unless the loan has been repaid by then. The amount paid by the closely held company to HMRC is repayable if and when the loan or advance to the participator is repaid or released.

Beneficial loans: Where a beneficial loan is made to an employee, the benefit of the loan is treated as earnings from the employee's employment and, accordingly, the employer is liable to account for employer NICs on the amount of the benefit. A loan is a beneficial loan if the amount of interest that would have been payable on the loan for a tax year at HMRC's official rate exceeds the amount of interest (if any) actually paid by the employee on the loan for that year. The amount of the benefit that is treated as earnings is equal to the amount of that excess. The following are treated as not being beneficial loans:

certain loans on ordinary commercial terms;
certain fixed-term loans at a fixed rate of interest; and
certain loans the interest on which qualifies for tax relief.

There is also an exclusion for loans made to an employee in an aggregate amount of less than £10,000.

The employer will be liable to income tax or corporation tax on any interest received on a loan that it makes to the employee.

Waiver of loans: The waiver or release of an employment-related loan will generally result in the employee becoming liable to income tax on the amount waived, in which case employer NICs will also generally be payable.

Disguised remuneration: Where a person other than the employer or a group company makes an employment-related loan, the disguised remuneration regime may apply.

Where the disguised remuneration regime applies to the making of a loan, the employer is liable to account for employment income tax and employer and employee NICs under PAYE on the full amount of the loan. As the disguised remuneration regime is an anti-avoidance regime, there is no refund of the income tax or NICs if or when the loan is repaid. The disguised remuneration charge does not, however, apply to a loan that falls within an exemption for qualifying loans made on commercial terms by banks or other commercial lenders.

7.2 What are the tax and social security implications for participants:

(a) On grant or award?

Share options and conditional awards/RSUs: No liability to employment income tax or NICs arises for the employee in respect of the grant of an employment-related share option. There are also no CGT implications for the employee at this stage, except that any consideration paid for the option will form part of the employee's CGT base cost in the shares acquired on exercise of the option.

Share plans: Where an employee acquires shares in the employer company or its parent company by reason of the employment, the employee will be liable to employment income tax, and (if the shares are RCAs) to employee NICs, generally charged on the amount (if any) by which the market value of the shares exceeds the price paid for them by the employee. If the shares are growth shares, their initial market value will be substantially diminished by their being excluded from the value in the company below the hurdle.

If the shares are restricted shares, the reference to market value is a reference:

to actual market value (taking account of the restrictions); or
if the employee and the employer make a joint Section 431 election, to unrestricted market value (ie, what the market value of the shares would be if they were unrestricted).

If the employee does not, within 90 days of the end of the tax year in which the shares are acquired (4 July in the next tax year), 'make good' to the employer (typically, by reimbursement) the amount of PAYE income tax for which the employer has had to account to HMRC, that amount is treated as earnings from the employee's employment and, accordingly, employment income tax and employee NICs are payable by the employee on the deemed earnings. It is generally possible to protect against this tax charge arising where the employee enters into an appropriate indemnity under which he or she agrees to put the employer in funds to pay the PAYE.

Where an employee acquires shares by reason of employment, the employee's base cost in the shares, for CGT purposes, will be:

the actual amount or value given for the shares (assuming that this does not exceed their market value); plus
any amount that constituted earnings in respect of the acquisition.

This will mean that the base cost is generally market value or, in a case where a Section 431 election is made, unrestricted market value.

(b) On vesting (which, for an option, means the option becoming exercisable)?

Share options and conditional awards/RSUs: No liability to employment income tax or NICs arises for the employee in respect of the vesting of an employment-related securities option. When a conditional award/RSU vests, the shares will be delivered and tax will arise, as set out in question 7.2(c) below.

Share plans: The vesting of restricted shares can have employment income tax and NIC implications for the employee. These are dealt with at question 7.2(d) below.

(c) On the exercise of a share option or conditional award/RSU?

Where shares are acquired by an employee pursuant to the exercise of an employment-related share option or the vesting of an RSU, the employee will be liable to employment income tax, and (if the shares are RCAs) to employee NICs, on an amount equal to the market value of the shares, less the exercise price and certain 'deductible amounts' (including, in respect of income tax but not NICs, any amount paid to acquire the option and any employer's NICs recovered from the employee).

However, if the employee and employer jointly make a Section 431 election for relevant restrictions to be disregarded in valuing the shares acquired, the charge to employment income tax and NICs will be on the unrestricted market value of the shares.

If the employee does not, within 90 days of the end of the tax year in which the shares are acquired (4 July in the next tax year), 'make good' to the employer (typically, by reimbursement) the amount of the PAYE income tax for which the employer has had to account to HMRC, that amount is treated as earnings from the employee's employment and, accordingly, employment income tax and employee NICs are payable by the employee on the deemed earnings.

The acquisition by the employee of shares pursuant to the exercise of an employment-related share option will determine the employee's base cost in the shares for CGT purposes. This base cost is equal, broadly, to:

any actual consideration given for the option;
the actual exercise price payable under the option; and
any amount counting as employment income by virtue of the acquisition of the option shares (including, therefore, any increase in that amount by virtue of a Section 431 election in relation to restricted shares).

(d) On the holding of shares acquired under a share plan or a share option?

Where the initial unrestricted market value of the shares exceeds the amount paid by the employee for the shares plus the amount charged to tax as earnings in respect of the acquisition (the 'excess amount'), the employee will be liable to employment income tax and, if (if the shares are RCAs) to employee NICs on the proportion of the unrestricted market value of the shares at vesting that the excess amount bears to the initial unrestricted market value of the shares. For instance, if

the shares have an initial restricted market value of £80 and an initial unrestricted market value of £100 (so the restriction discount is 20%),
the employee does not pay for the shares and, accordingly, is liable to an earnings charge on £80 on the acquisition of the shares, and
the unrestricted market value of the shares is £200 at vesting,

there will be a restricted securities charge on £40 (£200 x 20%) on vesting.

