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Employment-Related Securities and Unlisted Companies 3rd ed

Ken Moody

ISBN13: 9781910151501

New Edition ISBN: 9781913507107

Previous Edition ISBN: 9781907444722

Published: September 2017

Publisher: Spiramus Press Ltd

Country of Publication: UK

Format: Paperback

Price: Out of print

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 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. 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. 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 CGT 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.

Subjects:: Company Law, Employment Law, Taxation

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