Valuing restricted shares impact of decision of First-tier Tribunal

The valuation of private company shares acquired by, and disposed of by, employees is a complex field which has frequently caused confusion and misunderstanding.

There are several different share valuation methods which can be adopted for tax purposes. Which one will apply in a particular case will depend on the circumstances of the event giving rise to the tax charge.

Since 2003, the tax treatment for restricted shares has been governed by Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003. This legislation is fairly complex, but to date, few cases on its interpretation have been heard by the tax tribunals. One reason for this might be that companies and employees have frequently entered into section 431 elections (see below), even if only on a protective basis, in order to opt out of the Part 7 regime.

However, share valuation issues were relevant in the recent case of Sjumarken v HMRC [2015] UKFTT 375 (TC). The taxpayer had an interest in more than one of his employer’s incentive plans, but the one which is of particular relevance from the valuation viewpoint was his interest in his employer’s share plan (Share Plan).

After the taxpayer had been made redundant by his employer, certain shares deriving from the Share Plan were allocated to the benefit of the taxpayer.

At the time, these shares appear to have been valued for tax purposes by the employer without reference to any restrictions (resulting in a higher valuation and therefore more tax payable), although the taxpayer was informed by his employer that restrictions continued to apply to at least some of the shares. Evidently, there was some confusion over the extent to which (if any) restrictions continued to apply, and, if so, how this would affect the valuation process. The tribunal concluded that the relevant provisions in the Share Plan were unclear, and that, in practice, the shares were subject to restrictions and should therefore be valued on that basis.

This case is instructive on the following points:

1.       It is crucial that share scheme documents should be clear and unambiguous, and that individual arrangements for particular employees should be communicated fully and clearly to participants, so as to avoid lengthy and time-consuming arguments further down the line.

2.       Similarly, careful records should be kept by the employer regarding the individual arrangements for particular employees, and, in particular, the basis on which valuations are made.

3.       Where restricted shares are involved, a section 431 election might usefully be considered in order to disapply the Part 7 regime. Such an election can sometimes result in a higher upfront tax charge, but it does normally secure greater certainty of tax treatment.

3 July is Employee Ownership Day: How might it work in Professional Firms?

The UK’s third Employee Ownership Day is fast approaching, falling on Friday 3 July 2015Employee Ownership Day is intended to raise awareness of what employee ownership means, its benefits and successful employee share ownership models in a range of UK companies.

We take a look below at how a number of law firms are extending their ownership beyond the traditional partners.

  1. A recent high profile example is that of the national law firm, Gateley Plc, which has become the first UK law firm to have its shares dealt in on AIM. In 2014, Gateley took advantage of legislative changes to adopt an Alternative Business Structure (“ABS”) allowing non-lawyers to own, and invest in, law firms. It took the view that the combination of the ABS, the transition from an LLP to a PLC and the AIM listing would present, among other things:
  • Greater opportunities to develop Gateley both organically and by selective acquisition
  • Alignment, through share participation, of employees’ goals with those of the business, and aiding retention of staff
  • A more flexible career structure

It is understood that, while 10% of the shares were sold to clients, 7% of the shares have been reserved for employees.

  1. Australian law firm Slater & Gordon became the first legal practice in the world to apply for a public listing of its shares when it launched on the Australian Stock Exchange in 2007. Since then, it has expanded into the UK legal market by the acquisition of firms such as Pannone and Russell Jones and Walker, and has launched an employee share purchase scheme which is open to all UK staff.

The firm made initial grants of shares to employees on a “matching offer” basis, doubling any shares bought by staff members up to a specified limit.

We understand that the firm also offers long-term share incentives for key staff, as well as the opportunity for employees to receive bonuses in the form of shares rather than cash.

The board of Slater & Gordon has stated that it views equity participation as a fundamental component of an effective executive and employee rewards strategy.

  1. Triton Global is a multidisciplinary professional business operating in the insurance sector. It adopted a corporate structure and became an ABS in 2013.

An initial tranche of free shares was offered to employees at the outset, and two tax-advantaged schemes are now operated for the benefit of employees. Triton reports that, in this way, it has managed to move away from a “them and us” culture, has achieved an excellent rate of employee retention and unwelcome predators have lost interest in the business.

  1. Here at Postlethwaite, we also have adopted employee ownership. Over the years advising clients, we have observed the extent of the positive impact which employee ownership can have on their financial performance, attractiveness as a place to work and long term success.  We also felt it was well suited to our own firm, as we did not want to limit the ownership to only some of our full-time lawyers but preferred to extend it to all, recognising everyone’s contribution.  We have chosen direct ownership by employees rather than indirect ownership through an employee trust, although we think the trust ownership model will often be the right approach for other firms.

Further details about the Postlethwaite model are contained in an article in the 30 June edition of Solicitors Journal which can be found by clicking here

Employee ownership will not be the answer for all professional firms, but it can be worth considering if it might offer advantages compared with a firm’s current ownership structure.

