Tax Questions: Giving Shares to Employees
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.
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).
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 at Supreme Court determined that where a company is accounting for share-based payments in accordance with International Financial Reporting Standard 2 (IFRS 2) it is possible to obtain a corporation tax deduction based on the market value of shares when share options are granted to employees. (not necessarily recognised immediately but could be spread over a number of accounting periods.).
Awarding shares to employees is a complex area, feel free to contact us before you consider such arrangements on Let’s Talk. Our team of tax specialists is here to help!