All fur coat and no NIC[er]s
Where share awards and share option grants are made to employees of listed companies, and a tax charge arises, it is relatively easy for the employees to sell shares on the open market to cover any tax liability arising.
For private companies, provided options are only exercised on a sale of the business, the sale proceeds will also cover any tax charge arising.
However, for private companies who want their employees to acquire shares of value (other than under the Free Shares arrangement under a Share Incentive Plan), a tax charge will often arise on acquisition (or on exercise of the option). Similarly, a tax charge can also arise after the acquisition of shares if, for example, restrictions on the shares are lifted. In a private company, where it is not always easy, or even possible, to monetise shareholdings, this can be a real problem for employees who have to fund the tax charge out of their income.
Furthermore, National Insurance Contributions (NICs) might also arise – with the added complication that it’s not always clear if NICs should be payable or not. And the icing on the cake is sometimes NICs is charged because a company’s shares are deemed to be “readily convertible assets” – even if the reality is that they cannot easily be sold for value.
All these issues can be a real disincentive to private companies wishing to make employees shareholders.
On the back of recommendations from the Office of Tax Simplification (OTS), the government is consulting on ways to make this less of a difficulty. You can find the consultation here, and it closes on Friday 10th October at 5.00pm.
The original recommendation made by the OTS is a radical one. If implemented, it would introduce wide ranging changes to the taxation of employment related securities. In particular, one of the recommendations is that the tax charge would only arise when employees acquired shares that could easily be sold ("marketable securities”), or when the shares became marketable. However, employees could choose to accelerate the tax charge if they were happy to do so. Once a share became truly “marketable”, of course, then NICs would apply as well as the Income Tax charge.
Amongst other points, this requires a clearer definition of what constitutes a “marketable security”. The OTS made some suggestions so, for example, a fully listed company’s shares would be “marketable”, as would the shares in a private company with an EBT that traded regularly.
We will blog further on this consultation. In principle, we think that the introduction of the concept of a “marketable security” has the potential to ease the tax burden on employees in private companies; we also think that a clearer definition of what is “marketable” may make it easier to understand whether private company shares are, in reality, tradeable.
However, it’s undeniable that this may result in losers as well as winners; and it’s likely that the amendments to the tax legislation will be complex – even if the end result is more simplicity. And, with the best will in the world, it is very unlikely that any changes will completely remove arguments in all circumstances about whether shares are tradeable or not.
For more information on any of the content covered in this article, please contact Sarah Anderson or another member of the RM2 team on 020 8949 5522.