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EMPLOYMENT RELATED SHARES & THE PRIVATE COMPANY
A Guide for Professional Advisers By Ken Moody

The employment related securities (‘ERS’) legislation in Part 7 ITEPA 2003 is one of the most complex pieces of legislation on the statute book and also one of the most difficult to interpret. At the same time, practically every firm of accountants – however small – needs to know enough about ERS to comply with reporting requirements and try to try to ensure, as far as possible, that their company proprietor clients are not unnecessarily exposed to income tax and possibly NIC charges in respect of ERS. The professional advisers which the guide is aimed at are basically firms of accountants, tax advisers and perhaps solicitors involved in the formation and/or dealing with the general tax affairs of private companies. That, of course, includes practically every accounting firm in the country except that the larger practices will have their own in-house experts on employee taxation, share schemes and other incentives. Quoted companies are almost the exclusive province of the big firms and are perhaps most likely to offer share-based incentives to employees, whether HMRC-approved or unapproved, which may involve complex share structures and arrangements. The guide does not deal with HMRC-approved share schemes except for EMI, or with ‘blossoming rights’ ratchets and the like, but does aim to cover all relevant tax aspects of the ownership of shares in private companies by directors and employees, with particular focus on Part 7 ITEPA 2003 though dealing also with CGT, PAYE and other aspects. To the author’s knowledge there is no other publication which covers the same ground except in a general way.

Because of the focus on private companies the guide is not a complete review of Part 7, and ignores certain Chapters within Part 7 which are concerned with complex arrangements to avoid tax and which the general practitioner is unlikely to meet in practice in relation to private companies (Chapters 3A & 3B). An analysis of Chapter 4A dealing with university ‘spin-out’ companies is also omitted for similar reasons.

Because the guide aims to cover the core material in depth, it deals with the complex as well as the mundane so is not likely to be read cover to cover but perhaps used as valuable reference material.

Here are some of the topics covered:

• The distinction between taxation of ERS as general earnings or as special employment income under Part 7, with implications for PAYE and NICs.

• Definitions and reporting requirements, including brief commentary on Form 42 procedures.

• The implications of ERS being ‘readily convertible assets’.

• Distinguishing ‘restricted’ shares from ‘unrestricted’ shares, with implications for potential future income tax charges on the occurrence of ‘chargeable events’ when restrictions, e.g. a risk of forfeiture, are lifted or on disposal.

• The pros and cons of making the election under section 431 ITEPA 2003 in relation to the acquisition of restricted securities to avoid income tax charges in future, and also detailed explanation of how the formulae work for calculating amounts chargeable in respect or restricted securities in the absence of an election.

• The implications of partly paid shares and the tax treatment of the notional beneficial loan which is deemed to arise in such circumstances.

• Sales of shares for greater than their open market value, triggering an income tax charge on the excess, with particular reference to the recent Special Commissioners’ case of Company A v HMRC.

• Post acquisition benefits from securities, including the question of taxation of dividends as remuneration such as where ‘alphabet’ shares are involved, but also more generally in relation to private company shares, in the light of remarks made by the Paymaster General and other relevant considerations.

• Employee share options and the ERS legislation, including commentary on HMRC-approved EMI share options.

• Capital gains tax & PAYE aspects.

• Observations on valuation issues.

• Obtaining a corporation tax deduction in respect of amounts taxable in relation to ERS, under Schedule 23 FA 2002.

• The incorporation of professional partnerships, covering both ERS and wider issues.

Ken Moody, 16 June 2008

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