Company A develops security software products for business and public bodies. Company A is a wholly owned subsidiary of Company B.
Company A engages the services of a contractor who helps it to develope its software products. The agree consideration is £100,000.
Rather than Company A paying the contractor the £100,000 it was agreed between the parties that the contractor would be be granted share options in Company B for which the contractor would pay £1,000. The £1000 was considerably below the value of the shares he was given options on.
What are the accounting entries in Company A and Company B and what are the taxation implications for both companies and the contractor?
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What are the accounting entries in Company A and Company B and what are the taxation implications for both companies and the contractor?
For such a bizarre idea, this is a surprisingly regular question. (Sometimes shares; sometimes options.). Have a search of Any Answers.
Presumably you’re not advising both the companies and the contractor.
Sounds like one of those emails I used to get before the spam filters improved. "We have £100,000 waiting for you - we can release it to you if you send us £1,000 and your bank details."
I understand what you mean, however, this is a genuine situation. The companies concerned are clients but the contractor is not. I was not asked for advice in advance but simply told (when preparing accounts) that it had happened.
The shareholders of the holding company have other very large unrelated businesses and may have taken advice from the accountants who advise them on their other interests.
Cross-posted with your response. I'd follow up with shareholders and their advisers. You would hope they knew what they were doing.
The shareholders of the holding company have other very large unrelated businesses and may have taken advice from the accountants who advise them on their other interests.
Alarm bell #2. A business with multiple accountants to avoid the risk of someone seeing the whole picture.
I rather think it would have been wiser for the parties to understand the tax consequences before agreeing to such a deal.
From an accounting perspective, it's a barter transaction: A has paid for services of Contractor by granting options in B shares. The problem is that A is giving something it doesn't own, so A has to buy those option rights from B.
And then you have to value those options, which will depend on the strike price and any other conditions (timing, lock in). As well as the proportion that will be held by Contractor and any rights s/he may have as (presumably) a minority holder. Unless B is a public company or possibly have been through a fund-raising round, the shares/options are likely to have little realisible value.
Either all of these things have been thought through and there are ready answers. Or the parties are dumb.
Either all of these things have been thought through and there are ready answers. Or the parties are dumb.
The contractor certainly is. On the face of it, the companies have got £100,000 of services for nothing. Or is that £100,000 +VAT??
Good point. Contractor potentially has to pay £20k output tax with cash that they have not received. Unless, of course, Contractor has raised a VAT-only invoice.
I think OP can breathe a sigh of relief that Contractor is not their client.