Dan Sharman
• Dan specialises in advising on all types of employee incentive arrangements, ranging from share options, share ownership (particularly growth shares), cash-based schemes and employee benefit trusts.
• In addition to handling share options work, he also advises clients on all areas of employment tax, including employment related securities, internationally mobile employees and the tax efficient structuring of bonuses and termination payments.
• Dan is dual qualified as both a solicitor and a chartered tax adviser.
Practice Areas
Panel
- Contributing Author
Qualified Year
- 2013
Experience
- Osborne Clarke LLP (2018 - 2022)
- Bird & Bird LLP (2013 - 2017)
- Squire Patton Boggs (2011 - 2013)
Membership
- Chartered Institute of Taxation
12 Contributions by Dan Sharman
PRACTICE NOTES
Employment-related convertible securities: UK income tax under ITEPA 2003 - acquisition, chargeable events, anti-avoidance, PAYE/NICs, calculations and reporting
This Practice Note explains the income tax treatment of convertible securities
The meaning of convertible securities is provided in Practice Note: Convertible securities—definition. In broad outline, the regime for convertible securities (or interests in them) as found in Chapter 3, Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) operates by viewing the security itself and the conversion right as two distinct assets. Income tax liabilities may arise:
on acquisition of the convertible securities, calculated by reference to the value of the underlying securities while disregarding the conversion right, and
on a later chargeable event, being:
conversion of the convertible securities
disposal of the convertible securities, and/or
a change in description (as opposed to class) of securities, measured by the gain on the conversion right (but excluding any gain on the underlying securities)
In contrast to restricted securities, the rules do not allow an employer or an employee (or a director) to choose an alternative tax treatment. Therefore, it will often be preferable to structure employment-related securities so that they qualify as restricted securities rather than as convertible securities. Where income tax charges arise in relation to convertible securities for which...
Share Incentives
PRACTICE NOTES
Employment-related restricted securities under ITEPA 2003: UK tax on acquisition and chargeable events, joint elections (ss 425, 430, 431), PAYE/NICs, exclusions and HMRC guidance
Restricted securities
The provisions governing directors and employees in relation to restricted securities, as set out in Chapter 2, Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), are frequently seen in practice on management-involved corporate transactions.
Put simply, restricted securities are employment-related securities which:
at the time of acquisition
are subject to identifiable restrictions
that depress the value of the securities
For the meaning of employment-related securities, see Practice Note: What is an employment-related security? For a fuller explanation of the definitions of restricted securities and restricted interests in securities, see Practice Note: What are restricted securities?
Restrictions are commonly intended to encourage an employee or director to remain with the employer and to meet specified performance conditions.
They may affect an employee’s ability to keep shares (for example, the articles of association may require a transfer to 'permitted transferees' if certain events, such as resignation, occur), or limit the normal rights attached to the shares (for example, restrictions on transfer, dividends or voting).
Such restrictions usually reduce the market value of employment-related securities on acquisition, and therefore any income tax and NICs charge. Where the...
Share Incentives
PRACTICE NOTES
Employment-related securities: disposals at more than market value—UK ITEPA 2003 Part 7 Chapter 3D charges, valuation, PAYE/NICs, associated persons, structuring rights, Gray's Timber and CooperVision, reporting
This Practice Note
This Practice Note addresses the particular provisions in sections 446X–446Z of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) (Part 7, Chapter 3D) that bite where employment-related securities are disposed of for more than their market worth. The measures extend to all forms of employment-related securities, regardless of whether they are restricted, convertible, or obtained under a securities option (see Practice Note: What is an employment-related security?). They rest on the premise that shares or other securities would ordinarily be sold at market value, so any element of consideration above that level must derive from their employment connection. Accordingly, an income tax exposure (and potentially National Insurance contributions (NICs)) arises on the excess over market value for the relevant employee or director (and the employing company may owe employer’s NICs). This income tax liability sits alongside any capital gains tax (or income tax) that accrues on a gain realised up to market value on a disposal. An employee or director who disposes of employment-related securities for over market value will not, in addition to income tax, also face capital gains tax on that excess...
Share Incentives
PRACTICE NOTES
ITEPA 2003 Chapter 3C: Notional Loan Regime for Employment-Related Securities Acquired at a Discount, with Deferred Consideration or Nil/Partly Paid—Annual Interest, Discharge, Exemptions and Reporting
This Practice Note deals with the specific rules applying to employment-related securities acquired for less than market value contained within Chapter 3C, Part 7 of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)
For the definition of employment-related securities, see Practice Note: What is an employment-related security? Where the provisions apply, an employee or director who obtains shares or other securities:
is regarded as having an interest-free, notional loan (see: below), and
is charged to income tax each year on the benefit of that loan as though it were a real employment-related loan (see: below).
