Where companies give shares to employees in the company or group that they work for they will generally be taxed on the difference between the market value of those shares and the amount paid, if any. The transaction also needs to be reported to HMRC by 7 July following the end of the tax year. HMRC provide a template to enable employers to report the transaction online:
See: Other ERS schemes and arrangements: end of year return template, technical note and guidance notes - GOV.UK (www.gov.uk)
Considerations around whether employers need to operate PAYE and whether national insurance contributions are payable depends upon whether the shares are ‘readily convertible assets’. Broadly this would be where there are trading arrangements in place to quickly sell the shares.
It is generally more tax efficient for the employee if the company awards them shares under a tax-advantaged share incentive scheme such as under the Enterprise Management Incentive (EMI) scheme or a Share Incentive Plan (SIP).
Contact us if you would like more information about these schemes.
Corporation Tax relief for Employee Share Acquisitions
Provided certain conditions are satisfied, the employing company will obtain a corporation tax deduction when employees acquire shares in the company or group that they work for, whether they acquire the shares directly or under a share option agreement. The amount of the deduction is the difference between the market value of the shares and the amount paid by the employee and will often mirror the amount taxed on the employee. This is a statutory deduction and will be available irrespective of whether there is a deduction for the transaction in the company’s profit and loss account.
Tax Relief when Share Options are granted
A recent case before the Supreme Court (HMRC v RCL Investments Ltd and Ors (2022) UKSC 9) has determined that where a company is accounting for share-based payments in accordance with International Financial Reporting Standard 2 (IFRS 2) then it is possible to obtain a corporation tax deduction based on the market value of shares when share options are granted to employees. In the case heard, there was a complex arrangement involving payments to an Employee Benefit Trust (EBT) that acquired shares on behalf of employees. The Supreme Court determined that the grant of options by the EBT trustee to the companies’ employees triggered an obligation on the companies to recognise an expense in their income statements equal to the fair value of the options that the EBT trustee had granted. This amount would not necessarily be recognised immediately but could be spread over a number of accounting periods.
Awarding shares to employees is a complex area so please contact us before you consider such arrangements.