Shares readily convertible assets ?

Client advised to tax employees through payroll

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I have a client UK Subsidiary and US Parent.  US parent isn't listed.

A few of the UK employees have been given shares in the US Parent

The Shares vest on three conditions:

1) Time

2) Performance

3) Company is taken over

The employees do not pay for the shares and receive interest free loans to cover the Tax and NI which is recovered upon sale of the shares (when the company is brought out).  P11d will need to be completed as the loan is more than 10K

KPMG have stated employees have acquired securities in the form in incentive units and should be taxed through the payroll.

I am missing something here as shares if cannot be coverted into cash and are under an unapprove share scheme the employees should be taxed through self assessment ?

 

Replies (13)

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By Justin Bryant
06th Jun 2024 17:31
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By FactChecker
06th Jun 2024 17:35

Much too complicated (as in too many unknowns) for a serious answer on here ... I'm not saying KPMG are always right, but it's going to cost to find solid opinion that may (or may not) disagree with them.

[There are 'odd' concepts here like: "interest free loans to cover the Tax and NI which is recovered upon sale of the shares (when the company is bought out)" ... HOW does anyone know in advance the personal tax implications for an individual at a time in the future which may never happen? That can't be the full story.]

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Replying to FactChecker:
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By taxwizard
06th Jun 2024 22:36

When the shares are fully vested then that is tax point when the Market value of the Shares are taxed on the employee through the payroll. A loan is provided to cover the Tax and NI so employee Net pay does not change. The Loan is only recoverable when the shares are sold which can only happen if the company is taken over.

KPMG call them incentive units. Though to me it seems similar to share options that are not readily convertible assets. There must be a different tax treatment with "incentive units"

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By kim.shaw-and-co.com
06th Jun 2024 18:14

You will need to consider whether the options (or rights) to acquire shares on an assisted loan-funded basis are "securities options", and if so whether they fall within the scope of the ERS rules. In other words, whether the options/rights vesting would be taxed under Chapter 5 of Part 7 ITEPA 2003. You would then need to consider whether Part 7A ITEPA 2003 applied to the arrangements.

As far as Guidance is concerned, I'd start here :

https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/e...

https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/e...

Without performing a full ERS/Part 7A analysis, I would hazard KPMG formed the view that acquisition of securities on vesting by way of an employment-related loan was (in simple net effect) insufficient overall to prevent the loan being disregarded and a PAYE/NIC charge on the acquisition of shares for deemed 'nil' consideration arising when they vest.

Do you have a copy of their advice and reasoning ? You could not hope to have a view on this constructed or second-guessed without details of all the relevant facts and circumstances, consideration of the agreements etc. and that would attract a hefty fee owing to the complexity of the relevant legislation in point.

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By kim.shaw-and-co.com
06th Jun 2024 21:41

Also, if things are simpler than might be speculated in respect of the equity-settled share-based payment arrangement (in the subsidiary's accounts) consider EIM12400 viz. s702 ITEPA 2003 :

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim12400

Are you satisfied that a UK CT deduction is available to the subsidiary under Part 12 of CTA 2009 upon receipt of shares in the parent company by employees ?

Consider carefully s1007, s1008 and s1009 CTA 2009 ....

Consider especially s1008 (1) - Condition 2 (b) - are the shares in the ultimate parent in the group ?

Consider also Part 7, Chapter 3C, s446Q-s446UA of ITEPA 2003 (especially s446UA) if the shares employees receive are unrestricted.

If restricted, is the condition in s1009 (2) CTA 2009 met ?

If no CT deduction is available to the subsidiary then the conditions in s702 (5B) will not be met and securities that are not readily convertible are treated as if they are. Accordingly, PAYE and NIC would apply when they are given the shares (assuming what they receive is shares or securities that are treated as amounting to shares).

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By Matrix
06th Jun 2024 21:46

I have never worked out how employees would include this on their self-assessment, does the employer write to them?

I also wouldn’t spend too long on it if they have a tax opinion from KPMG, but get a copy and include a disclaimer. I assume they will give you the figures if they are advising.

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Replying to Matrix:
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By taxwizard
06th Jun 2024 22:44

Yes I had one case where the employee was notified via email of the market value of the shares upon exercise.

It should be clear if they are not RCA then self assessment and the if RCA then payroll. I can only presume these are not shares and some other type of security that has different tax implications.

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Replying to taxwizard:
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By Matrix
07th Jun 2024 06:12

I would not presume anything but read the tax opinion and agree next steps with your client depending what you have been engaged to do.

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Replying to taxwizard:
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By Tax Dragon
07th Jun 2024 06:25

You haven't read Justin's link to the end, despite the same point being made by kim.shaw-and-co.com.

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Replying to Tax Dragon:
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By Tax Dragon
07th Jun 2024 06:39

That said I agree with Matrix.

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Replying to Matrix:
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By nrw2
07th Jun 2024 10:03

Matrix wrote:

I have never worked out how employees would include this on their self-assessment, does the employer write to them?

If not readily convertible (ie not operated through PAYE), then typically the employer informs the employee of the value they have received upon exercise of the option / purchasing the shares (ie the discount received to market value) and the employee then needs to report the taxable amount in box 1 of the 'Share schemes' section on page Ai 2 of their SA101 Additional Information pages on their SA return.

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By taxdigital
07th Jun 2024 07:39

Shares needn’t be listed to be RCA. Often the agreement will have provisions for the US parent to buy them back from the employee. Hence the PAYE point. More on this later.

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Replying to taxdigital:
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By Tax Dragon
07th Jun 2024 08:12

KPMG are not talking about the shares themselves, but the document promising shares conditional on time and performance etc.

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