Convertible securities definition

View the related Tax Guidance about Convertible securities

Employment-related securities ― PAYE

Employment-related securities ― PAYEShare awardsAn outright award of employment-related securities (ERS) represents ‘money’s worth’ and is within the meaning of ‘earnings’ for ITEPA 2003, s 62 and is taxable as such. The amount taxable is reduced by any payment made by the employee. The ‘money’s worth’ value is seldom different from the statutory open market value for capital gains tax purposes. The charge to tax as earnings does not apply to shares that are acquired as a result of the exercise or vesting of an ERS option. Instead, the acquisition of such shares is a chargeable event under ITEPA 2003, s 476 (see ‘Charges under ERS rules’ below). Likewise, shares acquired by an employee under one of the tax-advantaged schemes (SAYE, share incentive plan (SIP), company share option plan (CSOP) and enterprise management incentive (EMI)) are subject to the tax rules covering the scheme in question, rather than being taxed as earnings.Charges under the ERS rulesUnder the ERS rules in ITEPA 2003, ss 422–484 (Chapters 2–5, Pt 7), a charge to tax can arise if any of the various ‘chargeable events’ occur (see the Employment-related securities ― overview guidance note). In such a case, an ‘amount which counts as employment income’ is taxable as ‘specific employment income’.TaxThe employer potentially has to operate PAYE in respect of ‘PAYE employment income’. That is made up of ‘taxable general earnings’ (ie earnings and benefits in kind) and ‘specific employment income’ (including charges under the ERS rules). However, whether the employer has to

Employment-related securities ― overview

Employment-related securities ― overviewIntroductionShares 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 acquisitionIt 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). The charge to tax on employment income in ITEPA 2003, s 6 relates to:•general earnings•specific employment incomeIn 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 rulesThe ERS legislation in ITEPA 2003, ss 417– 554 (Pt 7) may be divided into

Corporate debt ― overview

Corporate debt ― overviewThis guidance note provides an introduction to the provisions governing the taxation of debt for UK companies and also provides links to more detailed guidance notes dealing with those provisions.The taxation of corporate debt in the UK is complex. There are several different sets of rules governing the amount and timing of tax deductions available for interest and other amounts relating to corporate debt. These include:•the loan relationships regime•the corporate interest restriction (CIR) rules•transfer pricing and thin capitalisation requirements•a range of associated anti-avoidance measures ― it should be noted that there are regime anti-avoidance rules (RAARs) in CTA 2009, ss 455B–455D and related sections for loan relationships and in TIOPA 2010, s 461 applicable to the CIRIt should also be remembered that payments of interest by a UK company on all liabilities capable of remaining outstanding for more than one year are subject to withholding tax, unless they are expressly exempt or qualify for relief.Loan relationshipsIn most instances, a company’s financing costs and income are taxed or relieved under the loan relationships regime. Relief is only available where the cost attaches to the company’s own loan relationships or a balance which is deemed to be a loan relationship for tax purposes. See the What is a loan relationship? guidance note.A loan relationship exists where a company stands in the position of debtor or creditor in respect of a

Geared growth arrangements ― where are we now?

Geared growth arrangements ― where are we now?There are a number of equity schemes which companies offer to their staff to drive performance and to reward loyalty which are not government-supported. These are known by a variety of names, including: growth, flowering or freezer schemes and joint ownership arrangements. In the main they are used to deliver equity in a way which falls within the capital gains tax (CGT) regime rather than participants being subject to higher rates of income tax and NIC.Very often companies will look to implement these types of scheme where traditional tax-advantaged employee share plans such as Enterprise Management Incentive schemes (EMI) ( see the Why use an EMI scheme? guidance note) or Company Share Option Schemes (CSOP) (see the Why use a company share option plan (CSOP)? guidance note guidance note) are not available. For example companies may be too large to offer EMI or have balance sheet assets in excess of the relevant limit. With CSOP, whilst there is no longer any prior approvals process with HMRC, the need for companies to meet various tests in relation to both their share capital and the design of the scheme, coupled with the relatively modest limit in the value of shares under CSOP option, may act as a deterrent.These alternative schemes have come under HMRC scrutiny as part of the drive to curb anti-avoidance in relation to employee reward. In June 2010 the coalition government announced that arrangements involving geared growth would be subject to

