Inland Revenue Adds Tax To Employee Share Issues

by Jason Gorringe, Tax-News.com, London

25 August 2003

Next week, on September 1st, a clause in this year's UK Finance Act comes into effect which will penalise employees receiving allotments of shares in their companies as a result of incentive schemes or some types of share option scheme.

The Inland Revenue's rules for the issue of 'approved' shares to employees (which receive beneficial tax treatment) are quite restrictive, so that most issues of shares to employees are 'unapproved' and are therefore taxable. However, the Inland Revenue's rules have historically allowed shares to be allotted at a value below market level, reflecting restrictions placed on the shares, typically including a ban on selling the shares for a fixed period. Thus the amount of tax paid on the benefit received can be minimised through a low valuation.

Now, however, the Revenue is demanding a further tax payment when the restrictions are lifted, to reflect the increase in value. Apart from adding a further administrative burden to share schemes, the new rule will reduce the attractions of such schemes, something which has attracted adverse comment from the proponents of employee share ownership.

The new rules, which apply to any allotment of 'unapproved' shares after last April 16th, allow employees to choose between paying an additional amount of tax at the time of issue of the shares, or waiting until restrictions abate, when a market-based payment would have to be made.

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