Further income tax (and potentially National Insurance contribution (NIC)) liabilities may arise when the notional loan is treated as discharged, for example on a disposal of the securities (see: below). In this Practice Note, these rules are called the ‘notional loan’ provisions.
Note that an employee or director who acquires shares or securities at a discount by reason of their employment will, in most cases, not be taxed under the notional loan provisions. Instead, they are typically within the general earnings charge, known as the Weight v Salmon charge...
Share Incentives
PRACTICE NOTES
Restricted Securities Elections under ITEPA 2003 ss 425(3), 430 and 431 (UK): Joint Election Requirements, 14-day Deadline, HMRC-approved Forms and Required Information
The procedure for making joint restricted securities elections is the same regardless of whether the election is made under sections 425(3), 430 or 431 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
For an election to take effect, it must satisfy all of the following:
Be executed by both the employee (or director or other office-holder) and the employer. Note: it is the employer, not the company issuing or transferring the employment-related securities (if different), that must enter into the election with the employee.
Use an approved form (see below).
Be completed within 14 days of:
the acquisition (for elections under ITEPA 2003, s 425(3) or s 431), or
the chargeable event (for an election under ITEPA 2003, s 430).
The 14-day limit is absolute; extensions are not available. HMRC’s guidance indicates that where the acquisition or chargeable event occurs on day one, the election must be signed before midnight at the close of day 15. The time limit cannot be extended, though altering a restriction may open a window to make a s 430 election under ITEPA 2003, in...
Share Incentives
PRACTICE NOTES
UK employment-related convertible securities: definition, scope, conversion triggers; distinction from restricted securities; considerations for flowering/growth and ratchet shares
Convertible securities are:
employment-related securities (see Practice Note: What is an employment-related security?)
securities that can be converted into instruments of a different description (see below)
Accordingly, if a company grants securities to its employees or directors with restricted rights on issue (for example, no dividend entitlement or voting powers) but which may switch into ordinary shares on specified trigger events, those instruments constitute convertible securities.
They are often seen in private equity or venture capital settings and include:
convertible loan notes
convertible preference shares
For information on the income tax treatment of convertible securities, see Practice Note: Convertible securities—tax treatment. For the PAYE and National Insurance contributions (NIC) consequences of convertible securities, see Practice Notes: PAYE implications of employment-related securities and NICs implications of employment-related securities and securities options.
What are convertible securities?
Employment-related securities are convertible securities at the time of acquisition if:
they provide the holder with an entitlement—whether immediate or deferred, conditional or unconditional—to convert them into securities of another description
a contract, agreement, arrangement or condition authorises or requires the granting of such an entitlement
...
Share Incentives
PRACTICE NOTES
UK employment-related securities options: no tax on grant; income tax, PAYE and NICs on chargeable events (ITEPA 2003 ss 471–484)
Specific income tax rules
Specific income tax provisions (sections 471–484 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)) are applicable to securities options connected with employment. These provisions generally subject non tax-advantaged share options to an income tax charge. Different rules govern tax-advantaged arrangements such as EMI options, SAYE schemes and CSOPs.
A securities option is, in essence, a bare right to acquire securities, conferring no other rights.
Comprehensive guidance appears in Practice Note: Employment-related securities options—definition, covering:
what constitutes a securities option
when a securities option is regarded as employment-related
That Practice Note also sets out the tax treatment of employment-related securities options, which in brief is:
no income tax or National Insurance contributions (NICs) arise on the grant of an option
on exercise or another chargeable event:
the relevant employee or director may incur income tax and possibly NICs
the employer may have PAYE, NICs and apprenticeship levy obligations (see Practice Notes: PAYE implications of securities options and NICs implications of employment-related securities and securities options)
A non tax-advantaged option that falls outside of...
Share Incentives
PRACTICE NOTES
UK employment-related securities: post-acquisition benefits under ITEPA 2003 ss 447-450 – scope, valuation, exclusions (dividends, IR35), class-wide exemptions, private equity ratchets, PAYE/NICs and reporting
Post-acquisition benefits
This Practice Note addresses the provisions in sections 447–450 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) (Part 7, Chapter 4), which impose income tax on employees or directors for post-acquisition benefits received in connection with employment-related securities. For these purposes, benefits are interpreted broadly and can include, for instance, enhancements to share rights, the provision of travel or accommodation, and an allotment of bonus shares. For the meaning of employment-related securities, see Practice Note: What is an employment-related security? Following the Court of Appeal’s judgment in PA Holdings, HMRC may contend that dividend payments are simply taxable as earnings (or emoluments) under (what is now) ITEPA 2003, s 62 rather than under the specific post-acquisition benefits charge (see News Analysis: Employee remuneration and special purpose vehicles). Nevertheless, the post-acquisition benefits rules continue to operate as a sweeping-up charge where an employee or director benefits in connection with employment-related securities and is not otherwise chargeable to income tax...
