BN33 - Protecting Revenues: Employment-Related
S ecurities

Who is likely to be affected?

  1. Employers and employees who participate in avoidance schemes and arrangements that use options over shares and securities.

General description of the measure

  1. Legislation will ensure that any reward of employment obtained by employees from avoidance schemes using options over shares and securities will be fully subject to tax through PAYE and National Insurance Contributions.

Operative date

  1. This will take effect from 2 December 2004.

Current law and proposed revisions

  1. Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), provides the income tax rules in cases where securities, interests in securities or securities options are acquired in connection with employment to ensure that all of the value received by way of remuneration in the form of shares or other securities is taxed at the time it is accessed by the employee.
  2. On 2 December 2004, after closing down successive schemes which sought to avoid tax and National Insurance Contributions, the Government made a statement that it would close down future schemes, where necessary from that date.
  3. Despite this statement, evidence shows employers are continuing to use complex and contrived schemes to avoid paying the proper amount of income tax and National Insurance contributions, exploiting the tax rules
    relating to options over shares and securities. These avoidance schemes, which seek to sidestep the rules in Part 7 of ITEPA, will be stopped with effect from 2 December 2004.
  4. Finance Bill 2006 will introduce a targeted purpose test to be applied where a securities option is used as part of an avoidance scheme. The option itself will remain within the definition of a security as provided in Chapter 1 of Part 7 of ITEPA. Consequently the anti-avoidance measures for employment-related securities that were introduced in the Finance (No. 2) Act 2005 and earlier legislation will all apply to such options.

Further advice

  1. Draft clauses and explanatory notes are published today. Draft National Insurance Contributions regulations corresponding to this tax legislation will be published in May 2006.
  2. If you have any questions about this change, please contact Steve Lig on 020 7147 2827.