Treasury nears deal on tax levied on high-tech share options
The UK government believes it is close to resolving the bitter row that has raged with high-technology companies over the national insurance charges levied on share option schemes, according to a report in the Financial Times newspaper on 7 April 2000.
The proposed solution appears to involve passing on part or all of the employers' liability to employees who exercise the option as long as they agree.
Shifting the onus to employees is attractive to the government because it could resolve the problem without creating a general tax avoidance loophole, the newspaper report says.
The row began last year when the Inland Revenue imposed national insurance charges, currently 12.2%, on employees share option schemes, widely offered by fledgling internet companies and technology businesses.
Internet-style share options
One of the defining features of reward packages in internet companies — and arguably the main lure of working for them — is the offer of seemingly lucrative share options.
Taking stock options instead of a generous salary has its origins in the US internet economy. For the past two years US online businesses have been offering generous options and equity to give them the edge when recruiting seasoned off-line managers. The approach is now gaining popularity over here.
Tim Jackson, founder of the auction web site QXL.com, writing in the Financial Times on 17 January 2000, said: Stock options are the secret weapon that allows internet businesses to recruit experienced managers from traditional companies, without always having the money to match their previous salaries and benefits.
In more traditional companies, share options are largely confined to the upper echelons, but they certainly seem to have permeated further down the hierarchy in dot-com start-ups. As Jackson observed: This approach is very different from traditional businesses. Internet options tend to cover all staff, instead of a privileged few.
For Jackson, internet-style options are a way of turning employees into owners, allowing them to make a real investment in the company even if they do not have cash to buy shares when they are recruited.
National insurance charges
However, many internet companies are furious at the way these share options are taxed. In recent months, the government has come under severe criticism for levying national insurance contributions on unapproved share option schemes. As a result of the current rules, dot-coms can suffer severe cash flow problems.
When an option is exercised, the company must pay national insurance charges, along with income tax calculated on the difference between the share's market value and exercise price of the option. Companies have no control over when employees exercise their options or their share price.
A report in The Guardian newspaper on 9 February 2000 said that QXL set aside £ 15 million in the 1999 third quarter alone to cover its potential national insurance bill. Turnover for the quarter was £ 1.6 million.
Elsewhere, because of the stellar performance of its shares, software consultancy Axon had to make a £ 1 million provision to cover likely payments to the Inland Revenue. This compared with profits of £ 4.5 million.
Key quotes
At present employers are statutorily barred from asking employees to reimburse their insurance liability, even when share prices have risen sharply and staff have realised large share option gains but the company is not in profit. — Financial Times 7 April 2000.
Want to know more?
Visit the Financial Times online at www.ft.com and type share option schemes into its global archive search box — you will find a series of reports on this issue.