Share transactions invariably have tax consequences. For example, when an individual subscribes for shares in their employer company for less than market value, it is generally necessary to consider the income tax (and possibly National Insurance contributions) implications of the share acquisition.
A pleasant surprise?
However, it is sometimes overlooked that the employer company can often claim a tax deduction in such circumstances. This might seem too good to be true, particularly if the shares were not issued by the company but were (say) transferred by another person. Nevertheless, the company may be eligible for a tax ‘windfall’ if certain conditions are satisfied (CTA 2009, Pt 12, Ch 2).
The detailed requirements to be satisfied for relief to be available are beyond the scope of this article. In very broad terms, relief is available to the employing company if shares are acquired by an employee (or another person) because of the employee’s employment, generally by an employing company within the charge to corporation tax, where certain conditions are satisfied (nb there are also special rules for employees of overseas companies who work for companies resident in the UK or within the charge to corporation tax (see s 1007A)):
• The shares – The shares acquired must be ordinary, fully paid-up, non-redeemable shares. The shares may be in an unlisted company (although it cannot be under the control of another company, other than a listed one), or in a listed company. A ‘listed company’ is one whose shares are listed on a recognised stock exchange, and which is neither a ‘close’ company nor one that would be a close company if it were UK resident.
• The company whose shares are acquired – The shares must be in the employing company, its parent company, a member of a consortium that owns the employing company or a parent company, or broadly a company in the same ‘commercial association of companies’ as the employing company or its parent company (s 1008).
• The employee’s income tax position – If the shares are not ‘restricted’ shares, the employee must normally be subject to an income tax charge under the employment income legislation (ITEPA 2003) and certain anti-avoidance rules (in ITEPA 2003, s 446UA) must not apply to them. If the shares are ‘restricted’ shares, the employee must normally have ‘relevant earnings’ from the employment as a result of acquiring the shares, or alternatively will be subject to income tax if a ‘chargeable event’ occurs under the restricted securities rules (in s 426).
• The business – The business must be carried on by the employing company, and must be chargeable to corporation tax on the profits of that business, or would be chargeable but for the exemption for permanent establishments (in CTA 2009, s 18A).
The relief is not given if a deduction for the shares is available under the share incentive plan rules (CTA 2009, s 1037). There are also separate relief provisions relating to options to acquire shares (CTA 2009, Pt 12, Ch 3). However, for the purposes of this article let’s assume that an employee (Jayne) is allowed to subscribe for a small minority of 100 ordinary shares in her employer company (Acme Widgets Ltd) for £1 each, when their market value is £500 per share.
In the case of ‘plain vanilla’ shares (i.e. which are not ‘restricted’ or ‘convertible’), the tax relief available to the company is generally the market value of the shares when acquired, less any consideration given by anyone for acquiring them (nb there are separate rules for calculating the relief for restricted or convertible shares (in CTA 2009, s 1011)).
In the above example, the corporation tax relief available to Acme Widgets Ltd on Jayne’s acquisition of the shares is as follows:
- Market value of shares when Jayne acquired them (100 x £500) £50,000
- Less: Amount paid by Jayne (100 x £1) £100
- Tax deduction for the company = £49,900
The relief is available for the corporation tax accounting period in which the shares are acquired, and is generally given as a tax deduction of the ‘qualifying business’ (i.e. normally the employing company). There will be an income tax charge for Jayne in the above example, as she acquired the shares for less than their market value (ITEPA 2003, s 62; Weight v Salmon, HL 1935, 19 TC 174).
The potential scope for a company deduction is wide. For example, the shares do not have to come from the employing company; they could be transferred from an existing shareholder. In addition, a deduction can be available if qualifying shares are provided to non-employees, if the shares are acquired by reason of their (or another person’s) office or employment with the company entitled to the deduction. This includes qualifying shares acquired by ex-employees, directors, ex-directors, and relatives of employees or directors (see HMRC’s Business Income manual at BIM44265).
The above article was first published in Tax Insider (March 2018) (www.taxinsider.co.uk).