However, the employer and the employee can jointly elect, under Section 431 of ITEPA, for the employee to pay employment income tax and, if the shares are RCAs, employee NICs on the acquisition of the restricted shares by reference to their unrestricted market value. The charging provisions of the restricted securities regime do not apply if the employer and employee make a Section 431 election, in the form prescribed by HMRC, before or within 14 days after the employee acquires beneficial ownership of the shares. Furthermore, the charging provisions of the restricted securities regime do not apply if the employee pays unrestricted market value for the restricted shares.

Post-acquisition benefits from employment-related shares: If an employee receives a benefit in connection with employment-related shares, the employee will be liable to employment income tax, and (if the shares are RCAs) employee NICs, on the amount or market value of the benefit under the post-acquisition benefits regime. 'Benefit' connotes some reward, advantage or bounty and, in this context, is thought by HMRC to include an operation by which the value of an employee's employment-related shares is enhanced (eg, by amendments to the articles of the issuing company). The regime does not apply to a benefit that is otherwise chargeable to income tax, unless tax or NIC avoidance is involved.

Where an amount is charged to tax under the post-acquisition benefits regime in respect of an enhancement in the value of an employee's shares, it is added to the employee's CGT base cost in the shares.

(e) On the disposal of shares acquired under a share plan or a share option?

Disposal of employment-related shares for consideration exceeding their market value: If an employee disposes of employment-related shares for consideration exceeding their then market value, the employee will be liable to income tax, and (if the shares are RCAs or the consideration is cash or an RCA) employee NICs, on an amount equal to the excess under the 'disposal for more than market value' regime. A typical example would be where:

the employee has a right (outside the terms attaching to the shares) to sell the shares for a fair value or net asset value price without any discount for lack of control or illiquidity; and
if the shares were available for sale in the open market, they would not sell for a price that disregarded that kind of discount.

CGT: The employee will be liable to CGT, or will be entitled to an allowable loss for CGT purposes, on the disposal of the shares depending on whether the amount or value of the consideration for the disposal exceeds or falls short of the employee's base cost in the shares.

If the 'disposal for more than market value' regime applies to the disposal, the amount charged to tax under that regime will be deducted from the amount or value of the consideration for the disposal as calculated for CGT purposes.

(f) In relation to any loans provided to them within the framework of the employee incentive scheme?

Beneficial loans: Where a beneficial loan is made to an employee, the benefit of the loan is treated as earnings from the employee's employment and, accordingly, the employee will be liable to employment income tax (but not employee NICs) on the amount of the benefit. A loan is a beneficial loan if the amount of interest that would have been payable on the loan for a tax year at HMRC's official rate exceeds the amount of interest (if any) actually paid by the employee on the loan for that year. The amount of the benefit that is treated as earnings is equal to the amount of that excess. The following are treated as not being beneficial loans:

certain loans on ordinary commercial terms;
certain loans at a fixed rate of interest; and
certain loans the interest on which qualifies for tax relief.

There is also an exclusion for loans made to an employee in an aggregate amount of less than £10,000.

In certain limited cases, the employee will be entitled to income tax relief in respect of interest paid on an employment-related loan. Where tax is charged in respect of interest which is ultimately paid (because the interest 'rolled up'), it may be possible to reclaim it.

Waiver of loans: The waiver or release of an employment-related loan will generally result in the employee becoming liable to income tax on the amount waived.

Disguised remuneration: Where a person other than the employer or a group company makes an employment-related loan, the disguised remuneration regime may apply.

Where the disguised remuneration regime applies to the making of a loan, the employee is liable to employment income tax and employee NICs on the full amount of the loan. As the disguised remuneration regime is an anti-avoidance regime, there is no refund of the income tax or NICs if or when the loan is repaid. The disguised remuneration charge does not, however, apply to a loan falling within an exemption for qualifying loans made on commercial terms by banks or other commercial lenders.

Withholding tax: In certain cases, an employee may have to deduct income tax from payments of interest on employment-related loans – typically where the interest is paid to a non-UK resident lender that is not entitled to treaty relief.

7.3 What other key concerns and considerations in relation to employee share plans should be borne in mind from a tax perspective (eg, corporation tax deductions)?

Corporation tax relief for share-based remuneration: An employer company is entitled to statutory corporation tax relief where an employee acquires shares (either directly or under a share option) by reason of employment. The relief is only available if:

the employer company carries on a business and is within the charge to corporation tax in respect of it;
the shares acquired by the employee are ordinary shares that are fully paid-up and not redeemable;
the shares are:
- listed on a recognised stock exchange;
- shares in a company that is not under the control of another company; or
- shares in a company that is under the control of a listed company;
the shares are in the employer company or in one of certain associated companies; and
broadly, the employee is within the charge to employment income tax in relation to the shares.

Shares in investee companies that are controlled by private equity fund partnerships are generally excluded from this corporation tax relief, as they will be controlled by the corporate general partner.

The amount of the relief is, broadly, the amount on which the employee is liable to employment income tax on the acquisition of the shares. The relief is given as:

a deduction in calculating the profits of the employer company's qualifying business for corporation tax purposes; or
an expense of management of an investment business.

Stamp duty: Stamp duty is payable on instruments that transfer shares in a UK-incorporated company on sale, generally at 0.5% of the amount or value of the consideration paid.

Stamp duty reserve tax is charged on agreements to transfer shares in UK-incorporated companies at the rate of 0.5% of the amount or value of the consideration for the transfer. This tax mainly applies to shares that are not transferred by an instrument (eg, shares held in CREST), but the charge potentially applies to all sales of shares in UK-incorporated companies. The charge will generally be cancelled by duly stamping the instrument of transfer, if the sale is completed by transfer.

8. Corporate governance issues

8.1 What corporate governance rules and requirements apply to employee share plans in your jurisdiction?

In the United Kingdom, corporate governance rules and requirements for employee share plans are primarily governed by a combination of:

statutory regulations;
listing rules; and
best practice guidelines.

