Employment-Related Securities and Unlisted Companies

Employment-Related Securities and Unlisted Companies

Third edition

Employment-Related Securities and Unlisted Companies is written with mainly private or unlisted companies in mind and explains in depth how the employment related securities (‘ERS’) rules in ITEPA 2003, Part 7 apply to employee share acquisitions generally, including:

  • Securities as earnings
  • Restricted or convertible securities
  • Securities acquired for less than market value
  • Securities disposed of for more than their market value
  • Post-acquisition benefits connected with securities
  • Securities acquired under options

The book also explores employee share acquisitions through various means, the relevant capital gains tax rules and corporation tax relief for employee share acquisitions. Basic share valuation methodology is discussed and though PAYE and NICs do not apply generally to unlisted company shares/securities, they may apply where a market exists for the securities or on the occurrence of events related to ERS. Lastly, the compliance requirements with regard to online registration of schemes, annual returns, penalties etc, are also featured.

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Employment-Related Securities and Unlisted Companies is written with mainly private or unlisted companies in mind and explains in depth how the employment related securities (‘ERS’) rules in ITEPA 2003, Part 7 apply to employee share acquisitions generally, including:

  • Securities as earnings
  • Restricted or convertible securities
  • Securities acquired for less than market value
  • Securities disposed of for more than their market value
  • Post-acquisition benefits connected with securities
  • Securities acquired under options

Part 7 consists partly of anti-avoidance rules relating to shares and other securities acquired or disposed of under the above categories. The rest of the legislation is concerned mainly with the tax-advantaged securities option arrangements, though the major emphasis in this work is on the Enterprise Management Incentives (‘EMI’) share option scheme. EMI options are of relevance mainly to unlisted companies due to the financial and other limits applicable.

The book also explores employee share acquisitions through various means, the relevant capital gains tax rules and corporation tax relief for employee share acquisitions. Basic share valuation methodology is discussed and though PAYE and NICs do not apply generally to unlisted company shares/securities, they may apply where a market exists for the securities or on the occurrence of events related to ERS. Lastly, the compliance requirements with regard to online registration of schemes, annual returns, penalties etc, are also featured.

The vast majority of companies registered with Companies House are unlisted companies and OMB/SME owner-managers and their professional advisers need to be aware of the impact of the ERS rules and of both the pitfalls and the opportunities presented. Part 7 is complex and confusing but important legislation. The detailed commentary provided here aims to provide its target audience with as complete a guide as possible to both the technicalities and the practicalities involved in a wide variety of circumstances.  

 

There is no other publication of its type which deals with the ERS rules in depth and, as explained, this is a subject which all company owner-managers and their advisers need to be informed about.

Employment-Related Securities and Unlisted Companies is written with mainly private or unlisted companies in mind and explains in depth how the employment related securities (‘ERS’) rules in ITEPA 2003, Part 7 apply to employee share acquisitions generally, including:

  • Securities as earnings
  • Restricted or convertible securities
  • Securities acquired for less than market value
  • Securities disposed of for more than their market value
  • Post-acquisition benefits connected with securities
  • Securities acquired under options

The book also explores employee share acquisitions through various means, the relevant capital gains tax rules and corporation tax relief for employee share acquisitions. Basic share valuation methodology is discussed and though PAYE and NICs do not apply generally to unlisted company shares/securities, they may apply where a market exists for the securities or on the occurrence of events related to ERS. Lastly, the compliance requirements with regard to online registration of schemes, annual returns, penalties etc, are also featured.

