Tax View: Changes to the Taxation of Equity Awards for Internationally Mobile Employees 12.10.2015 | Tim McCarney

Through this blog, we’re proud to regularly bring you domestic and global tax insight from Weichert Mobility Tax Services. This month, subject matter experts from our friends at BDO discuss major changes to the UK tax treatment of equity awards for Internationally Mobile Employees (IMEs) and how companies should consider the impact on existing and new awards. Companies that move assignees to the UK will want to take note.

In the wake of a new ruling in April 2015, UK equity income is now sourced based on the nexus during the vesting period. If an individual works in the UK during the vesting period, there will be a UK liability and potential payroll withholding obligation. The new rules apply to all outstanding awards, regardless of the date of grant or the individual’s residence status on the date of grant or vest. Also, they apply to both inbounds and outbounds.

For example, say an employee received an option subject to a three year vesting period in 2013 while residing in Germany. If she moved to the UK in 2014 on a two year assignment after holding the option for 18 months, under the new rules, 50% of the gain will be subject to UK tax. Under the old rules, no gain would have been subject to UK tax. Broadly, the National Insurance Contributions (NIC) treatment follows the tax provisions but is dependent on the status of the individual and whether treaty or non treaty countries are involved.

The new legislation applies to any individual who meets one of the following:

  • The employee is resident in the UK and is taxable on the remittance basis at any time in the relevant period;
  • The employee is not resident in the UK for the whole of a tax year within the relevant period; or
  • Part of the relevant period is within the overseas part of a tax year where the employee is subject to split-year treatment.

Equity income is apportioned over the relevant period. The portion that relates to UK workdays is subject to income tax in the UK at the time of vesting/exercise. Special rules are applied if the employee claims the remittance basis.

Companies should work with their tax provider and consider the following key areas:

  • Employee communication
  • Tracking of internationally mobile employees (i.e. business travelers)
  • Payroll systems
  • Impact on tax equalization policies

New online filing obligations were introduced for 2014/15 and later years. All transactions must be reported online by July 6 each year and companies must register new plans with HM Revenue and Customs (HMRC). There are automatic penalties assessed if filing is late. In some cases, the benefits of qualifying plans can be withdrawn.

The UK changes are part of a global trend towards sourcing by presence and electronic reporting. The legislation is helpful in bringing the UK tax treatment of equity awards in line with other countries. It is clear that governments and tax authorities are focusing greater attention on IME equity.

Generally tax authorities are recognizing that equity is a complex area and companies are currently making costly mistakes that can be capitalized on.

This update was provided by David Gardner, Tax Director, BDO LLP.

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Written by Tim McCarney

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