This might involve asking some of the following questions regarding, for example, a traditional partnership structure:

  • Do you think more members of your team could make a greater contribution, and would be likely to do so if they had a stake in the outcome?
  • Are there other people who add value apart from your partners?
  • Are lawyers working part-time less likely to be partners?
  • Are you concerned as to whether there is a willing next generation of people in your firm to take over the ownership and enable existing partners to retire?
  • Would you like to retain more of your people for longer?
  • Would you like to build some new foundations for your firm to help it feel a more positive place to work?

Government policy is now to encourage greater employee ownership across all business sectors.   It believes that this has the potential to increase productivity, build more resilient businesses and foster greater wealth creation which is then shared among those who have helped create it.  Academic evidence suggests a number of strong positive links between employee ownership and company performance.

To stimulate the growth of employee ownership, two new tax reliefs were introduced in 2014.  One gives retiring company owners who sell a controlling interest to an employee ownership trust full relief against capital gains tax, while the other enables employees of a company controlled by an employee ownership trust to be paid income tax-free bonuses.

The number of employee-owned businesses in the UK is now reported to be growing by 10% per annum.

Looking outside the legal profession, some pioneering accountancy firms have now introduced employee share ownership plans, and Grant Thornton has announced plans to become a “shared enterprise”.

We plan to report periodically on further developments in the employee ownership arena, but, in the meantime, you can click on the following link to find out more about Employee Ownership Day on 3 July 2015  

New online filing system: rapid action required by any company with an employee share scheme

HMRC online filing and notification

As we have reported previously, HMRC is introducing an online registration and notification system for employee share schemes. By way of reminder, the key points are as follows.

  • These requirements apply to all kinds of share scheme, including EMI options, CSOP options, unapproved options, share incentive plans (SIPs), SAYE options and all other forms of employee share scheme.
  • All annual returns for tax years ending 5 April 2015 onwards for employee share schemes (whether tax-advantaged or not) must be filed online by 6 July following the end of the relevant tax year.
  • All tax-advantaged employee share schemes must be registered online with HMRC by 6 July 2015 at the latest if their tax advantages are to be preserved.

The steps you need to follow

If you are a company with any kind of share scheme,  you must complete the following steps by 6 July 2015. 

This applies to both tax-advantaged share scheme (EMI, CSOP, Share Incentive Plan (SIP) or SAYE options) and all other forms of employee share or option scheme (including unapproved options, growth or hurdle shares, shares purchased of gifted, restricted shares):

First step:  If not already done so, you must register your company with HMRC’s PAYE online service.  If you haven’t first done this, you won’t then be able to register your share scheme, so the PAYE online registration is the first step.

Second step: Using the online share scheme registration service, you must then register your share scheme by providing your corporation tax reference, company registration number and the type of scheme to HMRC.

Third step: HMRC should then send confirmation of registration and a plan reference number for your scheme by post.   It will go to your company’s registered office so make sure someone there looks out for it.

Fourth step: Complete your share scheme annual return online.  Clearly, there is likely to be a time delay between the second and third steps. Companies which delay registering their share schemes until the last minute could, therefore, miss the deadline for annual returns.

Important Note: A company’s agent cannot register the scheme (second step). Only the company itself can do this.

How to complete and file your share scheme annual return

HMRC has now published revised versions of the annual return filing templates for all tax-advantaged and non-tax-advantaged share schemes for 2014-15. HMRC had first published the templates in February 2015 but quickly removed them after users reported extensive technical problems.
Separate templates are available for the annual returns for:

  • Company share option plans.
  • SAYE option schemes.
  • Share incentive plans.
  • Enterprise management incentives options.
  • All non-tax-advantaged options and awards.

The templates can be found by clicking on the following link.

Registering grants of EMI options

Grants of EMI options after 5 April 2014 must be notified online to HMRC within 92 days following grant if the related tax advantages are to be preserved.  If not already done, you must first have registered with HMRC your EMI scheme.

Taxation of internationally mobile employees

Taxation of equity incentives awarded to internationally mobile employees

From 6 April 2015, the way in which internationally mobile employees are taxed in the UK on employment related share options and restricted shares will change.

The change follows a recommendation made by the Office of Tax Simplification aimed at addressing two perceived anomalies:

  1. Where an employee was not UK tax resident when share options or restricted shares were awarded, no UK tax is payable under current UK rules at vesting or exercise even if he or she moves to the UK before vesting or exercise.
  1. Conversely, where an employee was UK tax resident when share options or restricted shares were awarded, UK income tax is fully payable under current rules at vesting or exercise even if employment duties are performed outside the UK before vesting or exercise, although this may be relieved by an applicable double tax agreement.

The new rules create the concept of a “relevant period” (which, typically, is the period between the grant of an option or award and its vesting) which is split between that part during which UK tax is relevant and that part which is outside the scope of UK tax.

The part which is within the UK tax regime will be assessed on a “just and equitable” basis and UK tax will be charged on an amount attributable to the time the individual spent working in the UK.

The new rules will apply to all exercises of share options after 5 April 2015. This treatment differs from that originally announced, under which only awards granted after 1 September 2014 would be affected. There are no “grandfathering” provisions which would continue the current tax treatment to existing options which are exercised after 5 April 2015.

The new rules also provide that any corporation tax relief in respect of share awards should mirror the amount chargeable to income tax.