Introduction to share schemes

Introduction to share schemesIntroductionHistorically, the development and use of share schemes can be linked to companies seeking to use the rules to reward employees and directors in a way that did not, typically, attract income tax and national insurance contributions. However, as with all such schemes, the legislation has developed in order to ensure that payments by way of salary or bonus could not be simply recategorised in this way and paid out with lower (or even no) tax due.The share schemes legislation sets out a wide range of scenarios where income tax and, potentially, national insurance are due on transactions and events that involve shares and securities, particularly those where the recipients have an employment relationship with the company.However, share schemes are still a popular method of incentivising employees and there are a number of specific plans set out by tax legislation for companies to use. For commentary on why share schemes are popular methods of retaining staff, see the Why use a share scheme? guidance note.From 6 April 2014, share schemes, including share option schemes, no longer need to be approved by HMRC in advance of award of the shares or grant of the option. Instead, the company must provide notification within a certain time frame and self-certify that a scheme meets the criteria to benefit from the beneficial tax rules. Share schemes that were previously known as ‘approved’ schemes are now referred to as ‘tax-advantaged’ schemes.Given that tax-advantaged schemes confer tax benefits on the shares or

Employer tax consequences

Employer tax consequencesThere are a number of different consequences that can arise for employers as a result of introducing and operating employee share incentive arrangements, some beneficial and some costly.There may be an opportunity to obtain corporation tax relief on payments in the form of shares. This relief might also extend to the cost of implementing and running share schemes.Companies are also obliged to account for PAYE and NIC in respect of employee share awards in certain circumstances and on certain ‘chargeable events’ in relation to employment-related shares.Finally, companies that employ individuals who benefit from share schemes must budget for any employer’s NIC liability that might arise. This represents a real cost though in some circumstances it may be passed on to the employee.This guidance note does not consider the implications of the disguised remuneration legislation since this is looked at in detail elsewhere (see the Disguised remuneration ― overview guidance note) and is only peripheral to employee share arrangements.Corporation tax reliefIn order for shares to qualify for corporation tax relief, they must meet a number of different requirements. If certain statutory reliefs in respect of the costs of employee share schemes do not apply, the company may make a case to its HMRC office that it is entitled to make a deduction from corporation tax under general principles, eg where the expenditure was necessary to benefit the business.The company’s businessIn order to qualify for corporation tax relief in respect of employee shares awards the company must, as a

Derivative contracts

Derivative contractsA derivative contract is a financial instrument, or security, whose price is dependent on, or derived from, one or more underlying assets or indices. It is simply a contract between two or more parties whose value is determined by fluctuations in the underlying asset or index.The taxation of derivative contracts tends to make tax practitioners nervous unless they are experienced in the financial markets. However, the tax rules governing the basic derivative contracts used in day-to-day treasury transactions (eg forward currency contracts and interest rate swaps) are relatively straightforward. Many companies will have these types of basic derivative contracts without realising they fall within the derivatives rules, so it is worth discussing specific types of arrangement rather than derivatives generally when initially advising on derivatives.This guidance note steers readers through the rules and provides an overview of the main provisions and their practical application. It includes comments on the main definitions, the basis of taxation and the core anti-avoidance rules.The Derivative contracts ― general principles (A) video also sets out a basic introduction to the regime, covering the key definitions, exclusions, importance of the underlying subject matter of the derivative contract, the basis of taxation and links to GAAP.The rules governing the taxation of derivative contracts generally follow the same principles as the loan relationship regime. It is an accounts based income regime, ie unless there is an express provision to the contrary, the amounts recognised in the statutory accounts of the company are taxed as income rather

