Tax of Share Options in lieu of services provided

Client has been given share options in lieu of payment of services supplied.

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My client is an unincorporated partnership providing consultancy services.  It prepares its accounts under an accruals basis. (Not cash)

They entered into a service agreement and was awarded share options vesting over a 4 year period (2020-2024).  The only remuneration under the service agreement is the granting of options there is no other remuneration consideration for the services supplied.

The Share Option is set at $2.00 per share but latest valuations are significantly declining and currently <$0.50 so unlikely to ever exercise these options. The service contract expires same time options are fully invested end of 2024.

My question is wether there is any revenue to accrue at this stage.

FRS102 Section 23 sets out the criteria and on the basis that the services being supplied are not reliably measured and are purely speculative i think nil revenue can be regonised.

When the shares are exercised this triggers the income tax charge, but until then there is no trading income to declare. 

However should there be consideration to a "hope value" -  perhaps to refelct the "inducement" to enter into the service agreement -so whislt no cash was given for services there was some value given in lieu of services supplied ( payment in kind (share options) v cash)

 

Any thoughts on this would be appreciated 

 

 

 

Replies (14)

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By David Ex
13th Nov 2023 19:07

Donnah-AT-alliumwood.co.uk wrote:

The only remuneration under the service agreement is the granting of options there is no other remuneration consideration for the services supplied.

The Share Option is set at $2.00 per share but latest valuations are significantly declining and currently <$0.50 so unlikely to ever exercise these options. The service contract expires same time options are fully invested end of 2024.

Is the client still working for “payment” in $2 options?

There have been questions before about payment being settled in shares but I don’t recall a case like yours. Goes without saying it is an odd set of circumstances.

If the client is genuinely remunerated as you say, guess all you can do is make reasonable informed estimates of the value for accounting purposes.

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By Ruddles
13th Nov 2023 19:22

Not sure why you think that an income tax charge would arise on exercise. Tax charge, if any, should arise when the options are granted.

Difficult to comment further without knowing all of the circumstances but I doubt that I would be providing my services in return for options with a strike price of £2 over shares currently worth £0.50.

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Replying to Ruddles:
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By David Ex
13th Nov 2023 19:43

Ruddles wrote:

… I doubt that I would be providing my services in return for options with a strike price of £2 over shares currently worth £0.50.

OP said “The service contract expires same time options are fully invested end of 2024” so you wonder who drafted the original agreement. Not someone acting in the OP’s client’s interests, apparently.

Obliged to work for nothing (absent a big turnaround) for another 13 months will be rather galling.

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By [email protected]
13th Nov 2023 20:18

Can i check your comment that income tax is payable on the grant of share options.
I believe that share options are not taxed when granted but when they are exercised.

(non tax advantaged share schemes)

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Replying to [email protected]:
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By Matrix
13th Nov 2023 20:44

Has your client raised an invoice for the consultancy services?

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Replying to [email protected]:
By Ruddles
13th Nov 2023 20:45

Are the partners employees of the client? Ie exactly what is the nature of the service agreement? A contract of service or contract for services. Following on from my comment, I most definitely would not be working as an employee if I was going to have to pay £2 to acquire something worth 50p.

Assuming that we are in fact talking about a non-employee contract it should be a case of recognising the value of the options as partnership income when received. In normal circumstances one would expect to receive options with a current value equivalent to the value of the services provided- which would need to be agreed by the parties. But this doesn’t sound normal.

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By [email protected]
13th Nov 2023 21:25

To clarify my client provides consultancy services - the transaction is outside of ers.

I imagine what has happen is an agreement to provide services in lieu of share options on the belief that the company shares were going to be worth more than the grant options.

It appears the options were valued using the valuation of the last fund rise and maybe there was hype to believe that the shares were going to triple in value therefore the grant they received at $2 was to be at a discount. However they are worthless it appears. So can’t see that there is any value in them.

I understand that I need to attribute a value to the share options to bring in Trading income = services supplied but just not sure of how to attribute a value.
Using frs102 guidance if it can not be measured reliably and no future benefit expected that I think there is an argument that nil value can be recognised. As long as we have evidence to support this throughout the vesting period.

Luckily transaction is outside scope of vat here as services supplied to a country outside of the scope of Vat. Thinking of barter rules where payment is received in lieu of cash.

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Replying to [email protected]:
By Ruddles
13th Nov 2023 22:07

The problem, as suggested earlier, appears to be that the partnership entered into the arrangements without thinking it through or taking proper advice. If it were me I would have made sure that there was agreement in the value of my services and that I would receive sufficient options on each billing to meet that value. Of course if the options are worthless that doesn’t work in which case I would have ensured that the agreement catered for such an eventuality.

I appreciate that us not the question being asked. Whether you recognise the full value of the service, with a corresponding impairment, or just don’t recognise the income, I will defer to the accounting experts.

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By Tax Dragon
13th Nov 2023 22:45

I don't understand the scenario. Is it: options to buy shares for $2 exist; the shares (are they traded?) were once worth $2 (rendering the option fairly worthless by my maths - though I am not a specialist share options valuer); they are now worth $0.5 (the shares, not the options - those are still worth the zero they always were); your client has been 'remunerated' in these options?

Or can your client's options be exercised without payment, giving the options value - albeit this is less than when they were earned?

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By Tax Dragon
14th Nov 2023 06:44

And my other question, if the shares are not traded, is... who is valuing the shares?

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By [email protected]
14th Nov 2023 07:32

They are non trading / unlisted.

The value of $2 was the value of the shares on the last fund rise and where they must have agreed the share price for the basis of the share options.

The service agreement they entered into only remunerates them by the grant of these share options. I am trying to put a value to their services as preparing the accounts. There have been no professional valuations undertaken.

I don’t think hmrc will expect nil value for the services supplied and paid by substituting cash for share options as they must have held some hope value at the time of entering into agreement and providing the initial services.

They agreed to do something for something so that is a taxable (and vat able supply)

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By taxdigital
14th Nov 2023 08:15

Ignoring the tax part, revenue will be recognised when you have performed in accordance with the contractual terms. The payment may be settled in cash, shares or options ( a bit unusual though) or whatever.

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Ivor Windybottom
By Ivor Windybottom
14th Nov 2023 09:13

It is not that unusual for people to work for new startups in this way.

The hope that the business will be the next big thing makes the gamble of working for nothing other than share options worthwhile, particularly as the work contributed will often help dictate the success or otherwise of the venture. It does, of course, depend on having other funds to live off.

The tax treatment is dependent upon valuations, but if they are receiving options for shares at an exercise price of $2, when the shares are currently worth $2, then they are working for nothing. In other words, if you or I could get a $2 share option its value would presumably be zero if the shares are worth $2. There may be some hope value that needs to be taken into account (e.g. if it is expected the share price will rise to say $100 in the next few years).

It is important to value the shares - a whole minefield in itself for startups - and probably something your client is best placed to advise upon if they have access to enough management info. If the shares are going down in value then it should be easy to suggest the options are worthless.

Ideally the early stages will be zero tax and when the value explodes the gain will be a CGT event, sheltered by moving offshore (assuming the multi-million valuation justifies it!).

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By tonyaustin
15th Nov 2023 12:15

In the absence of employment, a share option is a chargeable asset for CGT. The LLP should account for the value when received as trading income in accordance with GAAP, which becomes the acquisition cost. I believe there is then a capital gain or loss when the shares are sold or the option lapses. However, I'd need to double check the relevant provisions of TCGA.

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