The NASPP Blog

Do you know how much tax your employees in the UK are paying on their stock compensation? It’s about to get a lot higher and further rate increases are scheduled for next year as well. If you’ve been turning a deaf ear to the recent UK budget announcements, now is the time to start listening–before it’s too late to do anything for your UK employees.

Death and Taxes, UK Style
I recently attended the San Francisco NASPP chapter meeting, where Valerie Diamond, Barbara Klementz, and Jennifer George of Baker & McKenzie summarized recent developments in the UK and a few other countries. One of my key take-aways was that taxes in the UK, which are already high, are about to get a lot higher.

One for You; Nineteen for Me

For the 2010-2011 tax year, the maximum income tax rate will increase to 50%; this rate applies to employees earning over £150,000. In addition, for employees earning between £100,000 to £150,000, some of the current exemptions are being phased out, increasing their tax liability. Then you add in NIC and, for some companies, NIC pass-throughs, and the end result is that some employees could end up paying taxes as high as 68.8%–that’s right, the employee’s net, after-tax, take home could be less than a third of their gain.

No Time Like the Present

The 2010-2011 UK tax year starts on April 6; until then option exercises and RS/unit vesting events are still subject to the current rates. This is one of those rare situations where it could make a lot of sense to pay taxes sooner rather than later, because waiting is likely to make the taxes a lot higher.

For those employees that hold vested, in-the-money stock options, consider a quick educational program to make sure they understand how the impending tax rates could increase their tax liability and can make an informed decision about whether they want to exercise before April 6.

You also may need to take a look at your withholding rate in the UK. Since there isn’t a flat rate, if UK employees are subject to tax at higher rates, this can impact the rate of withholding they are subject to. The phased out exemptions can make it particularly problematic to figure out the correct rate; now would be a good time to check in with your UK payroll group about this.

Accelerating Vesting

It’s also worth considering accelerating vesting on unvested awards and options. This would ensure that awards are taxed now, before the tax rates would go up, and would at least give employees an opportunity to exercise their stock options.

So long as employees aren’t required to give up any benefits in exchange for the acceleration, the modification shouldn’t be viewed as a tender offer. But, if you do require employees to give up a benefit, such as requiring them to agree to exercise their options before April 6 or agreeing to pay the company portion of NIC, that would likely require compliance with the SEC’s tender offer requirements. At this point, you don’t have time to manage that compliance, so don’t try to get fancy with the acceleration.

What’s This Going to Cost?

The accounting ramifications should be minimal under both ASC 718 (formerly FAS 123(R)) and IFRS 2. Under ASC 718, there might be some cost for the portion of the awards that were expected to be forfeited absent the acceleration, equal to their current fair value, but I wouldn’t expect there to be any additional cost for awards that were expected to vest anyway.

As I understand it, IFRS 2 doesn’t include all that gobbledy-gook about types I-IV, probable-to-probable, improbable-to-probable, etc., modifications, so the accounting is a little more straightforward. At worst, the end result would be the same as under ASC 718 and it’s possible there might not be any additional expense for the acceleration.

Of course, under both standards, any remaining unamortized expense would be recognized in full in the period the acceleration occurs. In addition, setting aside the possibility of incremental cost, the company’s overall stock plan expense will be increased to the extent that shares that would otherwise have been forfeited due to future terminations will be vested.

There also could be required disclosure for the acceleration. ASC 718 requires disclosure of any “significant” modifications. Materiality would most certainly be impacted by the number of awards and employees and the amount of expense involved. But these days, “significant” can also be a qualitative analysis; for example, if an executive officer is included in the modification, it might be considered significant even if the amounts involved are relatively small. IFRS 2 is not as specific on the required disclosures, but I expect that the same general principles apply.

Practice for the United States?

Similar, although not quite as drastic, changes have been proposed by the Obama Administration for the United States. The tax rate increases here wouldn’t go into effect until 2011, but the top income tax rates would increase (by 3-5%) and tax deductions/exemptions would be reduced. Here in US, the tax rates are lower to begin with, the increases aren’t as significant, FICA doesn’t come close to NIC, and company’s can’t make employees pay the company portion of FICA–all of which makes the situation significantly less dire. Even so, you may be looking at some of the same issues for your US employees once the end of the year rolls around.

For more information on the tax changes in the UK, see the UK page in NASPP’s Global Stock Plans Portal.

Other Tidbits

• NIC taxes are going to increase for the 2011-2012 tax year. We’ve still got some time on that, so I’ll cover it in next week’s blog.
• This has nothing to do with the UK, but I also learned from the team at Baker that the Australian government is flat-out, stark raving mad (my words, not Baker & McKenzie’s). If you haven’t been paying attention to recent tax changes in Australia, you’ll want to take a look at the Australia page in our Global Stock Plans Portal.
• Ten bonus points to anyone that knows the relevance of the title of this blog entry–no fair Googling it!

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

• Complete the Compliance-O-Meter quiz on Transaction Reconciliation.
• Submit your speaking proposal for the 2010 NASPP Annual Conference.
• Purchase the 2009 NASPP Conference Audio. 
• Renew your NASPP membership for 2010 (if you aren’t an NASPP member, join today). 
• Attend your local NASPP chapter meetings in Los Angeles, Phoenix, and San Diego. Robyn Shutak, the NASPP’s Education Director will be attending the San Diego meeting–be sure to say hello if you attend! 

-Barbara