Key elements include the following:

Companies Act 2006: This is the primary piece of legislation governing company law in the United Kingdom. It includes provisions on directors' duties and shareholder rights.
Listing Rules: For companies listed on the London Stock Exchange, the Listing Rules require shareholder approval for certain share schemes, particularly those involving the issuance of new shares or the transfer of treasury shares. This ensures transparency and protects shareholder interests.
UK Corporate Governance Code: This code, which applies to premium listed companies, includes principles and provisions on remuneration, including the use of share-based incentives. It emphasises the need for alignment between executive remuneration and long-term company performance. It operates on a 'comply or explain' basis. This means that companies should either comply with the principles or explain why they have chosen not to do so.
Market Abuse Regulation and UK Market Abuse Regulation: This regulation (originally an EU regulation but now adopted in the United Kingdom as retained EU law) applies to companies with shares and other financial instruments listed on a UK or an EU-regulated market. It includes important provisions on dealing restrictions and dealing disclosure in relation to listed financial instruments (including prohibitions on insider dealing and market manipulation) which are relevant to the operation of share plans by listed companies.
Investment Association Principles of Remuneration: These principles, which are aimed at companies with shares listed on the London Stock Exchange main market, include key guidelines on the structure and terms remuneration which they expect listed companies to comply with. The principles are mainly focused on awards for executive directors but also cover more broad-based shares plans. Various other bodies publish similar guidelines, such as:
- the Legal & General Investment Management UK Executive Pay Principles;
- the Pension and Lifetime Savings Association Corporate Governance Policy and Voting Guidelines; and
- Hermes Management's Remuneration Principles.
Wates Corporate Governance Principles: These non-statutory guidelines were introduced in December 2018 to provide a framework for good corporate governance for large private companies in the United Kingdom. Private companies are encouraged to adopt the Wates Principles on a 'comply or explain' basis. The principles are designed to be flexible and can be adapted to suit the specific circumstances of each company.

8.2 What other key concerns and considerations in relation to employee share plans should be borne in mind from a corporate governance perspective?

When implementing and managing employee share plans, companies should consider the following key issues from a corporate governance perspective:

Alignment with corporate strategy: Employee share plans should be designed to align with the company's overall strategy and long-term goals. This includes ensuring that the performance conditions attached to share awards are relevant and challenging.
Shareholder approval and communication: Obtaining shareholder approval for share plans, where required, and maintaining clear communication with shareholders about the purpose and benefits of the plans are crucial. Transparency helps to build trust and support for the plans.
Fairness and inclusivity: Companies should ensure that share plans are fair and inclusive, offering opportunities to a broad range of employees rather than just senior executives. This can help to foster a sense of ownership and alignment with the company's success across the workforce.
Regulatory compliance: Adherence to all relevant regulations – including those related to insider trading, disclosure and tax – is essential. Non-compliance can lead to legal and reputational risks.
Tax compliance and valuation: Accurate valuation of shares is essential for tax purposes, especially when granting options or awarding shares. Private companies may need to obtain professional valuations to ensure compliance with tax regulations.
Remuneration committee oversight: The remuneration committee should have a clear mandate to oversee the design, implementation and monitoring of share plans. This includes ensuring that the plans are in line with best practices and do not lead to excessive risk-taking.
Disclosure: Providing stakeholders with accurate and timely information about the company's operations, financial performance, and governance practices is a key compliance requirement for listed companies. Private companies must also comply with any applicable disclosure requirements, such as those related to significant shareholdings and changes in share capital.
Performance measurement and review: Regular review of the performance conditions and outcomes of share plans is important to ensure that they remain effective and aligned with the company's objectives. Adjustments may be necessary to reflect changes in the business environment or strategy.
Employee communication and education: Clear communication with employees about the benefits and mechanics of share plans is important to maximise their effectiveness. Providing education and support can help employees to understand how their participation in the plan can contribute to their financial wellbeing and the company's success.
ESG considerations: Increasingly, firms are integrating environmental, social and governance (ESG) considerations into their remuneration policies. This includes:
- assessing ESG risks and opportunities during performance evaluations; and
- implementing ESG-related performance criteria.
By incorporating ESG factors into remuneration practices, firms can demonstrate their commitment to responsible investment and sustainable business practices.

By considering these factors, companies can design and implement employee share plans that support their corporate governance objectives and contribute to long-term value creation.

9. Employment law issues

9.1 Do any employee consultation or notification requirements apply before an employee share plan can be rolled out in your jurisdiction?

No, unless the issuing company has a works council or an arrangement with a union, in which case those arrangements should be reviewed and complied with.

9.2 Are participants in employee share plans entitled to compensation for loss of associated benefits on termination of employment? Does this vary depending on the grounds for termination?

Where a participant's employment is terminated unfairly, he or she will have a right to compensation for loss suffered as a result. That could include:

loss due to forfeiture or lapse of awards under employee share plans; and
the loss of future opportunity to participate in employee share plans.

It is common for the rules of employee share plans to purport to exclude liability for such losses. However, under English law, rights in relation to unfair dismissal may only be waived by a settlement agreement which is entered into by the employee after receiving legal advice. Compensation for unfair dismissal is limited by statute (currently to a maximum of £115,115, except in certain situations (eg, discrimination on the grounds of age or sex).

A dismissal will be unfair unless:

it is for one of the reasons set out in the Employment Rights Act (capability, conduct, redundancy, breach of statutory duty or some other substantial reason); and
a fair procedure has been adopted.

Where the termination of a participant's employment is in breach of their employment agreement (eg, they are not given their contractual notice), they may be entitled to damages. The damages may extend to loss related to share plan awards – for example, where awards would have vested had they been permitted to work their contractual notice.

9.3 Can the type or amount of a share award granted to one participant potentially affect awards granted to other participants?

There is no legal reason why this cannot be done. For example, it is possible for employees who hold a class of shares which are entitled to a fixed percentage of the company's equity value to be diluted by the issue of further such shares (subject to any express consent or pre-emption requirements in the company's constitution or the share plan documentation).

The grant of awards to certain participants on a more generous basis than they are granted to other participants will not give rise to an employment law claim unless the difference is discriminatory.

9.4 What other key concerns and considerations in relation to employee share plans should be borne in mind from an employment law perspective?

The company should ensure that the terms of its employee share plan are consistent with, and that it operates its plan in accordance with, discrimination legislation. For example:

grant and vesting decisions should not discriminate against any employees with protected characteristics (eg, age or sex); and
the rules of the plan should not provide better treatment for certain employees where that would discriminate against employees with protected characteristics in a way which cannot be justified.

