Social Security Contributions (Share Options) Act 2001 (“the Act”): CIOT comments on draft guidance on section 3 (rollovers), sent to the Inland Revenue on 21 August 2001.
1. Thank you for giving us the opportunity to comment on a document that is likely to be widely consulted by the Inland Revenue, tax practitioners and companies on the practical application of the option rollover rules contained in the Act.
2. We welcome the practical examples in the document that considerably enhances its use. Our detailed comments are set out below.
General parity test
3. It would be helpful if confirmation could be given that any amount that is effectively a refund of the purchase price of an option would not prevent the parity test from being failed. For example:
An employee paid £100 for the grant of an option over 100 shares with an exercise price of £2 per share. The option is a settled option. It is then cash cancelled when the share price is £5 per share. A payment of £300 is received. The amount taxed under s135 TA 1988 would have been £200.
4. Example 1: This is not a parity rollover. The consideration give £5,100 (being £3,000 + £2,100) is greater than the profit element of £5,000 (being £5,100 - £100). This is set out in s2(3) of the Act.
5. Example 2: The numbers in the example are incorrect. The amount included in earnings will be £5,100 (being £10,100 – (£5,100 - £100)).
Option-for-option exchange
6. The following would be a parity rollover according to Test 2. Is that the intention? It would be helpful to confirm the Inland Revenue’s view.
An option over 100 shares that is exercisable at £1 per share when the current share price is £1 is exchanged for an option over 1,000 shares in the same company with an exercise price of £1.
7. Example 3: It would be helpful the inherent gain is shown as being “((£11 - £1) x 100)” rather than “£1,100 - £100) as it makes it easier to see where the numbers come from.
8. Paragraph between examples 3 and 4: This states that the concept of additional shares is measured by the parity rule shown in test 2. Test 2 does not do this and makes no mention of additional shares.
9. Example 4 (part 1): It would be helpful for Option Y to be over, say, 500 shares so that there is no confusion as to whether the 100 shares referred to in the worked example are the original shares or the additional shares. While the 50% of the shares under Option Y are additional shares, we do not believe that the percentage is a helpful concept compared with stating the numbers.
10. Example 4 (part 2): It would be helpful if the inherent gain is shown as being “((£15 - £0.5) x (200 - 100)” rather than “£2,900 x 50%) as it makes it a bit easier to see where the numbers come form. See also our comments above about using percentages and using an example with 100 original shares, 100 parity shares and 100 additional shares.
11. Example 4 (part 3): If 100 shares are protected from Class 1 NIC, the protected gain would be £1,450 (being ((£15 - £0.5) x 100)) not £1,500.
12. Last sentence above Example 4 (part 4): This will often not be of benefit to companies where an option lapses before being fully exercised. We would prefer to see “is generally” replaced with “can be”.
13. Section 4.4: For US accounting reasons, there is often a six month gap between the surrender of the original underwater option and the grant of the new option. This is becoming considerably more common in the current financial climate. Could this document explicitly confirm that this type of situation would be covered by these rules.
14. Example 8 (step 6): We would prefer to use a phrase along the lines of “of the parity shares” rather than “net of additional shares”.
15. Section 8.1: The way this section reads is that these are the only circumstances in which the Inland Revenue will accept a parity rollover. It would be helpful if this section could be amended to indicate that there are other circumstances (e.g. if SVD had agreed the value of the shares).
16. Section 8.1: There appears to be a word missing in the first bullet point (perhaps “Examiner”).
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