902.This section provides for the treatment of National Insurance contributions on share option gains.
903.Subsection (1) amends Schedule 1 to the Contributions and Benefits Act 1992. It omits sub-paragraph (2) of paragraph 3 of Schedule 1 to that Act, which deals with prohibition on deduction or recovery of Class 1 Contributions.
904.Subsection (2) inserts new paragraphs 3A and 3B into Schedule 1 to the Contributions and Benefits Act 1992.
Sub-paragraph 3A(1) prevents any person who is liable to pay any secondary Class 1 contributions, or any Class 1A or 1B contribution, from recovering these in any way. This reinforces that an employer may not under any circumstances compel an employee to pay any part of the secondary liability. It also strengthens the existing position by ensuring that the employer can recover neither of the two existing employer-only National Insurance charges, namely Class 1A (due on benefits in kind) and Class 1B (due on items included in PAYE settlement agreements). However, this new sub-paragraph is subject to the exception allowed under new sub-paragraph 3A(2).
Sub-paragraph 3A(2) allows an exception to sub-paragraph 3A(1). It allows a secondary contributor to recover some or all of his secondary Class 1 liability in relation to share option gains from the employee, but only where the employee agrees to this. Sub-paragraph 3A(3) makes it clear that such agreements will only be allowed if they are made after the date of announcement of this measure, namely 19 May 2000.
Sub-paragraph 3B(1) allows a secondary contributor and an employee to make a joint election to transfer to the employee the liability for some or all of the secondary contributor’s Class 1 contributions relating to gains on share options. For such an election to be valid, prior approval must be sought from the Inland Revenue. This approval will be given for both the form of the election and the arrangements made for securing that the payments required to meet the liability transferred by the proposed election will be paid and paid on time.
Sub-paragraph 3B(2) makes it clear that any liability which has been transferred by such an election is treated for the purposes of this Act, the Administration Act and Part II of the Social Security Contributions (Transfer of Functions, etc.) Act 1999 as a liability falling on the earner.
Sub-paragraph 3B(3) states that an election under new sub-paragraph 3B(1) continues in force until it ceases to have effect in accordance with its terms, it is revoked jointly by both parties or the approval of the election is withdrawn by the Inland Revenue in relation to options not yet granted. Where more than one of these events occur the election will cease to be in force of the date of earliest of these events.
Sub-paragraph 3B(4) allows the Inland Revenue to give approval to multiple elections relating to a particular secondary contributor as well as single ones. It can approve elections between a particular secondary contributor and particular earners or a particular class of earners, or elections made by a particular secondary contributor in certain circumstances.
Sub-paragraph 3B(5) defines the grounds on which the Inland Revenue can refuse approval of an election. It allows the Inland Revenue to refuse approval if it appears that adequate arrangements to make sure that the liability will be met have not been made, or if the Inland Revenue feels that it does not have enough information to decide on this.
Sub-paragraph 3B(6) allows the Inland Revenue to withdraw approval if they feel that the arrangements for making sure that the liability is met are proving inadequate, or if they feel that an election they have approved is likely to result in the avoidance or non-payment of secondary Class 1 contributions.
Sub-paragraph 3B(7) states that the Inland Revenue may withdraw general approval in relation to a particular secondary contributor, or withdraw approval for a single election or multiple elections in accordance with 3B(6). It states that such a withdrawal of approval means that any existing election made under the approved arrangements has no effect on contributions due on any right to obtain shares obtained after the approval is withdrawn.
Sub-paragraphs 3B(8) and (9) allow the person who applied for (or received) approval the right of appeal in the case of its refusal or withdrawal. This appeal is to the Special Commissioners. Where approval is withdrawn and elections made under that approval are effected in relation to future option grants, the employee also has a right of appeal.
Sub-paragraph 3B(10) makes it clear that elections cannot apply to contributions made on gains realised before the election was made. This is, however, subject to sub-paragraph 3B(12) below.
Sub-paragraph 3B(11) allows the Inland Revenue to make regulations in respect to elections made under sub-paragraph 3B(1). These regulations may in particular deal with the matters contained in such an election, the manner in which the election may be made and the manner of applications for approval.
Sub-paragraph 3B(12) provides a limited allowance for elections to apply to contributions made on gains realised before the election was made. If an election is made within 3 months of this Act receiving Royal Assent, it may relate to such liabilities arising on or after 19 May 2000.
Sub-paragraph 3B(13) clarifies that references to contributions on share option gains by the earner mean any secondary Class 1 contributions payable in respect of a gain treated as remuneration derived from employment under section 4(4)(a) of the Contributions and Benefits Act 1992.
905.Subsection (3) amends the Contributions and Benefits Act 1992. In section 6(4), it replaces the words from “paragraph 3” with the words “paragraphs 3 to 3B of Schedule 1 to this Act”.
906.Subsection (4) also amends the Social Security Contributions and Benefits Act 1992. It inserts new sub-paragraph (ca) into paragraph 8(1) of Schedule 1 to that Act. This new sub-paragraph extends the general regulations to require a secondary contributor to inform an earner to whom liability for secondary Class 1 contributions has been transferred whenever a transferred liability arises, and the amount of that liability.
907.Subsection (5) amends the Social Security Contributions (Transfer of Functions, etc.) Act 1999. It inserts new paragraph (ia) into paragraph 8(1) of that Act. This new paragraph extends the powers of the Inland Revenue to decide whether or not to grant, or withdraw, approval for an election under new sub-paragraph 3B(1) above. Subsection (6) inserts a new subsection (2A) in section 10 and amends section 10(1). The new subsection (2A) provides that decisions falling within the new section 8(1)(ia) will not be covered by regulations made under section 10.
908.Subsection (7) further amends the Social Security (Transfer of Functions, etc.) Act 1999. It amends section 12(4) of that Act, which deals with appeals to be heard by the General Commissioners, to include a reference to the right to appeal to the Special Commissioners given in new sub-paragraph 3B(8) above.