HMRC internal manual

Employment Related Securities Manual

Securities with Artificially Enhanced Value

Examples of arrangements attracting Chapter 3B charge

The following characteristics have been present in avoidance schemes counteracted by Chapter 3B:

Example 1: non-arm’s length transactions

  • Trading with a subsidiary where either too much is paid or too little is charged for goods or services.

In both cases the value of the subsidiary’s shares will be increased by the non-arm’s length transactions.

Example 2: forfeiture of shares enhances other shares

  • Another shareholder agrees to forfeit their shares in a way that enhances the value of employee’s shares.
  • Another shareholder agrees to forfeit their shares in a way that enhances the value of an employee’s FURB (funded unapproved retirement scheme)

In both cases the value of the employee’s shares or FURB is increased by the unusual circumstances of forfeiture of other shares.

Example 3: alphabet soup

  • A company uses special classes of shares to pay all or most of employees’ wages as dividends. Each employee will have their own class of shares so different dividends can be paid to each. The shares have no rights other than that the employer can award dividends at his discretion.

Each dividend is acting as if it were a cash bonus specific to the employee. Each time the dividend is voted the value of the share will rise and each time the dividend is paid, the value will fall again. The accumulated rises for the year will be artificial increases in value of the shares caught by Chapter 3B - the legislation disregards the falls in value.

If there is a large number of employees the classes of shares may be designated A, B, C, etc. hence the generic description “alphabet soup”.

Example 4: selective conversion

  • Shares are made convertible or similarly altered after acquisition. Employees convert, etc, their shares but the other shareholders agree not to, so the non-employees’ shares become worthless.

The effect of the selective conversion, etc. is to enhance the value of the employees’ shares.