chapter 5 employment income additional...

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ACCA P6 Advanced Taxation(uk) (AT uk)

⾼高级税务（英国）

ACCA Lecturer: Shelley Song

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Shares and Share Options: General Rules1

2 Employee Shareholder Shares

Chapter 5 Employment Income: Additional Aspects

3 Tax Advantaged Share Schemes

4 Lump Sum Payments


1 Shares: General Rules

If a director or an employee is given shares, or is sold shares for less than their market value, the director or employee is treated as receiving specific employment income of the difference between the market value and the amount (if any) which the director or employee pays for the shares.


Shares: General Rules (Cont.)

If there is an income tax charge in respect of acquiring shares, Class 1 National insurance contributions (NIC) may also be due. An amount equal to that charged to income tax is treated as ‘earnings’ for NICs. However, this treatment only applies if the shares are 'readily convertible assets' eg if they can be sold on a stock exchange.


Share Options: General Rules

(a) If a director or an employee is granted an option to acquire shares (ie is given the right to buy shares at a future date at a price set now), then, in general, there is no income tax charge on the grant of the option. !(b) On the exercise of the option there is a charge as specific employment income on the market value of the shares at the date of exercise minus the sum of what (if anything) was paid for the option and what was paid for the shares. !If he assigns or releases the option for money, or agrees (for money) not to exercise it or to grant someone else a right to acquire the shares, he is likewise taxable on the amount he receives minus the amount they paid for the option.


Simon was granted an option to buy 10,000 shares in his employer company in September 2012. The cost of the option was £1 per share. The price at which the option could be exercised was £5. Simon exercised his option in August 2015, when the shares had a market value of £8. What is the amount of specific employment income taxable in 2015/16? !Market value at exercise 10,000 × £8 80,000 Less price paid for option 10,000 × £1 (10,000) price paid for shares 10,000 × £5 (50,000) Chargeable on exercise 20,000

Example: Share Option


2 Employee Shareholder Shares

2.1 Employee Shareholder: Definition and Conditions

2.2 Income Tax and National Insurance Contributions on Employee Shareholder Shares

2.3 Capital Gains Tax on Employee Shareholder Shares


Example: Property Business Computation

An employee shareholder is an individual who works under an employee shareholder employment contract which provides for certain employment rights to be given up in exchange for shares in the employer company. !The following conditions must be met for an individual to be an employee shareholder: (b) The employer must give the individual fully paid up shares in the employer’s company (or employer’s parent company), which must be worth at least £2,000. (c) The individual must not pay for the shares in any way other than giving up the employment rights.

2.1 Employee Shareholder: Definition and Conditions


2.2 Income Tax and National Insurance Contributions on Employee Shareholder Shares

There is a charge to income tax and, possibly, national insurance contributions on the provision of employee shareholder shares to an employee shareholder. !However, the employee shareholder is deemed to have made a payment of £2,000 for those shares. Therefore, if £2,000 worth of shares are provided to the employee shareholder, there will be no charge to income tax or national insurance. If more than £2,000 worth of shares are provided to the employee shareholder, only the excess over £2,000 will be subject to income tax. !The deemed payment is usually only available once to an employee shareholder from the same employer. !The deemed payment is not available if the employee shareholder (or by or together with persons connected with that employee) has a material interest (ie >25% of voting rights) in the company at any time in the 12 months before the acquisition of the employee shareholder shares.


Example: Employee Shareholder Shares

Louise started employment with Halo plc on 1 December 2015 and was given 5,000 shares in Halo plc worth £2 each on that date. Louise did not have material interest in Halo plc at any time.What is the amount of specific employment income taxable in 2015/16 in respect of those shares if: (a) Louise is not an employee shareholder, or (b) Louise is an employee shareholder? !(a) Louise is not an employee shareholder Market value at provision 5,000×£2 Specific employment income £10,000 !(b) Louise is an employee shareholder Market value at provision 5,000×£2 £10,000 Less deemed payment (2,000) Specific employment income 8,000


2.3 Capital Gains Tax on Employee Shareholder Shares

If, when the shares were acquired, their total value was £50,000 or less, any gain on the first disposal of employee shareholder shares by the employee shareholder is exempt from capital gains tax. If the value of the shares exceeded £50,000, only the gain on the first £50,000 worth of shares is exempt. !If a loss arises on the disposal of employee shareholder shares, the loss is not an allowable loss if a gain would have been exempt had it arisen on the disposal.


