The UK Tax Authority has changed its stance on National Insurance contributions (NICs) on share-based income of employees moving between the UK and countries with which the UK has a social security agreement.
A liability to UK income tax arises on gains realised by an employee from the exercise of share options where that employee is resident (and ordinarily resident) at the date of grant. Where a liability arises to UK income tax, UK NICs are also payable.
An exception to this rule is where the employee was not subject to UK NICs at the time the option was granted. For instance, the employee was subject to the social security legislation of another country under the terms of a social security agreement that the UK has with that country.
Conversely, although an employee may have left the UK after having been granted an option and is subject to social security legislation in the new country at the time of exercise, the fact that they were subject to UK social security at the time of grant means that NICs are still due on the gain realised at exercise.
In many other countries, liability to social security charge is dependent on the individual's circumstances at the point of exercise. It is therefore likely that an individual on assignment overseas may have to pay social security on the exercise gain in the host country while remaining subject to UK NICs also because of their residence status at grant.
The UK Tax Authority, HMRC, has until recently taken the view that they would not pursue NICs in a situation where an individual was subject to UK legislation at the date of grant but subject to the legislation of the agreement country at the time of exercise. This position did not depend on the individual actually paying host country social security on the exercise gain so, if the host country did not treat the exercise as a chargeable event for social security purposes, no social security charge at all would arise.
HMRC has now stated that they will seek NICs on any exercise gain unless the exercise gain is fully subject to social security in the agreement country and host contributions are actually paid.
HMRC's position is reasonable and aims to prevent individuals and employers from avoiding any social security tax on the exercise of an option. UK employers of globally mobile employees, however, will need to keep track of the exercise of all options granted to employees while in the UK to ensure full compliance with UK NICs legislation.
Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue please seek specific advice relevant to your particular circumstances. In particular, no responsibility shall be accepted by the authors or by Abbiss Cadres LLP for any losses occasioned by reliance on any content appearing on or accessible from this article. For further legal information click here.
Circular 230 disclosure
To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this article (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
If you would like to copy or otherwise reproduce this article then you may do so provided that: (1) any such copy or reproduction is for your own personal use or if it is made available to any third party it is done so on a free of charge basis; and (2) the article is reproduced in full together with the contact details, disclaimer and any logos as they appear on each article.