Share Incentives
PRACTICE NOTES
UK ERS reporting obligations: HMRC online registration and annual returns for employment-related securities and options—reportable events, responsible persons, exemptions (founder shares, STBVs), PISCES, and penalties
Reporting employment-related securities to HMRC
Employers, and any other responsible persons, must supply specified details to HMRC about reportable events involving employment‑related securities or options held by employees or directors who are UK resident for tax purposes or perform duties in the UK, or who are expected to become UK resident or to undertake UK duties while holding such securities or options.
That information must be delivered:
online to HMRC, unless HMRC permits the return to be made in another way
by 6 July following the end of the tax year in which the event occurred, unless HMRC announces an extension, for example where there have been technical issues with the system
All companies operating employee share incentives for their staff, whether or not they are tax‑advantaged, must register those arrangements online with HMRC and also submit annual returns for them by 6 July each year. Returns must be filed online unless HMRC agrees otherwise, and automatic penalties apply if the deadline is missed. HMRC does not accept Form 42 paper annual returns (which was the hard copy share schemes return)...
Share Incentives
PRACTICE NOTES
UK restricted securities: comparative analysis of ITEPA 2003 s425, s431 and no election—tax/NICs charges, valuation scenarios and CGT base cost
This Practice Note summarises the principal factors and illustrative calculations for deciding whether to elect under section 425 or section 431 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), or to make no election, on acquiring restricted securities. For further background, see the following Practice Notes:
What are restricted securities?
Restricted securities—tax treatment and joint elections
Guidance on making a valid restricted security election
The question of whether a section 425 or section 431 election (or no election) should be made is examined using the example set out below.
Factual background
An incoming director of a private company pays £100 to subscribe for 100 shares in the company at par, provided as a ‘golden hello’. If, within five years of acquisition, the director does not meet specified performance conditions, resigns voluntarily, or is dismissed (including, but not limited to, for misconduct), the director must transfer the shares to a designated shareholder for an amount equal to the original subscription price. The income tax consequences (under the restricted securities regime in ITEPA 2003, Pt 7, Ch 2) and related National Insurance contributions (NICs) treatment at the time of acquisition of...
Share Incentives
PRACTICE NOTES
UK share plans: amending performance conditions in EMI, CSOP, SAYE and SIP: contractual, tax, rollover/change of control, governance and disclosure issues
What are performance conditions and why might they need amending?
A performance condition is a pre-determined requirement that must be met before an award holder can realise value from an option or award, and is therefore usually tied to vesting or, where relevant, the exercisability of the option. These conditions may cover a range of measures, most commonly:
overall performance of the company
results of a particular division or business unit (ie the area in which the employee works)
the individual performance of the employee award holder
the performance of a specific team (whether a project team or a permanent team)
Performance conditions can be set on an absolute or relative basis. For instance, company performance measures might be absolute (assessed against the company’s own targets) or relative (benchmarked against a peer group or a market index such as the FTSE 100). For further information on the purpose of performance conditions and guidance on drafting them, see Practice Note: Using performance conditions in employee incentive plans. There are certain circumstances...
Share Incentives
PRACTICE NOTES
UK tax on earn-outs: HMRC guidance on employment-related securities and options, including restricted/convertible shares, put/call structures, PAYE/NICs and Marren v Ingles
Earn-outs
An earn-out is a distinct method of structuring the consideration on a share acquisition, under which part of the purchase price is set by reference to the target’s performance during a defined period after completion of the acquisition. In deals that include an earn-out, the amount paid by the buyer for the shares will usually comprise:
an agreed, initial sum of consideration payable on completion of the sale; and
a contingent, unascertainable earn-out amount payable over, or at the end of, the agreed earn-out period
The initial consideration and the earn-out consideration can be satisfied wholly in cash, in shares or loan notes issued by the buyer (or a connected company), or in any combination thereof.
The earn-out component is often calculated by reference to the target company’s profits over a specified span, for example the next two or three accounting periods following completion of the sale.
It is also possible, though less common, to link the earn-out to turnover, net assets, or another financial measure that is appropriate to the transaction concerned.
Earn-outs are generally used in acquisitions where the future performance of the company is the key to justifying...
Share Incentives
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