Contents

Abbreviations

Table of authorities

1              Introduction to taxation of ERS and related matters

1.1          Introduction to this work

1.2          Terminology

1.3          Introduction to the legislation

1.4          ERS and taxation of earnings

1.5          History and commencement of the legislation

1.6          Finance (No.2) Act 2005 and tax avoidance

1.7          Finance Act 2006

1.8          From 2006 to the present

1.9          Taxation of ERS – review of the main provisions

1.10        HMRC guidance

1.11        Employee shareholder

1.12        The corporation tax deduction – overview

1.13        A few ideas

2              Circumstances and (some) solutions

2.1          Introduction

2.2          Four ways for employees to acquire shares

2.3          Typical scenarios

2.4          Commercial expediency

2.5          Where sale of the company is in prospect

2.6          The employee’s perspective

2.7          ‘Exit route’ considerations

2.8          A tax-inefficient exit

2.9          Managers’ equity investments

2.10        The ‘nil paid’ share arrangement

2.11        Growth shares

2.12        Shares in subsidiary companies

2.13        Joint Share Ownership Plans

2.14        ‘Flowering’ or ‘blossoming shares’

2.15        Option arrangements

2.16        ‘Alphabet’ shares

3              Definitions

3.1          Introduction

3.2          Scope of the legislation

3.3          Negative amounts

3.4          Meaning of securities

3.5          Definition of market value

3.6          Consideration

3.7          What shares are employment-related?

3.8          Bonus issues & replacement securities

3.9          Rights issues

3.10        Associated persons

3.11        Exclusions: public offers

3.12        Exclusions: residence

3.13        Employee-controlled companies

3.14        Duty to provide information

3.15        Penalties

3.16        Assessment of penalties and appeals

3.17        Reportable events

3.18        Responsible persons

4              Reporting and other compliance requirements (formerly Form 42)

4.1          Registration and annual returns

4.2          Occasions when no report is required

5              Restricted Securities

5.1          Introduction and overview

5.2          What are restricted securities?

5.3          Shares accepted as unrestricted – HMRC guidance

5.4          Statutory exclusions

5.5          Pre-emption rights and ‘good’ and ‘bad’ leavers

5.6          No charge on acquisition in certain cases

5.7          Chargeable events and amounts chargeable

5.8          Observations

5.9          Relief for NICs election and agreements

5.10        Exclusion for certain control situations

5.11        Elections to opt out of Chapter 2

5.12        Election on occurrence of a chargeable event

5.13        Pro forma elections

5.14        Shares acquired under HMRC approved plans

5.15        Avoidance cases – section 431B

6              Convertible securities

6.1          Introduction

6.2          Convertible securities

6.3          Adjustment of charge

6.4          Chargeable events

6.5          Amount of charge

6.6          Amount of gain

6.7          Consideration given for a right to convert

6.8          Case outside section 438 charge

6.9          NICs election

6.10        PAYE and NICs

6.11        Interaction with other chapters of Part 7

7              Securities with artificially depressed or enhanced market value & other tax charges

7.1          Securities with artificially depressed market value

7.2          Other tax charges

7.3          Securities with artificially increased market value

8              Securities acquired for less than market value

8.1          Introduction

8.2          Loans to participators

8.3          Application of Chapter 3C

8.4          Cases which are outside Chapter 3C

8.5          Notional loan

8.6          Amount of notional loan

8.7          Discharge of notional loan

8.8          Nil or partly paid share arrangements

8.9          Interaction of Chapter 2 and Chapter 3C – extended illustration

8.10        CTA 2010 section 455

9              Securities disposed of for more than market value

9.1          Introduction

9.2          When Chapter 3D applies

9.3          Amount chargeable

9.4          Fair market value

9.5          Gray’s Timber

9.6          Earn-outs

9.7          Company purchase of own shares

10           Post-acquisition benefits from securities

10.1        Introduction

10.2        The charge

10.3        Exclusions from the charge

10.4        Finance (No.2) Act 2005 changes

10.5        Are dividends within Chapter 4?

10.6        PA Holdings decision