Example: Capital Gains Tax on Employee Shareholder Shares

A enters into an employee shareholder share agreement with his employer, C Ltd. This is his only ESS agreement. Neither A nor anyone connected with him has or has had a material interest in C Ltd. In consideration of the agreement he acquires over a period of time three successive tranches of shares in C Ltd. !Tranche 1 has a value of £30,000; tranche 2 £20,000 and tranche 3 £10,000. Then, the shares in tranches 1 and 2 are exempt ES shares. The shares in tranche 3 are not exempt.


(a) No gain/ no loss provisions for disposals between spouses/civil partners do not apply to transfersof employee shareholder shares. !(b) Share pooling and matching rules do not apply to employee shareholder shares. In addition, if the individual has a mixture of employee shareholder shares and other shares in a company, on a disposal of shares, the individual can decide which of the shares disposed of are to be treated as employee shareholder shares. !(c) Paper for paper rules do not apply on a takeover of the employer company so there will be a disposal of the employee shareholder shares.

Cpital Gains Tax are Amended In Respect of Employee Shareholder Shares


4 Lump Sum Payments

4.1 Payments on the Termination of Employment

4.2 Other Lump Sum Payments


4.1 Payments on the Termination of Employment_Exempt Termination Payments

The following payments on the termination of employment are exempt. ➢ Payments on account of injury, disability or accidental death !

➢ Lump sum payments from registered pension schemes !

➢ Legal costs recovered by the employee from the employer following legal action to recover compensation for loss of employment, where the costs are ordered by the court or (for out-of court settlements) are paid directly to the employee's solicitor as part of the settlement.


Fully Taxable Termination Payments

An employee may, either on leaving an employment or at some other time, accept a limitation on their future conduct or activities in return for a payment. This is known as a restrictive covenant. Such payments are taxable as general earnings.


Partly Taxable Termination Payments

Other payments on termination (such as compensation for loss of office and statutory redundancy pay), which are not taxable under the general earnings rules because they are not in return for services, are nevertheless brought in as amounts which count as employment income. These are often called ex gratia payments. Such payments are partly exempt: the first £30,000 is exempt; any excess is taxable as specific employment income.


Benefits provided on termination

!Payments and other benefits provided in connection with termination of employment (or a change in terms of employment) are taxable in the year in which they are received.


Special Situations

HMRC regard payments notionally made as compensation for loss of office but which are made on retirement or death (other than accidental death) as lump sum payments under non registered pension schemes, and therefore taxable in full. !Also, payments in circumstances which amount to unfair dismissal are treated as eligible for the £30,000 exemption.


Practical Issues

If the termination package is a partially exempt one and exceeds £30,000 then the £30,000 exempt limit is allocated to earlier benefits and payments. In any particular year the exemption is allocated to cash payments before non-cash benefits. !Employers have an obligation to report termination settlements which include benefits to HMRC by 6 July following the tax year end. No report is required if the package consists wholly of cash. Employers must also notify HMRC by this date of settlements which (over their lifetime) may exceed £30,000.


Example: Redundancy Package

Jonah is made redundant on 31 December 2015. He receives (not under a contractual obligation) the following redundancy package: ■ Total cash of £40,000 payable £20,000 in January 2016 and

£20,000 in January 2017 ■ Use of company car for period to 5 April 2017 (benefit value

per annum £5,000) !

In 2015/16 Jonah receives as redundancy: £ Cash 20,000 Car (£5,000×3/12) 1,250 21,250 wholly exempt (allocate £21,250 of £30,000 exemption to cash first then benefit)


In 2016/17 Jonah receives: £ Cash 20,000 Car 5,000 25,000 Exemption (remaining) (8,750) Taxable 16,250 £11,250 (£20,000 less £8,750) of the cash payment is taxable

Example: Redundancy Package(Cont.)


4.2 Other Lump Sum Payments

Where lump sums are received otherwise than in connection with the termination of employment they will be taxable if they derive from the employment. Examples are: !(a) A golden hello, which is a one-off payment made to encourage someone to join a new employer. As it is effectively a reward for future services it is subject to both tax and NIC. !(b) A payment for a change in the terms of employment is also taxable.

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chapter 5 employment income additional...

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