ERSM170910 - PAYE & NICs: Social Security Contributions (Share Options) Act 2001: FAQs
Frequently asked questions
The following questions and answers, previously on our web site, provide guidance on the provisions in the Act:
Q1. What is meant by “settling the NIC”?
Q2. How did the company opt to settle the NIC?
Q3. How was the amount of NIC due on the deemed gain calculated?
Q4. What was the amount due from the employee?
Q5.What is the format of the notification?
Q6. Did the company’s notification to settle need to be approved by HMRC?
Q9. If the shares were underwater on 7/11/00 was a company able to settle its liability?
Q.10 Could options covered by a share option election be included in the settlement?
Q12. What happens where the option, which was settled, was subsequently rolled over?
Q16. Where will the notification and payment need to be sent?
Q18. When must the payment for the Special Contribution have been made?
Q1. What is meant by “settling the NIC”?
Employers who have granted share options to employees during the period 6 April 1999 and 19 May 2000 could pay the NIC on those share options in one or two ways. Ordinarily, they could pay Class 1 NIC on the actual gain on the exercise, assignment or release of an option. The gain liable to NIC under the existing rules was the same gain which was liable to Income Tax, calculated using the share price on the day of the actual gain.
However, under the provisions of this Act, a company could alternatively choose to pay NIC on a deemed gain, calculated by using the share price on the 7 November 2000 (the day prior to the announcement of this measure). Where a company opted to settle, there will not be a further Class 1 charge on the actual share option gain (subject to special rules for rollovers).
Q2. How did the company opt to settle the NIC?
The entitlement to settle the NIC was dependent upon the receipt of a notification from the company that they wish to settle. That notification had to be made within the 92 day period commencing on the 11 May 2001 which was the date when the Bill received Royal Assent. The entitlement lapsed if the appropriate NIC arising on the deemed gain, was not paid within 92 days of the Royal Assent of the Bill. See also Question and Answer 9.
Q3. How was the amount of NIC due on the deemed gain calculated?
The NIC due was a special contribution equivalent to 12.2% of the deemed gain on the 7 November 2000. The deemed gain was the difference between what might reasonably be expected to have been obtained if the shares had been sold in the open market on 7 November 2000 and the total exercise price of that option together with the amount of any consideration given for the grant of that option. See Q19 for guidance on share price.
Q4. What was the amount due from the employee?
The special contribution due on the deemed gain was an employer only charge. An employee was not liable for employee’s NIC on either the deemed gain or the actual gain where settlement was made under this Act.
Q5.What is the format of the notification?
The format of the notification is prescribed in the Social Security Contributions (Share Options) Regulations 2001, which were laid in Parliament on the 11 May 2001.
A model form of notification (see ERSM170920) to pay the special contribution was available for employers. They did not have to use the model notification but if they created their own notification it must have contained all the information and declarations that were required by the Social Security Contributions (Share Option) Regulations 2001.
Q6. Did the company’s notification to settle need to be approved by HMRC?
No. Providing the notification and appropriate payment were made, the NIC will be settled.
Q7. If the NIC was settled under this Act and the share price rose after the 7/11/00 will there be any further NIC to pay on the actual gain?
No - the settlement effectively caps the liability. Any further share option gain will not be subject to NIC on either the employer or the employee. However, there are special rules to cover rollovers, where a further charge may apply. Similarly, if the share price subsequently falls or the options are not exercised there will be no refund.
Q8. Did a company who wished to settle have to include all options granted between 6 April 1999 and 19 May 2000 in the settlement?
If a company did decide that it wanted to settle then it could choose to settle for all the options granted during the appropriate period, or it could be selective. This flexibility was introduced so that the employer could consider the exercise price for various grants, and make a judgement as to whether various employees will actually exercise.
Q9. If the shares were underwater on 7/11/00 was a company able to settle its liability?
If the share price on the 7 November was less than the exercise price then the deemed gain on the 7 November was zero. Under the legislation, no notification is required because a notification was deemed to have been made in such circumstances. This will also apply where the shares (and the option itself) are not readily convertible assets on 7 November 2000 (see further Q.11 below).
Q.10 Could options covered by a share option election be included in the settlement?
Where a NIC share option election had been made under paragraph 3B(1) of Schedule 1 to the Contributions and Benefits Act 1992 over these options there were two choices. First, the employer could choose to settle the NICs - but if they did so it would be for the employer to pay any amount due under the settlement. Second, the employee could opt to settle the liability that they had taken on, and if they did so, it will be the employee that paid. Where such election relates to only a part of any such gain, then the employer and employee must have jointly opted to settle the liability, unless the employer decided to settle the liability in respect of all the gain himself. The employer could however, to ease administration, complete the notification and send the payment on the employee’s (or employees’) behalf.
If the employer and employee entered a voluntary agreement as permitted under Paragraph 3A of Schedule 1 to the Contributions and Benefits Act 1992, the employer, and no one else, could opt to settle the liability. The employer in this case would not be able to recover the special contribution from the employee because the special contribution was charged on a deemed gain as opposed to an actual gain.
