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Tax of unapproved options for non-employees

Is there a different treatment employees and non-employees (consultants) for unapproved options

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My understanding for employees is as follows

 

Tax Treatment

If the option has to be exercised within 10 years of its grant, there will be no tax or national insurance charge when the option is granted.

On the exercise of the option there will be an income tax liability on the difference between the market value of the shares at that date, and the price paid for them.

On the disposal of the shares, the capital gain is calculated by comparing the disposal proceeds to the market value of the shares when the options were exercised.

There will be no national insurance charge on the grant or exercise of an option if the shares over which the options are granted, are not readily convertible into cash, which means there are no arrangements by which the shares’ value can be realised with certainty. In practice this means that there is no available market, no arrangements made by an employer to repurchase the shares and the company is not quoted on a recognised stock exchange (e.g. FTSE). For this purpose, AIM counts as unquoted.

On exercise, the company will obtain a corporation tax deduction for the difference between the market value of the shares at that time less any amount paid by the employee for the shares.

So couple of questions:

  1. Is the tax treatment the same for non-employees?
  2. Is an NED or other director an employee by the fact they are an "office holder"? If not do they become one by having some form of agrement to carry out certian commitments of time?
  3. Is a consultant an employee if they have a contract with the company to provide certain services?

Thank you for any advice as i have previously assumed the tax treatment was the same for all

Mike

 

 

 

Replies (7)

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By Tax Dragon
11th Aug 2020 17:39

1. No.
2. Yes, N/A
3. A consultant can also be an employee; being a consultant does not make her an employee.

Thanks (1)
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By masplin
11th Aug 2020 17:43

Ok so we can award unapproved options to any directors and income tax is due on exercise.

I am being asked to do work for a company in which I am shareholder, but cannot be a director due to other commitments. I am self employeed. If they issue me an unapproved option what is the tax treatment please?

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Replying to masplin:
Psycho
By Wilson Philips
11th Aug 2020 18:03

It depends. You need to find an accountant, who will be able to advise once he has considered all relevant facts, very few of which are revealed here.

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Replying to masplin:
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By WhichTyler
12th Aug 2020 10:39

masplin wrote:

I am being asked to do work for a company ... I am self employeed.

And the relevant facts will include assessing your employment status for this work, rather than any other work you have

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By masplin
11th Aug 2020 18:26

Ok s sounds like if I'm not a director it s a can of worms. Ok thanks for clarifying it isn't a simple as I hoped.

Mike

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Replying to masplin:
Psycho
By Wilson Philips
11th Aug 2020 22:39

Not necessarily - like I said, it will depend on the facts/arrangements and could be far more straightforward than if you were a director.

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By Tax Dragon
12th Aug 2020 06:45

There are what you might call general charging provisions (or 'first principles') that apply unless specific
rules set out a different approach or a different amount to tax. Think of BIKs - do you think a company car would not be taxable if there weren't specific rules telling you how to calculate the taxable amount? Shares are another good example actually - years before there were 100s of sections in ITEPA governing the taxation of employment related securities, an employee was taxable on cheap shares under the basic charging provisions (Weight v Salmon).

Similarly, will the share options be included in your sole trader accounts? Unless something says otherwise, first principles say that the tax will follow suit. Don't forget VAT.

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