For example, providing better leaver treatment for people who are retiring indirectly discriminates against younger people and would have to be justified.

Where the company has discretion as to the way in which the plan is operated (eg, grant decisions or the treatment of leavers), it should ensure that:

it exercises its discretion in a reasonable manner, taking account of relevant considerations; and
it records the reasons for its decision.

This is because a duty to exercise discretions reasonably in an employment context will commonly be implied. It is even possible that a decision made in respect of an employee share plan could be so inconsistent with an employee's terms of employment that it gives the employee a right to claim that:

there has been a breach of the implied term of trust and confidence; and
he or she has been constructively dismissed.

10. Securities law issues

10.1 What securities law rules and requirements apply to employee share plans in your jurisdiction? Do any exemptions apply?

The UK securities laws principally comprise the Prospectus Rules, which must be considered alongside other regulatory regimes which are in force in the United Kingdom whenever an offer of securities to the public (or application to admit securities to trading on a regulated market) is made.

Prospectus Rules: The UK implementation of the EU Prospective Regulation ((EU) 2017/1129) is considered retained EU law and therefore continues to apply following the United Kingdom's exit from the European Union. The UK Prospectus Rules provide a single regime on the content, approval and publication of prospectuses for the offer of securities in the United Kingdom.

The Prospectus Rules require a prospectus to be produced – which is generally an expensive and time-consuming undertaking – when either:

offering securities to the public; or
applying to admit securities to trading on a regulated market.

In the context of an employee share plan, this is relevant in a number of scenarios, including where:

any company establishes a plan and invites participants to acquire securities; or
a listed company intends to issue additional securities to employees.

There are certain threshold tests which must be met in order for the Prospectus Rules to be in scope in the first instance. If those threshold tests are met (meaning that, on the face of it, the offer may fall within the scope of the Prospectus Rules), there are a number of exemptions which can apply in relation to employee share plans meaning that no prospectus is required.

The following exclusions relevant to employee share plans will mean that the offer falls outside the scope of the Prospectus Rules:

If the securities being offered are not transferable securities, they will be excluded. This is relevant where a share plan giving the right to buy or be given shares (eg, an option plan or a conditional award plan) contains a provision that such a right is non-transferable (in which case it will be excluded under this rule). The UK Financial Conduct Authority (FCA) generally takes the view that a grant by a company to employees of share awards and/or options which are non-transferable under an employee share plan is not subject to the Prospectus Rules. It is established practice in the United Kingdom that such a restriction on transfer is sufficient to ensure that the Prospectus Rules are not engaged (with exceptions for transmission on death being permissible).
Offers where the total consideration paid or to be paid by UK participants for securities under offer is less than €1 million (or an equivalent amount) are excluded. For the purposes of the cap, consideration provided for all other offers (except those that were exempt under another exemption) in the 12 months preceding the new offer is also accounted for.
Employee share plans which are 'dealing facilities' are not treated as offers and are therefore excluded. Generally, a share plan will be treated as a 'dealing facility' where the employer and employee jointly contribute to the acquisition of shares and the shares are held on behalf of, or transferred to, the employee – for example, a UK Share Incentive Plan. There is some nuance to this exclusion. It is predicated on the assumption that the arrangements are such that neither the price at which the shares will be bought nor the identity of the seller will be known – the company or trustee operating the plan is not undertaking to sell particular shares to particular employees, but rather is offering to see whether it can find a relevant seller. This argument was accepted by the FCA back in 2006 (when it was the Financial Services Authority). Again, there is some nuance to this; where an offer is made for participants to participate in an option plan, it is therefore unlikely that the Prospectus Rules will apply – contrasted with an offer to participants to acquire transferable shares, in which case the Prospectus Rules are likely to apply (and so an exemption must be relied upon).

If the Prospectus Rules apply (because the offer is not within any of the above exclusions), there are a number of exemptions which are capable of application in relation to employee share plans (meaning that, while the Prospectus Rules are, on the face of it, in scope, the offer will be exempt such that no prospectus is actually required). The following are the most relevant for employee share plans:

If, on a per offer basis, fewer than 150 people in the United Kingdom are offered securities, that offer will be exempt. Note that offers to the following are to be treated as the making of an offer to a single person:
- trustees of a trust;
- members of a partnership in their capacity as such; or
- two or more persons jointly.
Securities that are offered, allotted or to be allotted to existing or former employees (by either their employer or an affiliated entity) will be exempt, provided that a document is made available which specifies:
- the number and nature of the securities; and
- the reasons/details of the offer or allotment.
As a result of this particular exemption, it is rare that a prospectus is ever required in connection with an offer made pursuant to an employee share plan.
If the securities being offered are denominated in amounts of at least €100,000 (or an equivalent amount), such an offer will be exempt.
If each participant acquiring offered securities provides consideration of at least €100,000 (or an equivalent amount), such an offer will be exempt.
Where securities are offered in connection with a takeover by means of an exchange offer (ie, shares in the company being sold are exchanged for shares in the acquiring company) or in connection to a merger or demerger, such an offer will be exempt, provided that a document is made available to the public which contains information about the transaction and its impact on the issuer.
Offers where the total consideration paid or to be paid for the securities under offer does not exceed €8 million (or an equivalent amount) will be exempt. For the purposes of the cap, consideration paid or to be paid for all other offers (including offers which remain open for acceptance, but excluding those that were exempt under another exemption) in the 12 months preceding the new offer is also accounted for.

Companies Act 2006: The Companies Act prohibits a private company from offering to the public any securities in the company (meaning, here, shares or debentures), or allotting or agreeing to allot any securities of the company with a view to such securities being offered to the public.

The definition of 'offer to the public' in the act can be broadly drawn and will be a matter of fact and degree, turning on the circumstances of each case. An offer will not be treated as an offer to the public for these purposes if either:

the offer is not calculated to result, directly or indirectly, in securities becoming available to anyone other than those receiving the offer; or
the offer is otherwise a private concern of the person receiving it and the person making it.

The latter exemption is most relevant in the context of employee share plans. An offer is regarded as a private concern in a number of scenarios prescribed by the legislation, including where the offer is:

made to a person already connected with the company, such as an existing member or employee of the company; or
made pursuant to an 'employees' share scheme' (as defined in the Companies Act).

