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HMRC internal manual

Employment Related Securities Manual

Securities with Artificially Enhanced Value

Dependent subsidiary pre-16 April 2003 - reason for special charge

The value of shares in a subsidiary company can be easily manipulated. For instance, if a parent company routes a large proportion of the profitable business of the group through a particular subsidiary, the shares of that subsidiary will increase in value as a result. But even if the re-routed business had its source in the parent company, the value of the shares of the parent company will not be adversely affected by this because it incorporates the value of its subsidiaries.

If, therefore, employees or directors are given shares in a subsidiary company, it is easy for the parent company to shift value into those shares to further reward those directors and employees.

Removal of certain companies from scope of charge

Nonetheless some groups wish to give directors and employees shares in subsidiary companies for valid commercial reasons. This is often the case where the subsidiary inquestion operates independently of the group as a whole such that the performance of the shares in the parent company is too remote to act as a motivator. In certain circumstances the legislation therefore excepts shares in such companies from the growth-in-value charge, which taxes normal growth as well as value-shifts. It allows them instead to be subject to the post-acquisition charge, in the same way as shares in non-subsidiary companies.

The independent subsidiary company identified by the legislation is one where the opportunity for value shifting by the parent is minimal. The onus for deciding that a subsidiary company is not a dependent subsidiary is placed initially on the directors of the group parent and on the company’s auditors.