Tax on compensation re share scheme

Share option scheme, company failed to set up, kept it quiet, compensated when it got rumbled. Tax?

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Share option scheme under EMI to compensate for us selling our company to other company. But they failed to set up the scheme, gave excuses and delay tactics, and by time we found out it was too late as company had turned into massive complex group. After legal case started, company offered us a cash settlement to try to reflect lost shares value as this was simpler than trying to find a way of giving us shares in the "right" component of the group (some of which was now overseas). Compensation was paid to us gross, not through payroll.

So ... is this PAYE/NIC? Or can we argue CGT on basis that shares would have had no value back when we should have been exercising, so the compensation is for the lost capital gains we would have made?

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By Tax Dragon
01st Sep 2017 19:04

Do you honestly believe that you have given enough information even to begin to answer your question?

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By Charlie's Mate
01st Sep 2017 19:19

Possibly not, but I was wondering whether there was a relatively straightforward principle at play (I am useless when it comes to tax).

I could write about 20,000 words on this situation, but at least this way hopefully someone can ask, so I provide only the relevant stuff.

So if you'd like to help, feel free to tell me what sort of information is going to be necessary to help understand the situation :-)

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By Charlie's Mate
01st Sep 2017 19:30

Some more detail, it seems, is probably needed. So:

- in 2008 a group of shareholders sold a company in exchange for share options in the buyer's company, to be set up via an EMI. Options would be exercisable after 2 and 4 years, and we were also becoming employees of his company (the 2 and 4 years thing was to stop us leaving)

- when 2010 rolled around, we signed some EMI paperwork so thought all was in hand, but when 2012 rolled around things were different

- what had been 1 company was now a multinational group, which was going through a reconstruction, so we were told we needed to wait until that was done before it could be decided in which entity our shares should be issued, which made us nervous but seemed to be unavoidable

- the delays just kept coming, and eventually we were told that the initial EMI had never been set up. The owner at that point promised to cover our tax liabilities that would arise as a result of the failure to set up the EMI

- still delays, until we felt we had no option but to go legal. The 2 sides could not agree on which entity we should have shares in, and what % (the initial agreement now being so old that it simply could not work with the new company structures)

- as a result, the owner offered us lump sum payments to stop our legal action and end any claim on shares, justifying the amounts based on his valuation of what we had contributed in terms of company valuation growth over the 8 years that had now passed

- the payout did not go through payroll, it was a lump sum with us told to sort our tax out ourselves

To be clear, the EMI never happened, no actual shares were ever issued to us (although we had "shareholder meetings" with the owner and got sent Financial Statements each year), and the compensation was in substance to "buy our shares".

Each of us would have owned less than 5% of the shares in the acquiring company, by the way, which I suspect might have some relevance. Or maybe not.

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By Tax Dragon
02nd Sep 2017 10:38

There is still some detail missing. The way you describe it, you have money that (perhaps) reflects the growth in value you lost out on, but nothing for the value of the shares you had until 2008. It's possible that what happened then (ie in 2008) would be relevant now. Maybe worth going back to the accountant who advised you about that transaction?

You need advice here, I think, and - without knowing the terms either of the 2008 deal or of the legal settlement (by which I mean, without seeing the documents) - that's going to be difficult to provide.

I'm also thinking that, if you have given away all right of further action eg to compensate you for a potentially worse tax position, you (and your legal advisor) are muppets. Maybe you should see a different legal advisor for a second opinion. Similarly, if your accountant in 2008 wasn't up to much, get a new one.

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By Charlie's Mate
04th Sep 2017 16:07

In 2008, our company had been going for 3 months only and I doubt anyone would say it had value. The key is that the buyer wanted us as employees, but wanted to tie us in for a few years, so he employed us all ... and the share options were a kicker to make sure we wouldn't leave, and would drive the fortunes of his company forward.

Regarding future legal action, the amounts that we negotiated as cash payments were negotiated on the basis of worst case scenario re tax (i.e. PAYE and NIC), although at the time neither party knew what the tax situation would be. And as noted before, the payments have been paid gross, outside of the payroll system here.

I don't know what the company have been told about the tax status (and I am not convinced we will ever be able to find out for sure what the company has done in this regard).

Our legal settlement states that we had a disagreement about the shares being issued, and that the cash settlement is in exchange for dropping the legal action in full.

I agree we almost certainly need actual advice, but before heading down that road I was hoping that there might be some rule or precedent on compensation for shares not being issued as they legally should have been.

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By Tax Dragon
04th Sep 2017 16:41

The number of people that, after a brief AWeb discussion, say, essentially, “yeah we know our situation is unique and we need advice – we just wondered what that advice will be” is getting silly.

It's not unreasonable to assume an income tax charge here, tbh, but it is anything but certain.

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By Charlie's Mate
04th Sep 2017 17:07

I would imagine everyone needs advice in almost every situation, since almost every situation is unique. The point of asking is in the hope (perhaps vain) that someone has seen something similar and can either say "go get paid advice, as this will need someone to see all the paperwork" or "saw similar recently and trust me HMRC will argue income tax so accept it".

Thanks for your feedback and thoughts. I suspect this will end up as income tax but it rankles because the substance is that we have had our ownership interests bought out to avoid having to actually formally issue those interests because that was proving to be a rather difficult thing to achieve.

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By michaelblake
01st Sep 2017 20:58
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