Employment-Related Securities and Unlisted Companies

This book explains the tax implications of employee share awards by private companies, including completion of form 42, restricted securities, share options (approved and unapproved), CGT and PAYE/NIC issues and corporation tax relief. The expanded second edition features detailed commentary on EMI options and includes two EMI option agreement precedents. New chapters have also been added covering CSOP, internationally mobile employees and practical discussion of valuation of ERS.

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This book explains the tax implications of employee share awards by private companies, including completion of form 42, restricted securities, share options (approved and unapproved), CGT and PAYE/NIC issues and corporation tax relief. The expanded second edition features detailed commentary on EMI options and includes two EMI option agreement precedents. New chapters have also been added covering CSOP, internationally mobile employees and practical discussion of valuation of ERS.

The vast majority of companies registered at Companies House are owner-managed private companies. The employment-related securities (ERS) regime applies to all shares owned by directors or employees in the company or group they work for with few exceptions. This book is of importance therefore for all shareholder-directors and employees of such companies, and for their professional advisers.

Often the tax implications of the ERS rules are not onerous, but sometimes result in an income tax charge for the employee, and the company may also be obliged to pay PAYE and National Insurance Contributions.

It has been the case for many years that if a director or employee acquires shares free or for less than they are worth, they are liable to income tax on the difference. This book explains how the rules for taxing such share awards work, including the rules for non-HMRC approved share options and for options qualifying under EMI. There are also chapters dealing with capital gains tax aspects of shares and share options, the PAYE and national insurance implications and the corporation tax deduction which may be claimed by the company.

Form 42 giving details of employee share acquisitions can be a perennial headache for companies and their advisers. This book explains in detail what the entries mean and how to complete these.

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.

This book explains the tax implications of employee share awards by private companies, including completion of form 42, restricted securities, share options (approved and unapproved), CGT and PAYE/NIC issues and corporation tax relief. The expanded second edition features detailed commentary on EMI options and includes two EMI option agreement precedents. New chapters have also been added covering CSOP, internationally mobile employees and practical discussion of valuation of ERS.

Contents

Foreword

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  Office of Tax Simplification

1.12  Employee shareholder

1.13  The corporation tax deduction – overview

1.14  A few ideas

2             Circumstances and (some) solutions

2.1     Introduction

2.2     Why do you need this book?

2.3     Four ways for employees to acquire shares

2.4     Typical scenarios

2.5     Commercial expediency

2.6     Where sale of the company is in prospect

2.7     The employee’s perspective

2.8     ‘Exit route’ considerations

2.9     A tax-inefficient exit

2.10  Managers’ equity investments

2.11  The ‘nil paid’ share scheme

2.12  Growth shares

2.13  Option arrangements

2.14  ‘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: HMRC-approved schemes

3.13  Employee-controlled companies

3.14  Duty to provide information – Form 42

3.15  Reportable events

3.16  Responsible persons

4             Reporting requirements: Form 42

4.1     Duty to provide information

4.2     Reportable events

4.3     By reason of employment

4.4     Occasions when no report is required

4.5     HMRC guidance on completion of Form 42

4.6     Form 42 itself

4.7     ‘Founders’ shares’

4.8     Grant or exercise of share options – Form 42 Section 1

4.9     Acquisition of securities – Form 42 Section 2

4.10  Events occurring after acquisition of securities – Form 42  Section 3

4.11  Participating companies – Form 42 Section 4

4.12  Nil return - Form 42 Section 5

4.13  Declaration – Form 42

4.14  Penalties

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     The nil paid share scheme

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

8.10  Section 455 CTA 2010

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

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  Recent developments – EMI and university spin-outs

11.3  Application of Chapter 4A

11.4  Tax relief on acquisition

11.5  Tax relief following acquisition

11.6  Scope of relief

11.7  Disapplication of Chapters 2 and 3B

11.8  Definitions

11.9  Capital gains tax

11.10                    Form 42: return of information

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  No approval required

13.5  Requirements

13.6  Capital gains tax

13.7  The EMI ‘Code’

13.8  Market value

13.9  Option price is market value

13.10                    Option price is less than market value

13.11                    Disqualifying events

13.12                    Tax charge following a disqualifying event

13.13                    Section 431 elections

13.14                    Seeking ‘comfort’ in advance

13.15                    Corporation tax relief

13.16                    Schedule 5 requirements: qualifying options

13.17                    EMI agreements – precedents

14          Approved 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  Approval of schemes

14.10                    Interaction with EMI

14.11                    CSOP and Capital Gain Tax

14.12                    PAYE/NICs

14.13                    Internationally mobile employees

14.14                    Deemed section 431 election

14.15                    Corporation tax relief

15          Capital gains tax and ERS

15.1  Introduction

15.2  The market value rule

15.3  The relevant provisions

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 Chapter 2, Part 12

16.3  Relief for options

16.4  Additional relief for restricted shares

16.5  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 – section 222 ITEPA

17.8  Employers’ NIC paid by employee

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

17.10                    Real time information

17.11                    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  Commencement

19.3  Taxation of foreign earnings

19.4  FA 2008 changes and ERS

19.5  Chapter 5A, Part 2 ITEPA

19.6  Effect of Double Taxation Relief (DTR) Agreements

19.7  PAYE/NICs

Appendix 1: Precedent EMI option agreement between company and employee, including alternative clauses in respect of performance targets

Appendix 2: Precedent EMI option agreement between individual grantor and employee, conditional upon sale of company

Appendix 3: Flowchart for the operation of PAYE

Index

Imprint
Spiramus Press
Publisher
Spiramus Press
Language
English
Product Format
Paperback
Dimensions
234 x 156
Publication Date
28 Jul 2017
Number of Pages
320
ISBN
9781910151501
Edition
3
Product Format
PDF
Dimensions
234 x 156
Publication Date
17 Aug 2017
Country of Manufacture
GB
Number of Pages
320
ISBN
9781910151518
Edition
3