Q.11 Where a company’s shares were not readily convertible assets on the 7/11/00 could they also settle the NIC using this Act?
Where options were not over shares which were readily convertible assets (RCA), and the option itself was not an RCA that is,
- the companies shares are not listed or about to list
- there is no market for the shares
- there are no trading arrangements in place or about to come into place
then the amount of the special contribution due was nil and no notification was required. A notification was deemed to have been made in such circumstances. The employer would need to be sure that their shares were not readily convertible assets because, if the appropriate payment does not accompany the notification, then the right to settle lapses. The shares of companies who took steps towards listing on the 7/11/00 will be RCAs.
Q12. What happens where the option, which was settled, was subsequently rolled over?
Where options were granted during the relevant period and are subsequently rolled over, the settlement will only relate to the part of the ultimate gain on the new option that relates to the original. So, provided that the options are rolled over at parity, the NICs will remain settled. But where a rollover is not at parity the amount of the gain on the new option, which relates to the amount in excess of parity (at the time of the rollover), will be chargeable to Class 1 NIC under the existing rules.
Q13. Could an option, which was granted between 6 April 1999 to 19 May 2000 but exercised before Royal Assent of this Bill, be included in the settlement?
Where the option was exercised, assigned or released before 7 November the option could not be included in the settlement. Option gains made after the 7 November but before the new legislation came into force could be calculated (or recalculated) by reference to the gain on the 7 November.
Q14. Where a gain was made before 11 May 2001 could the company pay the special contribution based on the 7 November share price, rather than under the existing Class 1 rules?
To ease administration for employers, where a gain was made before 11 May 2001, employers could calculate and pay the employer’s NIC charge on the deemed gain using the share price on the 7 November 2000, rather than using the existing Class 1 rules. Those employers who had made use of this administrative easement were still required to send in the appropriate notification within the 92 day period commencing from 11 May 2001, otherwise Class 1 NIC would remain due and interest and penalties on any underpayments and under recording applied accordingly.
Q15. What happened to Class 1 NIC paid on option gains arising in the period between 7 November 2000 and 11 May 2001 when the Bill received Royal Assent?
Employers who could benefit by paying the Special Contribution on these options would need to have submitted a notification to pay the special contribution. The Share Options Group arranged for a refund of any overpaid Class 1 NIC that was remitted in the tax year 2000/2001. For the tax year 2001/2002, employers were requested to send the notification to the Share Options Group and adjust the next or subsequent PAYE/NIC remittance to HMRC.
Q16. Where will the notification and payment need to be sent?
Notification and payment had to be sent to the Share Options Group within the 92 day period commencing from 11 May 2001. The address was as follows:
HMRC National Insurance
Contributions Office
Room BP2101
Share Options Group
Longbenton
Newcastle
NE98 1ZZ
Telephone: 0191 225 5176
Please note that the Share Options Group in Longbenton only dealt with the processing of notifications and payments for this Act. Any queries on other aspects of share options such as share option elections, or share scheme approval should be directed to your existing contacts.
Q17. What if a company wished to settle but did not send in its notification before the 92 days after Royal Assent has expired?
If the notification was not made within 92 days beginning with the 11 May 2001 then the entitlement to use this provision lapsed. Where this occurred, the existing Class 1 rules applied.
Q18. When must the payment for the Special Contribution have been made?
The full payment for the Special Contribution should have been made at the same time as notice was given to HMRC but certainly no later than the end of the 92 day period beginning with the date of Royal Assent, which was 11 May 2001.
Q19. What share price should have been used to calculate the deemed gain on 7 November 2000 if the company were quoted?
We suggested for shares in The London Stock Exchange Daily Official List the price can be taken as:
- the lower of the 2 prices shown in the quotations for the shares in the List on the 7 November 2000 plus one-quarter of the difference between those two figures, or
- halfway between the highest and the lowest prices at which bargains, other than bargains done at special prices, were recorded in the shares for that date.
The amount at (a) is used if it is less than (b), or if no bargains were recorded for the day. The amount at (b) is used if it is less than (a).
For shares not in the London Official List, all valuations must be agreed with HMRC Shares and Assets Valuation, Fitzroy House, PO Box 46, Castle Meadow Road, Nottingham NG2 1BD.
Q20. Did the provisions of the Act apply to cash cancellation payments made for releasing approved options?
Options granted under an approved scheme will not ordinarily attract a NICs charge on the share option gain. However, Class 1 charges do arise where, for example, there is a cash cancellation payment.
As a result of this Act where that scheme was still approved on the 7/11/00 the liability for the special contribution would be nil as the shares and options would not be RCAs on the 7 November 2000. Therefore, these employers would be deemed to have notified a nil liability and will not usually have to pay Class 1 on the actual share option gain. However, under clause 2(3) of the Bill, should the option be cash cancelled in the future for an amount which exceeds the gain which otherwise would have arisen on the option immediately prior to its cancellation then Class 1 NIC will be due on the excess (rather than on the full gain as under the current Class 1 rules).