Employment-related securities ― overview

By Tolley in association with Ken Moody
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The following Employment Tax guidance note by Tolley in association with Ken Moody provides comprehensive and up to date tax information covering:

  • Employment-related securities ― overview
  • Introduction
  • Charge on acquisition
  • The ERS rules
  • What are securities?
  • Market value
  • Reporting requirements
  • Exceptions for certain control situations
  • Restricted securities
  • Convertible securities
  • Securities with artificially depressed or enhanced market value
  • Securities acquired for less than market value
  • Securities disposed of for more than market value
  • Post-acquisition benefits from securities
  • Shares in research institution spin-out companies
  • Securities options

This document discusses these in detail, together with the situations when a loan benefit arises; methods of calculating of benefit; exemptions from the charge; reporting and National Insurance treatment; and loan repayment.

 

Note that all case references and references to Simon’s Taxes in this guidance note are subscription sensitive.

Introduction

Shares or securities awarded to employees are potentially taxable as earnings but the employment-related securities (ERS) rules are an overlay that modify the position in cases where the tax result that would flow from the particular circumstance does not reflect the full economic value received, or where the Government has determined that it wants a lesser / different tax burden to apply.

Charge on acquisition

It has long been established by case law that where an employee acquires shares in his employer and pays less than their market value for them, the discount is taxable as earnings (as defined in ITEPA 2003, s 62).

Weight v Salmon HL (1935) 19 TC 174; Ede v Wilson and Cornwall [1945] 1 All ER 367

The charge to tax on employment income in ITEPA 2003, s 6 relates to:

  • general earnings
  • specific employment income

In outline, ‘general earnings’ are earnings within s 62 and amounts ‘treated as’ earnings, which includes benefits in kind within the benefits code, while ‘specific employment income’ refers to amounts which ‘count as’ employment income under various heads ― the one we are concerned with here being the ERS rules in ITEPA 2003, ss 417– 554 (Pt 7).

The ERS legislation does not, in general, apply to the acquisition of securities since their value (less any consideration given by the employee) is taxable as earnings on general grounds.

The ERS rules

The ERS legislation in ITEPA 2003, ss 417– 554 (Pt 7) may be divided into two main categories:

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