National Insurance charge - UITF 25
The Social Security Act 1998 introduced a National Insurance charge on UK employers on the gains made by employees upon exercise of options under unapproved share option schemes (ie those not approved by the Inland Revenue).
The charge applies to options granted after 5 April 1999. The gain on which National Insurance contributions are payable is the difference between the share price at the date the options are exercised and the exercise price paid by the employee. This applies to those schemes where the shares are "readily convertible assets", ie they can be sold on a stock exchange or there are arrangements in place that allow the employees to obtain cash for the shares.
UITF 25 concludes that provision should be made for the NIC due on all such share options outstanding at the balance sheet that are expected to be exercised, based on the market values at that date, because a liability to do so exists at that time.
The expense relating to such a provision may comprise a very substantial charge to the profit and loss account in situations where large numbers of such options have been granted and where the shares are trading at levels well in excess of the option price.
Where such options have been "substituted" for cash salaries and bonuses, typically in a start up ebusiness, the cash flow advantages to the company is clearly retained, but the extent to which future costs are now being charged in a current period may have a significant adverse effect on the profit and loss account.
A company can only be relieved of the profit and loss account charge if formal arrangements have been made for the benefiting employees to bear what would normally be an employer's liability. (Employees who do agree to this will get income tax relief on the NIC they pay!)
UITF 25 now in force.
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