Employers will need to ensure that payroll systems are able to identify the proportion of awards which will be subject to UK tax.

Award holders will need to decide whether they might benefit from exercising options before 6 April 2015 (if permitted to do so under the rules governing them) in order to secure UK tax treatment or non-UK treatment under the current regime. Any tax advantage in the UK might need to be balanced against any non-UK tax which could be payable as a result of early exercise.

If you or your clients would like to discuss any of the developments mentioned in this newsletter, please contact:

Robert Postlethwaite
David Reuben
Stephen Chater
Judith Harris
or call us on 020 3818 9420

Latest News about Employee Ownership

In this issue:

  • Latest developments on new tax reliefs and employee ownership trusts
  • Employee Ownership Association 2014 Annual Conference
  • Upcoming Autumn Statement

Employee ownership trusts

In previous newsletters, we have reported on the progress of the Government’s recent initiative to promote increased employee ownership, and in this newsletter, we are providing an update on developments over the past few months.

Since the tax reliefs were first announced, we have been working with various companies which have been exploring the possibility of making a transition to employee ownership using the relief where the sale of a controlling interest in a business to an indirect employee ownership trust (“EOT”) is entirely free from capital gains tax (CGT).  A second tax relief is that bonuses paid to employees of companies controlled by an EOT benefit from an income tax (but not National Insurance) exemption.

In this relatively short period, we have successfully completed transactions for two clients, and are actively working on similar projects with various others. We are setting out below how such a transaction might work, based on our experience.

ProcessTypically, a company establishes an EOT and seeks prior clearance from HM Revenue and Customs that any tax payable by UK taxpayers on the proceeds of the sale of their shares to it would be CGT (rather than dividend income tax). Once clearance has been obtained, full relief against CGT can be claimed.

Professional advice will normally be sought on the company’s current value, and the company’s shareholders will then enter into a contract with the EOT under which the EOT agrees to purchase at least a majority of the shares in the company.

An EOT can be funded by a company out of its profits.  The EOT can make an initial payment to the selling shareholders financed by the company’s retained profits, with the intention that the balance of the purchase price will be paid over a period of years out of future profits.

Where it is not intended that an EOT will distribute any of its shares to employees, employee ownership is indirect – through the EOT – and rewards for future performance can be based on a broadly-based bonus plan making use of the income tax relief for employees of companies controlled by an EOT.  This type of indirect employee ownership structure will often be preferred where there is no perceived need for employees to benefit from capital growth. It also has the added advantage that it eliminates the need for regular sales or purchases of shares by or between employees.

Although an EOT might be a company’s controlling shareholder, that does not mean it runs the company.  The day-to-day management of the company remains the responsibility of its directors.


An EOT is operated by its trustees. There are no particular restrictions on who might act as a trustee and the trustees could include, for example, employees, directors and/or independent persons from outside the company.  As the beneficiaries of the EOT will be the company’s employees as a whole, the trustees have a duty to act in the best interests of the employees as a group.  To a considerable degree, this might entail ensuring that the company is managed effectively by its directors, invests prudently for the future and that it generates consistent profits to be shared with employees.  The trustees would also be likely to encourage a corporate culture which is positive and rewarding for its employees.

We would be happy to discuss any aspect of these arrangements with all those who are interested in exploring further what opportunities there might be.

Employee Ownership Association 2014 Conference

We have just stepped off the train from Nottingham, where we were attending and exhibiting at the Employee Ownership Association 2014 Annual Conference (and also chairing a workshop on transitioning to employee ownership). Attended this year by 500 people, it is a fascinating event and essential for any company or adviser interested in employee ownership.

Autumn Statement

The Chancellor of the Exchequer will make his Autumn Statement on 3 December 2014. This might include a progress report on the consultation exercise launched in July 2014 following recommendations from the Office of Tax Simplification.

The first review concerns the tax treatment of shares (or other securities). At present, a tax charge will, broadly, arise at the point at which shares are acquired by an employee for less than their market value, unless the acquisition is pursuant to a tax-advantaged scheme. This can cause difficulties where the shares cannot be sold to fund the tax liability, and there can be significant time (and expense) in agreeing with HMRC what the shares are worth. The OTS’s main proposal is that a tax charge should in future arise only when the employee was able to sell the shares.

The second review relates to the possible introduction of an employee shareholding vehicle (sometimes referred to as a safe harbour trust) which would be simple to set up and operate and would act as a warehouse and marketplace for employee shares. It would be designed to benefit from certain exemptions under tax legislation, and would be an alternative to a traditional employee benefit trust (but would not offer the tax reliefs associated with an EOT).

Both these reviews deal with complex areas of law and tax, and the Government will be concerned to eliminate any opportunities for tax avoidance which might otherwise arise as a result of implementing the proposals. The consultation period closed on 10 October 2014. It is unlikely that draft legislation will be forthcoming in the near future, but the Chancellor might comment on the outcome of the consultation.

If you or your clients would like to discuss any of the developments mentioned in this newsletter, please contact:

Robert Postlethwaite
David Reuben
Stephen Chater
Judith Harris
or call us on 020 7470 8805