It is therefore generally the case that offers made pursuant to an employee share plan are compliant with the Companies Act, provided that the employee share plan falls within the specific definition in the act – namely, that it is a scheme for encouraging or facilitating the holding of shares in or debentures of a company by or for the benefit of the bona fide employees or former employees (or certain family relations thereof) of the group.

Financial Services and Markets Act 2000 (FSMA): There are two additional regulatory considerations to take into account in connection with an offer of, or dealing in, securities which arise alongside the securities law and Companies Act issues described above.

Financial promotions: FSMA contains a restriction on any person "in the course of business, communicating an invitation or inducement to engage in investment activity", unless:

that person is an authorised person under FSMA;
the contents of the communication have been approved by an authorised person for the purposes of FSMA; or
the communication is covered by an exemption contained in the regulations issued under FSMA.

This means that a company wishing to, among other things, make an offer or invitation to subscribe for its shares or securities in the United Kingdom or make an offer to acquire shares from its employees participating in an employee share plan (eg, as part of a synthetic exit or liquidity event) will need to comply with the financial promotion regime under FSMA.

The term 'financial promotion' is likely to capture all kinds of written, electronic and oral communications relating to an offering of shares, including, for example, those made in the context of a meeting, conference or telephone conversation. Unless the relevant communication setting out the offer is issued or approved by an authorised person, it will be important to ensure, wherever possible, that the communication falls within one of the exemptions.

Helpfully, the regulations contain an exemption in relation to any communication issued for the purposes of an 'employee share scheme', meaning that an offer of its shares by a company to its employees will fall within the relevant exemption and so ned not first be approved by an authorised person. To benefit from the exemption, the financial promotion (ie, the offer) must be made by:

the company;
a member of the relevant company's group; or
a relevant trust (eg, the trustee of an employee benefit trust).

The exemption is generally relied on by most companies that offer employee share plans or share purchase arrangements to its employees. The exemption has, however, some noteworthy limitations:

It does not apply to offers of all types of securities (although shares in any group company are generally covered); and
It only applies to bona fide employees, former employees and their relatives. It does not apply to offers made to non-employee contractors, directors or consultants.

There are certain other exemptions under the regulations which may apply where the employer share scheme exemption is not available, although these are generally more difficult to navigate.

Carrying on a regulated activity: Under FSMA, a person must not carry on, by way of business, a regulated activity in the United Kingdom (or purport to do so), unless they are an authorised or exempt person. However, a person may not need to be authorised if it is carrying on a regulated activity within an exclusion (ie, the effect of the exclusion is to stop an activity from being a regulated activity).

The regulated activities most likely to be relevant in a share offer scenario are:

where a company organises its own share offer and issuance – the regulated activity of 'dealing in investments as principal';
where a company engages a third-party to market its shares to employees and outside investors – the regulated activity of 'arranging deals in investments'; or
in marketing materials related to a particular share offer which gives advice on the merits of taking up an offer for shares (rather than simply factual information on the company, the shares and the terms of the issue) – the regulated activity of 'advising on investments'.

The regulated activities set out in the bullets above could apply equally to a scenario where the company is offering to acquire securities (or arrange for the acquisition of securities) from employees.

In the case of most share offers (whether an offer to acquire or to sell), the issuing company (or purchasing company) will not be carrying on a regulated activity, as it is unlikely that it will satisfy the requirement to be carrying on the activity 'by way of business', which is necessary in order for the restrictions to apply. Where such offers are done on a wider scale and on a regular basis, a conclusion that offering shares (or offering to acquire shares from employees) does not amount to a regulated activity done by way of business is less likely.

For this reason, most companies tend to rely on a separate 'employee share schemes' exemption set out in separate regulations to the financial promotion exemption (discussed above), but which otherwise has the same effect. That is, where most regulated activities (with the exception of advising on investments) are carried on by a company (or a group company) in relation to the company's shares in connection with an employee share scheme, such activity is exempt from the authorisation requirement.

As with the financial promotion exemption, if shares are offered to non-employee participants, the exemption will not be available (in respect of the offer specifically to non-employee participants), so other exemptions will need to be relied on.

10.2 What other key concerns and considerations in relation to employee share plans should be borne in mind from a securities law perspective?

In January 2024, draft legislation was published that is intended to overhaul the Prospectus Regulations (which underpin the Prospectus Rules), which includes a number of changes affecting whether a prospectus would be required. The date on which such changes take affect has yet to be determined; however, advice should be sought in relation to the implementation of UK employee share schemes to determine what impact these changes will have on future employee share schemes.

11. Data protection issues

11.1 What data protection rules and requirements apply to employee share plans in your jurisdiction?

In the United Kingdom, data protection is primarily governed by:

the General Data Protection Regulation (UK GDPR), as retained in UK law post-Brexit; and
the Data Protection Act 2018 (DPA).

The UK GDPR and the DPA together govern the processing by data controllers and data processors of personal data relating to data subjects. Employers, as data controllers, must comply with a set of principles for processing personal data.

For these purposes, 'personal data' is "any information relating to an identified or identifiable living natural person" (Article 4(1) of the UK GDPR). There are also certain categories of sensitive personal data identified as 'special categories of personal data' (Article 9(1) of the UK GDPR), including data relating to:

racial or ethnic origin;
health; or
sexual orientation.

Special categories of personal data have greater protection under the UK GDPR.

Processing personal data: The UK GDPR outlines several key principles that must be adhered to when processing personal data:

Lawfulness, fairness and transparency: Data processing should be lawful, fair and transparent to the data subject.
Purpose limitation: Data should be:
- collected for specified, explicit and legitimate purposes; and
- not further processed in a manner that is incompatible with those purposes.
Data minimisation: Only data that is necessary for the purposes for which it is processed should be collected and maintained.
Accuracy: Personal data should be accurate and kept up to date.
Storage limitation: Personal data should be kept in a form that permits identification of data subjects for no longer than is necessary for the purposes for which the personal data is processed.
Integrity and confidentiality: Data should be processed in a manner that ensures appropriate security, including protection against unauthorised or unlawful processing and against accidental loss, destruction or damage.
Accountability: The data controller is responsible for, and must be able to demonstrate, compliance with the other principles.

