A new measure by the Chancellor to stop top City traders avoiding tax is to hit tens of thousands of innocent employees. The measure announced in Wednesday's Budget changes the way "phantom" options or stock appreciation rights (SARs) are taxed.
These instruments resemble share options, but do not give the recipients the right to buy shares. Instead, they give them a share of the increase in value in a business as calculated by the owner.
Currently they are treated exactly like share options, so that tax is only paid when cashed in. However, Gordon Brown, worried that they are being used by City firms as a way of spreading or avoiding tax on bonus payments, has ruled that the tax will be payable when the options are granted.
Michael Landon at Mercer Human Resource Consulting warned: "Employees will suffer an income tax and National Insurance contribution charge several years before they receive the cash benefit from their rewards."
Scores of companies use "phantom" options or SARs as legitimate ways to reward staff. Typically they are used when employees work for a subsidiary of a company that is doing better than the parent group, so that they get the upside of how well that business is doing. They are also used by UK subsidiaries of overseas companies, particularly US groups.
A third kind of business using these instruments is a family company where the owners do not want to dilute ownership by giving options over actual shares.
The effect of this change is that many employees would not be able to afford to sign up to these incentive plans.
In the US, a similar anti-avoidance measure was dropped after the dot-com crash, when it emerged that staff were being taxed at the nominal value of an option award when it was granted, but because the company's share price dropped, the incentive was worthless.Reuse content