Shares as a trivial benefit

do they qualify?

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I have a client who wants to give employees shares in the business. The shares are not worth a great deal, so the valuation per share, based on a recent investment made by an unconnected third party, values them at less than £50 each.

Shares are not cash or cash vouchers (I believe, I suppose they may be cash vouchers, it's a bit of a vague term so correct me on that if necessary).

The shares are being given by the owner as he wants his employees to have a stake in the business. It is not a reward for performance. There is no obligation on him to give his employees shares.

Does the gift of shares then qualify as a trivial benefit? I can't shake the feeling I am being stupid, but I've been in lockdown too long to know better anymore.

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By Tax Dragon
11th May 2020 11:45

Why does he want them to have a stake in the business if not to encourage better performance?

There is a gulf between HMRC's interpretation of these rules (under which almost nothing qualifies) and the interpretations put forward in here (under which almost everything qualifies). The truth may be somewhere in the middle, but shares are surely on the wrong side of the line?

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Replying to Tax Dragon:
By Duggimon
11th May 2020 16:23

It's one of those ones where it felt wrong but I couldn't decide why it would be wrong. Being a trivial amount, even if not a trivial benefit, it's not worth losing sleep over but I thought someone might know the definitive answer and help spare my sanity.

His motivation, as he explained it to me, is more like he wants them to feel a part of the company, I suppose ultimately it comes down to encouraging better performance but you could say that of absolutely everything that does qualify as a trivial benefit, so it's an unconvincing counter.

It's certainly not in recognition of past performance or as a specific incentive for future performance, rather more vague and nebulous than that.

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Replying to Duggimon:
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By Tax Dragon
11th May 2020 16:33

OK you've forced me to look at the legislation. (For which I'm more grateful than I might sound :-))

You'll probably agree that s228(1) is not so unconvincing, is not at all vague and is not nebulous.

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Replying to Tax Dragon:
By Duggimon
11th May 2020 17:01

Are we talking ITEPA 2003 here because I am lost. I was looking at 323A and couldn't see how shares would be excluded.

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Replying to Duggimon:
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By Tax Dragon
11th May 2020 17:18

Yes. As s323A is in Pt 4, it is governed by s228 as that introduces Pt 4. The shares are taxable either under s62 or Part 7 (I forget which... probably depends how they are being made available). So, as s323A is not mentioned in s228(2), I figure you can stop looking at it.

Having said all that, I see (on looking again) that s228(1) refers to liability under Pt2 (I missed that before). The way ITEPA works is that there are a couple of Parts that do all the taxing and lots of Parts that tell you what is taxed. So if the tax charge itself would be under Part 2 (notwithstanding that the amount is set out elsewhere), then you could end up back in s323A. This is more nuanced than I thought... give me a bit longer to rummage around.

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Replying to Duggimon:
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By Tax Dragon
11th May 2020 17:34

OK I think it's s227 (not 228) that's relevant. (Marry in haste and all that...) See also HMRC's take on s227 in EIM20030.

I think (though I haven't proved) that s323A is in the "earnings-only" list. I further think that this leaves Pt7 free to pave the way to a tax charge. Both those thoughts are subject to repair, if you can demonstrate otherwise.

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By Rweaver
11th May 2020 20:13

I’m probably missing the point, but why is the benefits code relevant? Doesn’t the tax charge arise under the ERS legislation (to which the trivial benefits exemption would not apply).

Surely an IT charge is levied under s.6 on specific employment income (defined in s.7 as including anything in Part 7). Part 7 (namely s.421B) deems securities to be received by reason of employment unless the normal course of the domestic, family or personal relationships exemption applies.

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Replying to Rweaver:
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By Tax Dragon
12th May 2020 08:53

As I said above, I think that's probably the right answer. However, s227(1) and (3) tell me that there are exemptions, located in the same part as s323A, that remove any charge under ITEPA - not just charges under the benefits code. Indeed, s228(1), which is what I initially skimmed, seems to say that some of the exemptions remove any charge to (income) tax under any enactment. So, while I do think you are right, there is more to the answer than you have provided.

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Replying to Tax Dragon:
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By Rweaver
12th May 2020 09:01

Thank you TD - understood.

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By Duggimon
13th May 2020 16:44

It's an interesting and fiddly question not really worth answering when the tax is, due to the value of the benefit, entirely trivial!

Thanks to both for the input though.

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Replying to Duggimon:
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By Tax Dragon
14th May 2020 12:46

Probably (even if the exemption does apply) you should still consider s431 ITEPA.

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