Specific Treatment of RSU and Stock Option Income
Jun 2, 2014
As part of our Client Alert Series for new domestic & international tax developments which may impact your Global Mobility Program, please find below potentially significant U.K. taxation changes related to equity awards that could affect your global mobility program.
Changes to Taxation of Restricted Stock Units (RSUs)
The HM Revenue & Customs has recently changed their approach to the way that RSUs (Restricted Stock Units) will be taxed in the U.K. There will now be a U.K. tax charge on the full or proportionate RSU gain depending on an employee's period of U.K. employment. The effect of this recent shift in apportionment philosophy is that many existing RSU plans which have traditionally been treated as securities options for taxation purposes (in accordance with the prevailing general practice) are now at risk of HMRC challenge on historic, as well as future RSU awards.
In the past, RSUs may have been taxable to mobile employees by reference to their resident status on the date of vesting, or have time apportionment applied to them by reference to their tax residence status over the grant-to-vest period. In our experience, HMRC has accepted both treatments provided the treatment was consistent. On this basis, no U.K. tax or NIC charge would have arisen for outbound employees who had left the U.K. before their RSU vest date or for U.K. inbound employees who were granted RSUs before they arrived or became resident in the U.K. While these changes introduce new treatment of these awards, they also bring the U.K. into line with many other countries that already utilize an earnings period attribution and sourcing approach in determining the amount of income that is subject to taxation.
GMT recommends the following action:
- If you have an RSU plan, we would strongly recommend that it is reviewed for U.K. tax purposes as a matter of urgency. Rather than simply asking employers to amend their processes going forward, HMRC are actively pursuing companies for unpaid PAYE/NIC for historic years and as a matter of course are seeking back taxes over 4 closed tax years. This is resulting in costly settlements for many companies.
- Consider whether it is appropriate to make a voluntary disclosure to HMRC for earlier years. The benefit of voluntary disclosure is that HMRC will generally agree a £nil or a suspended penalty where voluntary restitution has been made.
- Assignment tax cost projections and accruals for your U.K. assignees may require recalibration. In addition, equity compensation sourcing and tax withholdings for current releases may require the application of these new rules. GMT specializes in this area!
Changes to Taxation of Stock Options
Similar changes are on the horizon for mobile employees who have worked in the U.K. and been issued stock options. U.K. stock option laws, which have not aligned with current international taxation models, are being simplified. Presently, the nature of U.K. taxation of stock options, is dependent on an employee's U.K. tax residence status at the time of grant. If a stock award is granted while the employee is not a U.K. tax resident, the option is not taxable in the U.K. when exercised. Conversely, if an option is granted while the employee is a U.K. tax resident then it is taxable in full for U.K. purposes regardless of the employee's country of residence at the time the option is exercised.
New laws are agreed, pending legislative confirmation, to come into effect April 6, 2015. On or after this date if an option is exercised and there are U.K. working days between the grant and vest/exercise date then there will be U.K. tax implications regardless of the employee's U.K. tax residency status on the date of grant. Normal sourcing conventions will be followed. For instance, in regards to stock options, a U.K. resident who has also has U.S. working days will be taxed on the amount of U.K. working days between grant and exercise period per the U.S./U.K. tax treaty. For most other countries the options will be apportioned according to workdays during the grant to vest period. It should be noted that there is no grandfathering involved. If the exercise occurs after the aforementioned date the new rules will be strictly observed.
GMT recommends the following action:
- If an employee has U.K. working days and vested options they should carefully consider the U.K. taxation benefits that may arise by exercising before April 6, 2015.
- Companies may need to adjust their systems for tax withholding calculations based on these new laws and make sure to communicate the tax implications to employees affected by the new laws.
- As with RSU's, assignment tax cost projections and accruals for your U.K. assignees may require recalibration. In addition, equity compensation sourcing and tax withholdings for exercises after April 5, 2015 may require the application of these new rules. GMT is your specialist in this area!
Should you need any immediate assistance regarding the above, please do not hesitate to contact us. We are ready to help!
Your Global Mobility Tax Team