UK Companies Have 92 Days To Place A Bet On Their Share Option NIC Liability

Jason Gorringe, Tax-News.com, London

22 February 2001

UK companies with a National Insurance liability in respect of share options issued in 1999 and 2000 may have a chance to reduce or remove that liability under legislation due to receive the Royal Assent by Easter - if the election isn't called in the meantime, which would automatically kill any outstanding Bills. But companies will only have 92 days in which to agree a deal with the Inland Revenue under the legislation.

First, a little history:

Most share options issued in the UK to senior staff (and many issued to junior staff) are so-called 'unapproved' options, due to the low limits placed on the issue of tax-privileged 'approved' options. The booming dotcom sector in 1998/99 was especially active in issuing unapproved options, and was duly horrified in April 1999 when the budget imposed National Insurance Contributions (just call it a tax of 12.2%) on gains in the value of options on exercise, especially when it transpired that the potential liability had to be reflected on their often very stretched balance sheets.

In the face of a growing clamour from the high-tech sector, the Treasury gave in on May 19th, 2000, and allowed the NIC liability on options granted after that date to be borne by the employee rather than the employer. That was just about the date on which the dotcom sector started to implode, so that many companies turned from worrying about the high value of the liability attaching to their stock options to worrying about staying alive.

The Treasury also announced legislation to deal with the problem of options issued between April 1999 and May 2000, under which companies have an opportunity to get rid of potential liability, or anyway to cap it, on options granted during that period and which were unexercised on November 8th, 2000.

The Social Security Contributions (Share Options) Bill allows companies whose shares were 'readily convertible assets' (mostly companies with traded shares) on November 8th 2000 to choose to settle their liability to NIC based on the value of the options on that date. Then they will have no further liability to NIC, regardless.

On the other hand, if the option shares were not readily convertible assets, or if they were under-water (trading below their option prices) then the company is deemed to have given notice and there will be no NIC, again regardless of what happens later.

The Inland Revenue estimates that around 2,000 companies may have offered share options to some 50,000 employees during the 13 months covered by the Bill. These companies will face a tricky decision, though.

Your typical dotcom, let's say, issued 1m options at par, giving a valuation of £1m, when it floated in 1999. Its share price rocketed to £10, giving a valuation of £10m (and an NIC liability of £1.08m). But then in 2000 its price halved, let's say, to £5, leaving a liability of to NIC on November 8th of just under £500,000. Since then the price has fallen further, to £3, so now the liability is £240,000.

What to do? The company still has £5m in cash, but another funding round is years away. What are the chances that the shares will rise above £5 by the time the options are exercised (an event the company can't control anyway)?

The Bill is well-meaning, and will help some companies. But for many, it will be an agonising decision, and not much time in which to make it. Better call your accountants right now!

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