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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Post Acquisition Benefits from Securities

Nature of benefit

During the debate on the FA05 changes, the Paymaster General made it clear that “benefit” in this context is employment reward:

“A reference to benefits in the context of the schedule means the employment reward - the passing of value to an employee in return for the employee’s labour. Where investors are carrying out their normal investment transaction, this charge will not affect them.” (Standing Committee B, Clause 12, 21 June 2005)

Arrangements that deliver post-acquisition benefits are most unlikely to be available to non-employee shareholders, but statutory exclusions are provided in certain cases to put this beyond doubt (see ERSM90200).

The phrase “benefit in connection with employment-related securities” is very widely drawn and encompasses a spectrum of benefits. Benefits include a whole range of things. For example, the provision of travel, accommodation or other vouchers not caught by other benefits legislation because their receipt stems from the possession of employment-related securities, such as free ferry trips given to all its employee shareholders by a ferry company. However, a similar benefit provided for both employee and non-employee shareholders might be exempt through ITEPA03/S449 - see ERSM90210.

Intrinsic and extrinsic benefits

An extrinsic benefit would be one separate from the employment-related security itself, e.g. bonus share or free holiday. But where the value of an employee’s share is increased by something done that rewards the employee, the benefit would be intrinsic, e.g. by amending articles of association.

Bonus shares

A common benefit would be the provision of bonus shares. Prior to 16 April 2003 rights issues might also be within Chapter 4, but now they are more likely to be caught by Chapter 5 - see ERSM111000. Because Chapter 4 only applies to employees resident and ordinarily resident at time of acquisition (see ERSM90030), other employees may only be chargeable on bonus shares under Chapter 3C (see ERSM70010).

The amount of the benefit would be the market value of the bonus shares less any reduction in value of the original holding caused by the issue of the bonus shares.

Amending articles of association

For example, an employer could improve the rights of shares owned by employees by altering the articles of association. The increase in value would then be the receipt of a benefit in connection with the employment-related security. However, please see ERSM90500 on ratchets and ERSM90220 on interaction with Chapter 3B (securities with artificially enhanced market value).

Otherwise chargeable

See ERSM90200 for discussion of the meaning of a benefit that is exempt because it is “otherwise chargeable to income tax”.