In principle there is a straightforward answer. It depends if the shares in question are readily convertible assets (RCAs). If so, then tax and national insurance (employer and employee) must be charged via payroll of the employing company. If they are not RCAs, then only tax (no NICs for employer or employee) is charged via the self-assessment tax return, where it will be entered onto the additional information pages.
Therefore, now we simply need to decide whether the shares are RCAs.
Readily convertible assets
The underlying legislation for this is section 702 ITEPA 2003. This essentially classifies shares as readily convertible in three different situations:
• If the shares are quoted on a recognised exchange.
• If at the time the shares are acquired there are trading arrangements in place or likely to come into place for sale of the shares.
• If the shares are not eligible for corporation tax relief under Pt 12, CTA 2009, then they will be treated as RCA.
The first two of these situations are largely self-explanatory, but the third is more obscure.
Corporation tax relief for employee shares – Pt 12, CTA 2009
Statutory relief may be available, giving a corporation tax deduction for companies making awards of shares to their employees, but as one might expect, there are several conditions attached.
The shares or options may be acquired by a person by virtue of his, or another person’s employment. The deduction can therefore apply where qualifying shares are provided to persons who are not employees, if they acquire the shares by virtue of someone’s employment. This can include shares acquired by ex-employees and relatives of current employees.
There are several conditions, with the main ones being:
• They must be shares in the employing company or the parent of the employing company.
• They must be shares in a quoted company or a subsidiary of a quoted company, or otherwise shares in a company that is not a subsidiary of any company.
• The shares must be ordinary shares, fully paid up and not redeemable (note that the shares could be readily convertible assets and the corporation tax relief is still available).
• Where shares are awarded, the employee must be subject to tax in respect of the award, or would be if, at the material times, he or she had been resident, and ordinarily resident, and the duties had been performed in the UK.
The fact that an employee does not actually pay any tax as a result of a specific exemption for approved share incentive schemes (SAYE, EMI, SIP, etc) does not prevent the employing company from obtaining corporation tax relief.
Where shares are awarded, the amount of relief is the difference between the market value of the shares at the time of the award and the value of any consideration given for them. The relief is given to a company in the accounting period in which the recipient acquires the shares. This is particularly important where options are granted, and then there may be a long delay before the actual shares are acquired.
Operation of PAYE
As the employee has received shares rather than actual cash, it can be problematic to operate PAYE on the notional payment, because there may not be enough available real pay from which to make the necessary deductions. The employee may effectively be in a negative pay situation. Nevertheless, the employer must account for the tax and NICs due and pay it over to HM Revenue & Customs.
It is common practice for employers to withhold some of the shares and sell them on behalf of the employee in order to fund these statutory liabilities.
Any PAYE not immediately recovered from the employee must be made good by the employee within 90 days of the end of the tax year, otherwise the unrecovered amount must be shown as further remuneration on form P11D. If the employee subsequently repays the amounts due there is no relief from, in effect, a double charge to tax.
Ben Chaplin is managing director of Croner Taxwise
