sending UK share option holders to take up posts overseas may still find
themselves liable for paying UK tax
companies will grant share options to employees based in the UK who, before the
option is exercised, move overseas to work.
these employers may not realise is that if the employee exercises that option
while abroad, there may still be a liability to UK income tax and national
insurance, and PAYE may apply.
Revenue has issued new guidelines (Inland Revenue Tax Bulletin – Issue 55)
intended to clarify what may be a confusing position for employers, and to
explain revenue practice in this area. So what do the guidelines tell us?
basic principal is that tax is paid where the work is done. Take an example of
a UK resident employee who, in 1998, is granted an option of over 100 shares at
£1 each. In 2000, the employee is moved to work overseas, and in 2002 he
exercises his option. At this point, the shares are worth £5 each – and the
"gain" of £400 is subject to income tax.
tax purposes, we apportion the gain on a time basis between the UK and the
other country. Since the option was granted, he spent half of the time in the
UK, and half overseas, so £200 of the gain is subject to UK income tax, and the
balance is taxed in the other country.
does this mean for the employer? Well, if PAYE applies to the tax due the
employer must make the necessary deduction when the option is exercised. An
employer failing to do so (either because it did not know it had to, or there
is no UK income from which the deduction may be made) will still be obliged to
account to the Revenue for the amount it should have deducted.
the guidelines also illustrate that there are steps that HR managers could, and
should, take to minimise the risks.
speak to your tax advisers before the employee goes abroad to see whether or
not the guidelines apply. Find out whether exercise of your options triggers
liability to income tax and, if so, whether PAYE applies, (it only applies to
unapproved options over shares which can be converted into cash. This covers
all quoted companies, but only some unquoted). Also, find out if a double tax
make sure that you keep accurate and up-to-date records of options granted, and
where the option holders are working. This information should be shared with
your personnel/payroll teams, particularly when options are exercised.
take protection from your option scheme rules. These should require option
holders to reimburse any tax due immediately an option is exercised – this
avoids the risk of the UK company being obliged to deduct tax, but having no UK
pay packet from which to make that deduction. Make sure that the rules cover
all taxes world-wide, not just in the UK.
if all of this seems like too much of a headache, it may be better to allow the
option holder to exercise his options before he leaves the UK (but make sure
first that your scheme rules allow this) and provide some other form of
incentives until the overseas posting ends.
guidelines are helpful in flagging up this potential problem area for employers
and give useful examples of how tax should be applied in these circumstances, but
nevertheless leave employers with a lot of work to do to get it right.
Speak to your tax advisers before sending an option holder abroad.
Find out whether exercise of your options ordinarily trigger PAYE obligations.
Check that the option scheme rules enable you to recover all taxes from the
Keep track of where your option holders are working – your records must be
accurate and kept up to date.
Make sure your share scheme administrator communicates regularly with
Consider allowing option holders being transferred abroad to exercise their
Neil Pearson an associate at Wragge & Co