Share option laws to help dot.com start-ups

The new change, which follows consultation announced in the Budget, will, following agreement between companies and their employees, allow the employer's National Insurance contributions to be recovered from or transferred to the employee. This will solve accounting difficulties and also help smaller start-up companies with limited cash flow.

In addition, the employer's National Insurance paid by employees as a result of this change will qualify for relief against the taxable gain on the share option.

Financial Secretary Stephen Timms said :

"Allowing employers and employees to come to an agreement to recover or transfer the National Insurance charge should provide a technical solution by completely eliminating the unpredictability of the charge.

"I intend to continue this dialogue about how we can make Britain the best competitive environment for e-commerce. We want to attract business and jobs to Britain and help British companies compete in the global market. Giving the employee tax relief for the National Insurance they pay will help to ensure that the UK tax system remains highly attractive."

The details of the changes (which, the Government says, will be introduced at “the first legislative opportunity”) are as follows:

• The main change would remove the current statutory bar which prevents employers and employees coming to an agreement under which the employee can pay the employer's National Insurance Contributions ("NICs") but only in respect of share option gains. The employer and employee will be able to come to a voluntary agreement under which the employee could agree to fund all or part of the employer's NICs.
• Alternatively, the employer and employee will be able to make a joint election under which the liability for all or part of the employer's NICs is transferred to the employee. An election will take effect after the Inland Revenue have approved the form of the election and the arrangements made for securing that any liability transferred by the election is paid.
• The change will enable employers and employees to come to an agreement or make an election in relation to any unapproved share option granted on or after 6 April 1999 where a gain has not yet arisen.
• This change should help companies with very volatile share prices that offer their employees substantial share options as part of their remuneration package.

Recovering the employer's NICs from the employee or transferring the charge to the employee should solve the accounting difficulties faced by companies. These arise because of the need for companies to put a provision in their accounts for a NICs liability that is unpredictable since it depends on the company's share price at the time when the employee decides to exercise his or her option. It also helps smaller start-up companies which may have limited cash flow by putting the company in funds to pay their NICs charge or by moving the payment of the NICs charge to the employee.

• In a separate measure, a new tax relief will be introduced which will allow employees to set off any NICs they pay, under an election or under an agreement to recover NICs, in calculating the income tax charge arising on the share option gains.
• The Government does not want employers to be able to transfer their wider National Insurance liabilities to their employees. The legislation will therefore also confirm the existing general statutory bar on doing so, and extend it to Class 1A (on benefits in kind) and Class 1B (on PAYE Settlement Agreements), both of which are only payable by employers.