HELP - Tax q on shares/options
Discussion
Help, not me but wife does the book keeping for a company and needs some clarification. Scenario as below:
European company gave UK employees some share options. Options vested and employees got some money. Accountants (not wife!) forced the employees to pay tax for a non-approved share scheme through PAYE.
Now, my thinking (however flawed) is that they were options granted to the employee not shares. The employees sold the options (not share) and I still think that they need to declare this on their tax return as a Capital Gain and pay tax at the highest rate. Since the option has no value before or after the vesting period how can you pay tax?
Because the accounts have done this the IR are going to do an audit on the employees to check correct payment of NI and tax! IR are insisting that there must be evidence of payment of tax ON ISSUE of the options (even though some of the vesting periods were years in advance!).
I think the accountants were wrong and have screwed up. What does the PH collective tax thinkers say?
European company gave UK employees some share options. Options vested and employees got some money. Accountants (not wife!) forced the employees to pay tax for a non-approved share scheme through PAYE.
Now, my thinking (however flawed) is that they were options granted to the employee not shares. The employees sold the options (not share) and I still think that they need to declare this on their tax return as a Capital Gain and pay tax at the highest rate. Since the option has no value before or after the vesting period how can you pay tax?
Because the accounts have done this the IR are going to do an audit on the employees to check correct payment of NI and tax! IR are insisting that there must be evidence of payment of tax ON ISSUE of the options (even though some of the vesting periods were years in advance!).
I think the accountants were wrong and have screwed up. What does the PH collective tax thinkers say?
off_again said:
Since the option has no value before or after the vesting period how can you pay tax? ?
It is not true that an option has no value before it vests. There are two parts to an option's value, there is the intrinsic value, annd the time value.
The intrinsic value is the difference between the strike price and the share price (if the latter is higher), and the other part is a function of strike, time to expiry, stock price, and stock price volatility.
The option price might not always be obvious (for example if the options do not trade on an exchange, so the question of which volatility to use is not one with an obvious answer), but there are several methods for providing an estimate which is goood enough for a rough valuation.
IIRC (and thats a big if)...
If you are issued options with an option price below the current market value of the shares, the difference is immediately taxable under PAYE at the time of grant of the options. This applies to unapproved options; but no approved option scheme will allow issue below current market price anyway.
If you exercise the options, and the share price at the time of exercise is above the option price, then for unapproved options the gain is immediately taxable under PAYE - if there is opportunity to trade the shares, or is likely to be. Any shares which are listed on an exchange are covered by this, as are any privately held shares for which there exists, or is likely to exist, an opportunity to sell the shares.
Since options are typically exercised at a company refinance/sale/floatation, this is usually the case.
Otherwise any paper gain by exercising the options is not realised until a sale occurs, and then it's taxed under CGT.
If you have an approved option scheme, then there is no PAYE liability at time of exercise regardless of the saleability of the shares, and certain schemes are also free of CGT (EMI options, for example).
Please check with a qualified accountant/lawyer though...
So to address your specific points:
If there was no charge made, then the option grant is taxable at the 'current market value' of the share options.
I assume this means:
- the option period passed
- the employees exercised their options, and paid the option price
- the employees then sold the shares, and were paid 'market price' for the shares
Options are not usually transferrable, i.e. you cannot 'sell' the options themselves.
If the initial PAYE tax had been paid, the gain on sale, i.e. difference between the option price and the sale price, is taxable as income.
Because its the In;and Revenue, and they don't want you to get away with making money without being taxed. And they want it now. And they make up the rules.
This is unfortunately correct. The company is going to be in the doo doos.
>> Edited by Size Nine Elm on Sunday 1st May 10:33
If you are issued options with an option price below the current market value of the shares, the difference is immediately taxable under PAYE at the time of grant of the options. This applies to unapproved options; but no approved option scheme will allow issue below current market price anyway.
If you exercise the options, and the share price at the time of exercise is above the option price, then for unapproved options the gain is immediately taxable under PAYE - if there is opportunity to trade the shares, or is likely to be. Any shares which are listed on an exchange are covered by this, as are any privately held shares for which there exists, or is likely to exist, an opportunity to sell the shares.
Since options are typically exercised at a company refinance/sale/floatation, this is usually the case.
Otherwise any paper gain by exercising the options is not realised until a sale occurs, and then it's taxed under CGT.
If you have an approved option scheme, then there is no PAYE liability at time of exercise regardless of the saleability of the shares, and certain schemes are also free of CGT (EMI options, for example).
Please check with a qualified accountant/lawyer though...
So to address your specific points:
off_again said:
European company gave UK employees some share options.
If there was no charge made, then the option grant is taxable at the 'current market value' of the share options.
off_again said:
Options vested and employees got some money.
I assume this means:
- the option period passed
- the employees exercised their options, and paid the option price
- the employees then sold the shares, and were paid 'market price' for the shares
Options are not usually transferrable, i.e. you cannot 'sell' the options themselves.
If the initial PAYE tax had been paid, the gain on sale, i.e. difference between the option price and the sale price, is taxable as income.
off_again said:
Now, my thinking (however flawed) is that they were options granted to the employee not shares. The employees sold the options (not share) and I still think that they need to declare this on their tax return as a Capital Gain and pay tax at the highest rate. Since the option has no value before or after the vesting period how can you pay tax?
Because its the In;and Revenue, and they don't want you to get away with making money without being taxed. And they want it now. And they make up the rules.
off_again said:
Because the accounts have done this the IR are going to do an audit on the employees to check correct payment of NI and tax! IR are insisting that there must be evidence of payment of tax ON ISSUE of the options (even though some of the vesting periods were years in advance!).
This is unfortunately correct. The company is going to be in the doo doos.
>> Edited by Size Nine Elm on Sunday 1st May 10:33
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