Processing personal data will only be lawful if at least one of the conditions in Article 6 of UK GDPR is met – the most relevant of these are as follows:

The data subject has given consent to the processing of their data for one or more specific purposes ('employee consent'). Employee consent must be:
- freely given;
- specific, informed and unambiguous; and
- a clear affirmative action.
Employees have the right to withdraw consent at any time.
The processing is necessary:
- for the performance of a contract to which the data subject is party; or
- in order to take steps at the request of a data subject prior to entering into a contract.
The processing is necessary to comply with a legal obligation to which the controller is subject ('legitimate interests').

The exemptions above do not apply to the processing of 'special categories' of personal data One of the following, more limited, exemptions must be relied upon:

The data subject has given explicit consent for the processing;
The data processing is necessary to carry out the rights and obligations of both employer and employee under employment law (subject to certain conditions); or
The data processing is necessary to protect the vital interests of the data subject or another person, where the data subject is physically or legally incapable of giving consent.

Application to share plans: Companies and their advisers should ensure that share plan rules and processes comply with UK GDPR.

Launching share plans: Processing is likely to be for the purpose of ensuring that qualifying employees are invited to participate. At this stage, there will be no contractual basis for processing, so the company will need to demonstrate that the processing is necessary for the purposes of the legitimate interests pursued by the data controller.

Granting awards: Once invitations to participate have been issued or award recipients identified, the company must formally grant awards. Again, at this stage, there may be no contractual basis for processing, so the company will need to demonstrate that the processing is necessary for the purposes of the legitimate interests pursued by it. However, once an award has been granted, processing is likely to be necessary for the performance of that contract with the data subject.

Maturity: Processing in relation to a share plan maturity will most likely be necessary for the performance of a contract.

Leavers: Processing in relation to a leaver under a share plan is likely to be necessary:

for the performance of a contract; or
to comply with a legal obligation of the data processor.

Depending on the reason for leaving, the personal data may fall into one of the 'special categories' of personal data for which specific rules apply (eg, if the participant leaves by reason of ill health, injury or disability). In these circumstances, it is likely that the processing is necessary for carrying out rights and obligations under employment law, but this will depend on the circumstances.

Sending data: As part of administering a share plan, data may need to be sent to a parent company, an administrator or a trustee (eg, a trustee of an employment benefit trust). When sending data to a parent company, administrator or trustee, it is likely that the lawful basis for processing will be either that:

the processing is necessary:
- for the performance of a contract; or
- to take steps at the request of the data subject prior to entering into a contract; or
the processing is necessary for the legitimate interests of the data controller.

The UK GDPR also restricts the transfer of data outside the United Kingdom. There are a number of circumstances in which it is possible to transfer data abroad – including that the transfer is necessary for the performance of a contract – but additional protections must be in place to ensure that:

the receiving country provides an adequate level of protection; or
appropriate safeguards are implemented, such as standard contractual clauses.

The United Kingdom continues to permit transfers of personal data from the United Kingdom to the European Union, the European Economic Area, Gibraltar and other third countries which are recognised by the European Union as having an adequate data protection regime.

11.2 What other key concerns and considerations in relation to employee share plans should be borne in mind from a data protection perspective?

Data protection wording in plan documents: Companies should generally not rely on consent to process data in relation to share plans –consent under UK GDPR must be freely given and specific and can be withdrawn any time, so it is unlikely to be the appropriate basis for processing data in relation to share plans. For share plans that apply to UK employees, the accepted practice is that instead of (or in addition to) consent provisions, the plan should contain reference to a UK GDPR-compliant data privacy notice, which should include information regarding the basis for the processing of data for the purposes of the plan.

A company's general employee data privacy notice should therefore include information regarding processing of data for the purposes of its share plans. The employee data privacy notice should be kept under review to ensure that it covers all types of processing needed for share plans purposes.

Corporate transactions: Companies should also carefully consider whether (and at what stage) it is appropriate to send share plan participants' personal data to a potential purchaser or its advisers. The data controller may be able to rely on the legitimate interests basis for lawful processing in this situation, but this will depend on the circumstances. A company's general employee data privacy notice should also include information on the sharing of personal information with third parties – for example, in the context of the possible sale or restructuring of the business – including the purpose of the processing and the lawful basis for the processing.

12. Internationally mobile employees

12.1 What are the tax and social security implications if a participant in an employee share plan becomes tax resident in another jurisdiction?

Share options and restricted stock units (RSUs): The acquisition by an employee of shares on the exercise of an employment-related share option or on the vesting of an RSU can be a chargeable event for the purposes of the United Kingdom's employment-related securities regime, even if the employee is no longer UK resident at that time. However, the United Kingdom will not tax the entire amount of any gain arising. Only that part of the gain that, on a just and reasonable apportionment of the gain over the vesting period, is attributable to tax years in which the employee was UK resident or to periods in which the employee was non-UK resident but working in the United Kingdom will be liable to employment income tax.

If the employer is based in the United Kingdom and the shares are readily convertible assets (RCAs) (see question 6.1):

it will be liable to account under Pay as You Earn (PAYE) for the income tax chargeable on any gain arising; and
the employee must reimburse to the employer the income tax paid under PAYE by 4 July following the end of the tax year to avoid a further charge to income tax arising.

If, when the employee acquires share on the exercise of the share option or the vesting of the RSU, he or she is treaty resident in a state which has a double tax treaty with the United Kingdom, he or she may be able to make a claim, under the treaty's employment income article:

for any gain to be exempt from employment income tax in the United Kingdom; or
to be liable to such tax only to the extent that it is attributable to duties performed in the United Kingdom.

The acquisition by an employee of shares that are RCAs on the exercise of an employment-related share option or on the vesting of an RSU is also a chargeable event for the purposes of NICs, notwithstanding that the employee is no longer UK resident at that time. However, again, the United Kingdom will not charge NICs on the entire gain: only that part of the gain that, on a just and reasonable apportionment of the gain over the vesting period, is attributable to periods in which the employee was within the charge to NICs in the United Kingdom will be liable to employer and employee NICs. The employee will be within the charge to NICs, broadly, at times when he or she is resident, ordinarily resident or present in the United Kingdom, unless taken outside the charge by:

the UK/EU Trade and Cooperation Agreement 2020;
a similar social security convention between the United Kingdom and a European Free Trade Association member state; or
a reciprocal social security agreement between the United Kingdom and another state (eg, the United States).

