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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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PAYE & NICs: Readily convertible assets: examples

Example 1 - existing trading arrangements

Ted’s employer is the UK subsidiary of a French company quoted on the Paris stock exchange (not a Recognised Investment Exchange or RIE). Ted is awarded 1,000 shares in the parent company at a 25% discount on their £10 market value. There are no restrictions on sale.

There is a charge to income tax as earnings in respect of the money’s worth to Ted of £2500. As the shares are capable of sale on an exchange, but not one being an RIE, trading arrangements exist at the time of the award and the employer should operate PAYE and account for NIC.

Example 2 - understanding about future trading arrangements

Wendy’s UK employer is not a subsidiary of any other company and is not quoted on any market. The employer gives Wendy 1000 shares worth £5 each, as a part of her remuneration. The employer undertakes to buy the shares from Wendy at any time while she remains an employee, but only after a 6 month qualifying period. There are no other conditions attached to the shares. Wendy is free to sell them, although in fact she is not likely to find anyone prepared to buy them as the company is unlisted.

The entitlement to shares represents money’s worth to Wendy and there is a money’s worth charge on £5000. There are no trading arrangements at the time of the award, because the shares cannot be sold, as there is no market, but there is an understanding that it is likely the shares can be sold in the future. This satisfies subsection (i) above and the employer must operate PAYE and account for NICs.

Example 3 - corporation tax deductible shares

Bill is a manager of a small family-owned company, not being a subsidiary of any other company. He is offered to purchase 1,000 shares at par value of £1 each, but there is no market in the shares and no arrangements for repurchasing them. There is a standard pre-emption article in the Articles of Association that anyone selling shares has first to offer them to other shareholders, but there is no obligation for those other shareholders to purchase them and no evidence of recent repurchases under pre-emption rights. Shares and Assets Valuation agree there is a money’s worth value on the shares of £2,000.

There is a charge to income tax as earnings in respect of the money’s worth of £1,000 to Bill (£2,000 less £1,000 paid). There are no trading arrangements which would make the shares RCAs. The charge of £1,000 on Bill will be a deductible expense to the employing company under Schedule 23 FA 2003 so the additional deeming provision in (j) above will not treat the shares as RCAs. No PAYE or NIC will be payable by the employer and Bill will pay Income Tax under self-assessment.