ITEPA: ‘Normal Rules Charge’ - Section 62 ITEPA
The charge under section 62 is the ‘money’s worth’ basis of valuation previously seen in section 19 ICTA. Section 62(3) provides that…
“For the purposes of subsection (2) ‘money’s worth’ means something that is –
- of direct monetary value to the employee, or
- capable of being converted into money or something of direct monetary value to the employee.”
In general terms the ‘money’s worth’ is the extent to which the asset received can be converted into money by the person receiving it. The concept is not new: as early as 1935 the House of Lords decided in Weight v Salmon (1935) 19 TC 174 that where shares are made available to employees at a price below their value, the undervalue represents money’s worth taxable as income.
An employee who receives shares at less than their value receives money’s worth and will be liable to tax on the value at the date of acquisition less the consideration, if any, paid - see Weight v Salmon (1935) 19 TC 174. The basis of the valuation is derived from case law - see the Employment Related Securities Manual at ERSM220030. It does not matter that the employee does not actually sell them or that they cannot be sold for a certain period, or without special permission. The employee still receives money’s worth as there are other means than a sale of the legal title to turn shares to pecuniary account - see Ede v Wilson and Cornwall (1945) 26 TC 381.
The money’s worth basis of valuation does not postulate a hypothetical sale in the open market. However, the lack of the concept of a hypothetical sale does not itself preclude the shares having a value for “normal rules” purposes. We are generally concerned with the possibility of a sale and, if not, there are other ways of turning a perquisite to account.
Although you cannot rely upon decided open market case law there is unlikely to be much difference in practical terms. Experience has shown that the number of cases where ‘money’s worth’ differs from the “open market value” is small and, in general, you should proceed on the same basis. Most valuation requests are of small minority holdings. The distinction between the two types of value need not be taken except in the exceptional cases where the personal knowledge of the taxpayer adds substantially to the value that would have been arrived at under open market information standards. For example, confidential information about an impending sale which might be considered inadmissible in an open market valuation of a small holding. We are not concerned with the concept of hypothetical parties to the sale so the vendor for the purpose of establishing the money’s worth is the actual taxpayer and any information known to him can be taken into account. This is in accordance with the judgements in several decided cases set out at ERSM220030.
Since the general intention is to tax the value of the employment income in the hands of the taxpayer, you may need to take into account the price that an employee might have been able to obtain in the restricted market or fair value under the Articles. If the prices are very much removed from what would have been a reasonable estimate of open market value, you should refer to your Team Leader for advice.
Unrestricted Market Value
Under Section 431 ITEPA it is possible for the employer and employee to jointly elect to fully or partially disapply Chapter 2 of Part 7 ITEPA – the chapter that deals with restricted securities.
The idea is to allow employees to be charged on the full market value of the securities ignoring any restrictions, at the time the securities are acquired. No further charge to income tax should then arise when the restrictions are lifted.
In practice most employers and employees elect out of the money’s worth basis of valuation for a full unrestricted market value (UMV). Where the UMV is seemingly less than the money’s worth value, the case should be referred for advice.
|Additional Guidance: SVM150000|