My long association with the ITEPA 2003, Pt 7 Employment Related Securities (ERS) legislation leads me to conclude that confusion stalks the land. Or put less dramatically, the rules are often confusing and contain some quite major inherent contradictions.
Land of Confusion
For example, the CGT definition of ‘market value’ was imported (by ITEPA 2003, s 421) to apply for most of the ‘charging’ chapters of Part 7. Except that we now know from case law (see Lord Walker’s comments in Gray’s Timber Products v CRC [2010] UKSC4) that it does not and cannot; otherwise, parts of the legislation would not work as expected and intended. So, after more than 20 years, that remains one big source of confusion we must work with. Another is the relationship of the ERS rules with the rest of ITEPA 2003, which can be confusing in a different way and requires ‘sorting the wheat from the chaff’.
ERS or Not?
On the one hand, almost all employee share awards will be ERS because the definition of ERS deems them to be, whether they are or not, as a question of fact. But that statutory fiction does not necessarily go hand in hand with a charge to income tax, as we shall see. For example, while ‘founder’ shares in a company would not normally be acquired by reason of employment as a question of fact, the deeming provision (at s ITEPA 2003, 421B(3)) says that they are (with only very limited exceptions). Indeed, the deeming provision was introduced specifically to preclude any such argument. I hope not to bore readers too much with the ‘nitty gritty’ of the legislation, but the charge on employment income includes ‘general earnings’ and ‘specific employment income’. General earnings includes earnings and benefits-in-kind, while specific employment income includes amounts which ‘count as’ employment income under the ERS rules.
Is It ‘Earnings’?
Earnings, of course, includes all the familiar items (e.g., salary, wages, gratuities), but also any profit or benefit in money or money’s worth and anything else which ‘constitutes an emolument of the employment’ (ITEPA 2003, s 62(2)). Company shares are regarded as a ‘monetary asset’, the value of which is therefore earnings within section 62 rather than benefits-in-kind within section 63 and related chapters of ITEPA 2003. In Weight v Salmon HL [1935] 19 TC 174, for example, a company allotted shares to directors at par, which was considerably less than their market value. The courts held that this was a profit in money’s worth received as remuneration for services. However, whether such receipt constitutes a profit or emolument of the employment is a question of fact, regardless of the ERS legislation. To come back to which, in general the ERS rules do not impose a tax charge on acquisition, the main exception being the acquisition of ERS pursuant to an ERS option. Otherwise, if there is a charge on acquisition, it is as earnings within ITEPA 2003, s 62. It follows that while an acquisition may be within the definition of ERS and reportable as such, whether a tax charge arises is a different question. In the case of founders’ shares acquired on the incorporation of a business, these would not normally constitute a profit or emolument of the employment (and will usually be equal in value to the consideration given anyway). So, I’m glad that’s all clear now (not)!
Practical Tip
Another minor point of possible confusion; HMRC guidance indicates that shares acquired shortly after the incorporation of a company do not need to be reported (using the online ERS service). However, the fact that such acquisitions may not be reportable does not mean that they are not ERS (see HMRC’s Employment Related Securities Manual at ERSM140040), to which any relevant chapters of ITEPA 2003, Pt 7 may therefore apply in future.