10.7        PA Holdings and Chapter 4

10.8        ‘Alphabet’ shares

10.9        A double tax charge?

10.10      Whether ‘something has been done’

10.11      Other Chapter 4 situations

11           University spin-out companies

11.1        Introduction

11.2        Application of Chapter 4A

11.3        Tax relief on acquisition

11.4        Tax relief following acquisition

11.5        Scope of relief

11.6        Disapplication of Chapters 2 and 3B

11.7        Definitions

11.8        Capital gains tax

12           Securities options

12.1        Introduction

12.2        Commencement

12.3        Chargeable events

12.4        Amount of charge

12.5        Deductible amounts

12.6        Employer’s NIC paid by employee

12.7        Exchange of options

12.8        Earn-outs

12.9        Interaction with other chapters of Part 7

13           Enterprise management incentives

13.1        Introduction & overview

13.2        Recent developments

13.3        Key advantages

13.4        Requirements - overview

13.5        Capital gains tax

13.6        The EMI ‘Code’

13.7        Market value

13.8        Option price is market value

13.9        Option price is less than market value

13.10      Disqualifying events

13.11      Tax charge following a disqualifying event

13.12      Section 431 elections

13.13      Seeking ‘comfort’ in advance

13.14      Corporation tax relief

13.15      Schedule 5 requirements: qualifying options

14           Company Share Option Plan

14.1        Introduction

14.2        Summary

14.3        FA 2013 changes

14.4        Application

14.5        No charge on exercise

14.6        Charge where option offered at a discount

14.7        Introduction to Schedule 4

14.8        Exchanges of options

14.9        Notification of schemes

14.10      Annual returns

14.11      Notices and returns to be given electronically

14.12      Penalties, enquiries etc

14.13      Interaction with EMI

14.14      CSOP and Capital Gains Tax

14.15      PAYE/NICs

14.16      Deemed section 431 election

14.17      Corporation tax relief

15           Capital gains tax and ERS

15.1        Introduction

15.2        The market value rule

15.3        Relevant income tax charges

15.4        Unrestricted shares

15.5        ERS Options

15.6        Restricted or convertible securities

15.7        Shares in research spin-out companies

15.8        Conditional share interests

15.9        Priority share allocations

15.10      Effect on transferor

15.11      Options

15.12      Application of section 119A in certain circumstances

15.13      Entrepreneurs’ Relief

16           The corporation tax deduction

16.1        Introduction

16.2        Basic requirements under Part 12, Chapter 2

16.3        Relief for options

16.4        Basic requirements

16.5        Additional relief for restricted shares

16.6        Additional relief for convertible securities

17           Employment-related securities and PAYE/NICs

17.1        Introduction

17.2        PAYE – Readily convertible assets

17.3        ‘Readily convertible assets’ defined

17.4        Valuation

17.5        Chargeable events subject to PAYE/NICs

17.6        Payment of PAYE

17.7        Payment of PAYE where deduction not possible – ITEPA section 222

17.8        Linkage with NICs legislation

17.9        Employers’ NICs paid by employee

17.10      Amount on which PAYE is due where employee meets employer’s NIC

17.11      Real time information (‘RTI’)

17.12      Avoidance of PAYE and NICs

18           Valuation of ERS and related issues

18.1        Introduction

18.2        Basis of valuation

18.3        Open market value

18.4        Money’s worth valuation

18.5        Shares and Assets Valuation practice

18.6        Valuations under the company’s articles of association

18.7        Money’s worth value v market value

18.8        Effect of transfer restrictions, pre-emption rights etc on valuation

18.9        Valuation basics

18.10      Effect of earlier sales

18.11      A different approach

18.12      Dealing with SAV

19           Internationally mobile employees

19.1        Introduction and overview

19.2        Taxation of foreign earnings

19.3        Internationally mobile employees – Schedule 5B

19.4        Effect of Double Taxation Relief (DTR) Agreements

19.5        PAYE/NICs

Appendix 1: Flowchart for the operation of PAYE

Index

Imprint
Spiramus Press
Publisher
Spiramus Press
Language
English
Product Format
Paperback
Dimensions
234 x 156
Publication Date
12 Sep 2017
Number of Pages
408
ISBN
9781910151501
Edition
3
Product Format
PDF
Dimensions
234 x 156
Publication Date
11 Sep 2017
Country of Manufacture
GB
Number of Pages
408
ISBN
9781910151518
Edition
3