If the employer is based in the United Kingdom (and, in some cases, if it is based in the European Union or certain other jurisdictions), it will be liable to account for employee and employer NICs on the part of any gain arising that is liable to NICs.

Share plans (eg, growth shares): If an employee who is resident and works in the United Kingdom acquires shares (eg, growth shares) under an employee share plan, he or she will normally be charged to income tax and, if the shares are RCAs, employee NICs on earnings on the amount by which the actual market value (or, if the employee makes an election under Section 431 of the Income Tax (Earnings and Pensions) Act 2003, the unrestricted market value) of the shares exceeds the amount paid for the shares. However, this full UK taxation on the earnings arising from the acquisition of the shares does not mean that no UK tax implications will arise subsequently – for instance, when the employee has become non-UK resident. Various post-acquisition tax charges can arise under the United Kingdom's employment-related securities regime – notably:

the restricted securities regime (which applies where the employee does not make a Section 431 election); and
the sale at an overvalue regime.

As in the case of gains arising from employee share options, amounts liable to these post-acquisition tax charges must be attributed, on a just and reasonable apportionment, to the tax years in which they arose. To the extent that these chargeable amounts are attributable to tax years in which the employee was UK resident or to periods in which the employee was non-UK resident but working in the United Kingdom, he or she will be liable to UK employment income tax, even if the employee is not UK resident when the charge arises.

12.2 What are the tax and social security implications where a participant in an overseas employee share plan becomes tax resident in your jurisdiction?

The acquisition by an employee of shares on the exercise of an employment-related share option or on the vesting of an RSU is a chargeable event for the purposes of the United Kingdom's employment-related securities regime, provided that the employee has been UK resident or has worked in the United Kingdom at some point in time during the exercise period or the vesting period. However, again, the United Kingdom will not tax the entire gain: only that part of the gain that, on a just and reasonable apportionment of the gain over the vesting period, is attributable to tax years in which the employee was UK resident or to periods in which the employee was non-UK resident but working in the United Kingdom will be liable to employment income tax.

If the employer is based in the United Kingdom and the shares are RCAs:

the employer will be liable to account under PAYE for the income tax chargeable on any gain arising; and
the employee must timely reimburse to the employer the income tax paid under PAYE to avoid a further charge to income tax arising.

The employee may be able to make a claim, under the United Kingdom's unilateral double tax relief provisions or under a double tax treaty between the United Kingdom and any other country in which he or she has worked during the vesting period, for foreign tax on the part of the gain that is liable to UK tax to be credited against (and, therefore, reduce) that UK tax.

The acquisition by an employee of shares that are RCAs on the exercise of an employment-related share option or on the vesting of an RSU is a chargeable event for NIC purposes, notwithstanding that the employee may only have become UK resident relatively late in the vesting period. However, the United Kingdom will not charge NICs on the entire gain. Only that part of the gain that, on a just and reasonable apportionment of the gain over the vesting period, is attributable to periods in which the employee was within the charge to NICs in the United Kingdom is liable to employer and employee NICs. The employee will be within the charge to NICs, broadly, at times when he or she is resident, ordinarily resident or present in the United Kingdom, unless taken outside the charge by:

the UK/EU Trade and Cooperation Agreement 2020;
a similar social security convention between the United Kingdom and a European Free Trade Association member state; or
a reciprocal social security agreement between the United Kingdom and another state (eg, the United States).

Share plans (eg, growth shares): If an employee who is not resident and does not work in the United Kingdom acquires shares (eg, growth shares) under an employee share plan, the acquisition will not normally have any UK income tax implications, as there is no territorial connection with the United Kingdom at that time. However, this absence of UK taxation on the earnings arising from the acquisition does not mean that no UK tax implications will arise subsequently – for instance, where the employee becomes UK resident before the end of the vesting period. Various post-acquisition tax charges can arise under the United Kingdom's employment-related securities regime – notably:

the restricted securities regime (which applies where the employee does not make a Section 431 election); and
the sale at an overvalue regime.

If the employee was neither resident nor working in the United Kingdom at the time of acquisition of the shares, it will not have been possible (and likely will not even have occurred to the employee) to make a Section 431 election. This means that, unless the shares were acquired for their unrestricted market value, post-acquisition charges are likely to arise under the restricted securities regime (which is a chapter within the employment-related securities regime). As in the case of gains arising from employee share options, the amount liable to these post-acquisition tax charges must be attributed, on a just and reasonable apportionment, to the tax years in which they arose. To the extent that these chargeable amounts are attributable to tax years in which the employee was UK resident or to periods in which the employee was non-UK resident but working in the United Kingdom, they will be liable to UK employment income tax. This issue should be considered promptly when a move to the United Kingdom is being considered, as there may be steps which can be taken to mitigate the position.

12.3 What other key concerns and considerations in relation to internationally mobile employees should be borne in mind, from a tax perspective or otherwise, in relation to employee share plans?

The key tax concerns and considerations in relation to internationally mobile employees who participate in employee share plans are those that relate to compliance. These include the following:

The imposition of UK employment tax on the parts of vesting gains or post-acquisition chargeable amounts that are attributable to tax years in which the employee was UK resident or to periods in which the employee was non-UK resident but working in the United Kingdom means that internationally mobile employees must keep very precise records of the timing of their movements during the vesting period. Poor record keeping results in real difficulties in correctly computing taxable amounts on vesting. The proliferation of electronic diaries and similar apps has helped significantly in this area, but tax departments of employer companies still need to monitor the record keeping of affected employees for whose tax affairs they are responsible.
The imposition of PAYE and NIC compliance on employers in relation to the reporting of, and payment of taxes on, chargeable events means that their tax departments must keep track of:
- the various chargeable events that can arise under employee share plans;
- changes in the residence of affected employees; and
- the timing of movements of affected employees between countries where this does not involve a change in tax residence.
The complexity of these compliance obligations can be particularly acute where the employer company is not the group company that operates the plan or issues or transfers shares to employees on vesting. Take, for instance, a group share option plan operated by the US parent of an international group. There is a five-year vesting period and a US employee spends the third year working for the group's UK subsidiary. When vesting occurs and the US parent issues its shares to the US employee, the employee will no longer be working for the UK subsidiary and the UK subsidiary will be not involved in the issue of the shares on vesting. Nevertheless, the UK subsidiary may have both PAYE and NIC compliance obligations on that event. This makes it most important that:
- both companies keep accurate records of the timing of international movements of employees who participate in the group's share plans; and
- precise and accurate information is exchanged between participating group companies and between those companies and participating employees about the issue of shares and other relevant transactions (eg, the sale of shares to which post-acquisition charges apply), to ensure that all relevant taxes are accurately and timely accounted for.