Employment-related securities

Employment-related securitiesIntroductionEmployment-related securities (ERS) broadly means that the shares or securities in question are acquired in connection with an employment. The term ‘securities’ is widely defined in ITEPA 2003, s 420. ‘Securities’ includes shares, debentures, loan stock and financial instruments such as options, futures, contracts for differences and rights under contracts of insurance. The ERS legislation is complex and it is not possible to cover all the areas comprehensively in this guidance note. This is an overview of the ERS legislation, focused on common scenarios, including potential pitfalls associated with ERS in a management buy-out (MBO). Links are included to Simon’s Taxes for further commentary, where appropriate.The rules that govern the tax treatment of ERS are listed below:Type of securityLegislationDetailed commentaryRestricted securitiesITEPA 2003, ss 422–432ERSM30000; Simon’s Taxes E4.507B–E4.507FAConvertible securitiesITEPA 2003, ss 435–444ERSM40000; Simon’s Taxes E4.507G–E4.507LSecurities with artificially depressed market valueITEPA 2003, ss 446A–446JERSM50000; Simon’s Taxes E4.507M–E4.507QASecurities with artificially enhanced market valueITEPA 2003, ss 446K–446PERSM60000; Simon’s Taxes E4.507R–E4.507TASecurities acquired for less than market valueITEPA 2003, ss 446Q–446WERSM70000; Simon’s Taxes E4.507U–E4.507WSecurities disposed of for more than market valueITEPA 2003, ss 446X–446ZERSM80000; Simon’s Taxes E4.507X–E4.507YPost-acquisition benefits from securitiesITEPA 2003, ss 447–450ERSM90000; Simon’s Taxes E4.507Z–E4.508AShares in research institution spin-out companiesITEPA 2003, ss 451–460ERSM100000; Simon’s Taxes E4.508AA–E4.508ADSecurities optionsITEPA 2003, ss 471–484ERSM110000; Simon’s Taxes E4.508H–E4.508OThe taxation of ERS for internationally mobile employees is covered in ERSM160000, the Employment-related securities: internationally mobile employees guidance note and Simon’s Taxes E4.1324.Exclusions from the ERS rulesIt should be noted that,

Employment-related securities: internationally mobile employees

Employment-related securities: internationally mobile employeesGeneral principlesWhere a UK resident employee acquires or is granted the right to acquire employment-related securities (ERS), the employee is subject to certain UK tax and regulatory requirements which apply no matter where the issuer of those ERS or the employer is located.For tax, the basic principle is that the employee is charged to income tax on the value received. The situation becomes more complex where that employee is internationally mobile and the relevant rules are outlined below.Where an event occurs in connection with the acquisition, holding or disposal of ERS, and is chargeable to UK income tax, there is a requirement to report details to HMRC. HMRC can require any ‘responsible person’ (as defined in ITEPA 2003, s 421L(3)) to report. Broadly a responsible person may be the employer, the host employer, or the issuer of the securities (special provisions apply to continental shelf workers). In practice, typically the employer or issuer of the securities (eg the holding company of a group) will make the report. For details of the online ERS reporting requirements, see the Annual returns guidance note.Chargeable events in relation to ERS may also give rise to a liability to NIC. Although the NIC rules are quite different to the income tax rules (see the ‘National Insurance’ section below), both kinds of liability should always be considered.TaxationThe income tax treatment of shares and similar securities acquired by reason of employment (ERS) where the employee in

Employee shareholder shares

Employee shareholder sharesImportant noteIn the Autumn Statement given on 23 November 2016, the Chancellor announced that the tax advantages associated with employee shareholder shares were being withdrawn for shares given under agreements entered into on or after 1 December 2016 (2 December 2016 in cases where the potential employee shareholder (ES) receives professional advice in relation to the share offer on Autumn Statement day before 1.30pm). See the Autumn Statement, para 4.31.The legislation on ES shares was then repealed, and does not apply to any transactions made after the above dates. BackgroundIn a move intended to improve flexibility in the labour market, in 2013 the Government created a new form of employment status and labelled it as ‘an employee shareholder’. Companies were able to offer this new status to selected employees or prospective employees between 1 September 2013 and 1 December 2016. An ES is an employee who has, by agreement with his employer, given up and amended certain employment rights in exchange for shares in his employer’s company or in its parent company. Those shares must be awarded to the employee free of charge. No consideration may be given for employee shareholder shares beyond the individual’s agreement to the reduction in his employment rights. For more details, see the Employee shareholder status guidance note.In order to achieve ES status, six conditions must all be met:•the individual and the company must both agree that the individual will become an ES•shares in the employing company or its parent