Gifting or buying of shares

Possible employee related securities issue?

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Hi All,

I am hoping for a clearer explanation or advice on the below scenario please:

I work as a bookkeeper for a small company (Company A) that has just finished first year of trading, we are preparing our accounts currently and the company has more or less broken even for the year, (about £1k pre-tax profit and a small turnover less than £200k, no significant assets). We have been in talks with a client (Mr. B) (someone in the industry who has a lot to offer expertise wise and is looking to dissolve his current company (company B) due to his business partner wanting to take a different direction). There is one sole director and shareholder of company A (my boss). The plan is for Company A to purchase the assets of company B and Mr. B coming on board as an equal shareholder of company A with my boss. We have instructed solicitors to draw agreements up, but our accountant is advising us against doing it this way, and instead setting up a brand new company with my boss and Mr B as equal shareholders and starting again. The reason is that he has explained that we could be breaking 'Employment Related Securities' rules. He didn't say it can't be done, just that ideally we shouldn't and that there will be tax implications.

We obviously will respect our accountants advice and start a new company if we are required to, but it's not ideal and will be big set back time wise, we have a good credit rating (we need to borrow money to buy the machinery of company B) and all of our insurances, H&S requirements, credit supplier accounts, bank accounts, clients etc set up in company A.

I guess my question is, me, my boss or Mr B don't really understand the reasoning behind why we shouldn't do this when it was explained, and were hoping someone could maybe explain it in a different way? We aren't looking to 'avoid' anything tax wise or bend any rules. We appreciate that although the plan was to 'gift' half of the shares to Mr B, if some money has got to change hands to purchase the shares then that is also fine, although the value I would assume would be quite low? Surely this kind of thing happens all of the time when people go into business together? Is anyone able to explain in lamens terms what the pitfalls are please as this is not something I have any experience of and no amount of googling is answering my question!

Thanks in advance.

Replies (10)

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By Matrix
23rd May 2024 12:21

Wouldn’t the shares just be part of the payment for B’s assets? So yes they would need to be valued and included in the SPA. I would see if there is a tax adviser at the solicitor firm who could help with this so you are properly supported.

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Replying to Matrix:
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By TeaJunkie
23rd May 2024 14:47

Buying of B's assets will result in Company A paying company B. Wouldn't the purchase of shares be Mr. B paying my boss, so money moving the opposite way, or am I completely misunderstanding? But yes - we will ask for the transaction of shares to be included in the SPA. It's the tax implications of doing so that we aren't understanding.

Thanks though, hadn't thought about asking solicitors if they have a tax adviser, will give that a try.

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By cohen
23rd May 2024 13:27

Why don't you ask the accountant to explain it to you?

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Replying to cohen:
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By TeaJunkie
23rd May 2024 13:31

We have, but all three of us aren't understanding, so wondered if another person's explanation may make the penny drop for us!

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Replying to TeaJunkie:
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By leeanthonyblackshaw
23rd May 2024 14:23

This has the feel of either the accountant is not explaining it well or you have not agreed a sufficient work scope/fee for them to properly explain it.

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Replying to leeanthonyblackshaw:
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By TeaJunkie
23rd May 2024 14:42

No issues with Fees - he bills us, we pay :-) most likely our lack of understanding (very happy with our accountant, not here to discredit him, but whatever way he is explaining it, we aren't understanding it! So would really appreciate another point of view/person explaining it please.

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By Taxguy96
23rd May 2024 15:13

Where individuals who are employed (or going to be employed) by a business, which includes a director role, there is a basic principle that anything that is money's worth is charged to income tax.

Shares in a company are an asset with a value (but the value is unknown), and to the extent Mr B does not pay the market value for said shares, a personal income tax charge would arise - the Employment Related Securities rules ("ERS") are incredibly complex, but this is the main crux of legislation.

By way of example if the shares are worth £500, and Mr B just receives this without paying anything he would end up with a tax charge based on £500 of deemed income. If he paid £400 for the shares he would have a tax charge based on £100 of deemed income. If he paid £500 there should be no tax charge. The question is, what is market value? If it is a price freely negotiated between 2 unconnected parties then this is the definition of market value, but you should consider would Mr A sell 50% of his business to the man on the street for the same price - if not then there is an indication Mr B is receiving value and therefore a tax charge may apply.

You are correct that this is not insurmountable, there is no actual need to set up a new company, but the parties need to be aware of the potential tax consequences.

Mr B also needs get some advice as if he disolves a business such that it is a capital receipt, and subsequently starts another business the TAAR (anti-phoenoxism rules) may apply - they also may not because I can't remember them off the top of my head but it needs to be considered.

Hope this helps.

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Replying to Taxguy96:
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By TeaJunkie
23rd May 2024 15:28

That was super helpful, thank you so much!

So, the main thing to consider is that we get a true and fair value of the shares as part of the exchange and we should be ok. Or, we agree a reduced rate and include this on the SPA and he declares this as income and pays the tax.

Much clearer, thank you!

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By Tax Dragon
23rd May 2024 20:12

I don't think your accountant would have said start again in a new company. There might have been a suggestion of a new company as part of some kind of merger of the two existing companies, but that's not the same thing.

Your plan as stated doesn't sound sensible commercially (never mind tax). Your boss's company pays for the assets of Mr B's company (so B's company keeps its value?) and then Mr B is given half the shares in Co A? Is that what you meant?

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By kim.shaw-and-co.com
24th May 2024 00:38

Your accountant my simply be suggesting that Company C acquires the shares of both Company A and Company B via a share-for-share exchange, and then the trades and assets can be hived around the group without triggering any deemed disposal(s). Residual 'shell' trading companies are easily collapsed.

Company C might for example swap its name with Company A if trades are hived up into it.

https://www.accaglobal.com/gb/en/technical-activities/uk-tech/in-practic...

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