The key UK non-tax concerns and considerations from a share plan perspective in relation to internationally mobile employees who move to or leave the United Kingdom while holding awards under or shares derived from employee share plans will generally relate to employment law, data protection and securities laws. Examples include the following:

If the share plan contains non-compete undertakings or similar restrictive covenants, the employer should consider whether such undertakings will be enforceable under English law.
The employer should consider whether any data processing carried on in connection with the share plan is legal in the United Kingdom (which will generally be the case provided that it is limited to processing which is necessary in order to implement the plan in accordance with the parties' contractual rights).
The employer should ensure that:
- any communications to be made pursuant to the plan which constitute financial promotions are within an appropriate exemption or otherwise permitted; and
- the actions required in respect of the vesting and sale of the shares subject to the awards are not prohibited.
Where awards are held by employees, securities law issues are unlikely to be problematic.

13. Disputes

13.1 In which forums are disputes over employee share plans typically heard?

In the United Kingdom, different courts are assigned responsibility for dealing with disputes relating to the different issues that may arise over employee share plans. Given the intersection of employment, tax and contractual elements inherent to employee share plans, disputes may be heard in several different forums, depending on:

the nature of the dispute; and
the dispute resolution mechanism stipulated in the plan documents.

The primary forums are as follows:

Employment tribunals: If the dispute relates to employment rights.
Tax tribunals: If His Majesty's Revenue & Customs challenges the tax treatment of shares or options granted under a particular share plan.
Civil courts: If the dispute engages contractual issues (eg, the interpretation of the plan rules); it will be heard either in the High Court or, for lower-value or less complex cases, in the county court.
Arbitration: If:
- the dispute resolution mechanism in the plan documents specifies arbitration; or
- the parties separately agree to submit the dispute to arbitration.

13.2 What issues do such disputes typically involve?

Disputes relating to employee share plans may arise due to a variety of potential issues. However, some common disputes relate to the following areas:

Eligibility and allocation:
- Who is eligible to participate in the share plan; and
- How shares or options are allocated among relevant participants.
Vesting and exercise of options and awards:
- Vesting conditions (particularly those that are performance related);
- The timing and process for exercising options; and
- The interpretation and operation of related clauses.
Valuation:
- The valuation process conducted (particularly where shares or options are granted in non-listed companies); and
- How shares are valued at the time of grant, vesting, exercise or where a participant leaves the company.
Leavers:
- The treatment of a leaver's shares or options, including whether they are entitled to retain shares or exercise options after leaving; and
- The operation of good/bad leaver provisions and of malus and clawback provisions, particularly where the remuneration committee of the company has discretion in operating these provisions (as is often the case) and its decision making is challenged.
Variations to plan rules: Changes to the terms of the share plan, particularly if these are seen to adversely affect the rights of participants.
Tax implications: The tax treatment of shares or options, including disagreements over:
- tax liabilities; and
- the application of tax advantages associated with certain types of UK share plan.

14. Trends and predictions

14.1 How would you describe the current employee share plan landscape and prevailing trends in your jurisdiction?

From a regulatory and securities law perspective, the UK landscape is relatively benign, given the existing employee share plan exemptions.

From a tax perspective, the concern that capital gains tax (CGT) rates might be aligned to income tax rates has receded for now, meaning that share plans which result in gains being taxed as capital (eg, growth shares, jointly owned shares and the various statutory tax-qualified plans) are still popular. However, while the statutory tax-qualified plans are more flexible than ever, their tax benefits have been eroded by:

a failure to increase the statutory limits over time (save in relation to the Company Share Option Plan, where the grant limit was recently doubled to £60,000); and
the reduction in the annual CGT exempt amount and the increase in CGT rates.

14.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The UK government is consulting on proposals under which private companies could choose to offer a proportion of their shares on a new platform – PISCES (which stands for 'Private Intermittent Securities and Capital Exchange System') – where their shares will be able to be bought and sold. Companies that choose to take advantage of this will be able to offer employees the opportunity to realise the value in their share awards by selling their shares to investors on the exchange, which will be a simpler, less regulated environment than a listed environment.

15. Tips and traps

15.1 What would be your recommendations for the smooth rollout of an employee share plan and what potential pitfalls would you highlight?

Our recommendations for issuing companies are as follows:

Consider consent requirements at an early stage (including less obvious ones such as banking documents).
Where value at grant is important from a tax perspective, consider obtaining an independent tax valuation in order to ensure that:
- the company complies with its PAYE obligations; and
- participants do not suffer unexpected tax consequences.
Ensure that the project plan covers all of the steps required throughout the life of the plan, not just implementation (including in relation to tax), so that it acts as an operation manual for the people who have to run the plan going forward.
Ensure that the detail of the tax and the legal steps does not distract from producing clear communications which explain the benefits of the plan to participants (potentially including further communications while awards are outstanding).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Employment Incentives Comparative Guide

Contributor

1. Legal and enforcement framework

2. Providers

3. Participants

4. Types of plans

5. Awards

6. Formal and regulatory requirements

7. Tax And Social Security Issues

8. Corporate governance issues

9. Employment law issues

10. Securities law issues

11. Data protection issues

12. Internationally mobile employees

13. Disputes

14. Trends and predictions

15. Tips and traps

Employment and HR

Contributor

United Kingdom