40 taxation


Tax charges on employee shares – 0% OR 54.6%?


Last Wednesday was a good day; the sun was shining and I had a meeting with new client Joe, writes Alan Ross of Wilson Partners


“How much tax will I pay when I sell some shares?” asked Joe. A simple enough question on the face of it, but on such seemingly straightforward queries are the careers of many a tax accountant forged. “It depends,” came my almost inevitable reply before seeking further details.


Joe, it turned out, is sales director at TechCo, having joined the fledgeling start-up 10 years ago. He has a good relationship with the founder, who has always indicated that Joe would be “looked after” if the company is sold. Joe was given to understand that he had a 4% stake in the business and was told recently that a US group is to buy the company for £10 million.


As a highly competent sales director, it took but a moment for Joe to calculate that he could be in line for a £400,000 windfall. The potential tax implications, however, were another matter entirely.


On further questioning, I established that Joe has always been resident in the UK and acquired his TechCo equity as a reward for being a good employee rather than through family ties. He believed there to be paperwork documenting his 4% stake but would have to search for it in his files.


“Your tax bill will be somewhere between zero and 54.6%,” I declared with the utmost confidence. “I like the sound of zero,” Joe replied. “Zero is


VAT: Understanding the new 'place of supply' rules


From January 1, 2015 businesses in the UK supplying digital service (including telecommunication, broadcasting and other electronic services) to private consumers in the EU will need to be able to establish where the customer belongs to comply with new place of supply rules for VAT, writes Jason Mitchell of MHA MacIntyre Hudson


Currently the place of supply is usually deemed to be where the supplier is based, despite digital services being sold across the globe in a blink of an eye.


Services range from virtual meetings, intercontinental participation in video games and even web searching, emailing and video streaming. At a high level, these changes affect:


• Broadcasting, including TV, satellite and radio


• Telecommunication services, such as fixed and mobile calls and even Internet connection


• Electronic services including sales of apps, music downloads, e-books, on-line auctions, gaming, video on


www.businessmag.co.uk


demand, provision of information, sale of advertising space and other downloaded applications.


If you only supply to business customers then there will be no change to your current VAT compliance, as you will remain subject to the reverse charge mechanism (where the buyer will self-account for VAT in their EU member state). However, where you supply private individuals, the new rules will affect how you account for VAT on these supplies as you will no longer be able to account for these sales on the UK VAT return. Instead, you will need to charge VAT at the local rate by either registering for VAT locally or signing up for the new HMRC filing regime, MOSS (Mini One Stop Shop).


There are pros and cons to MOSS, which will see UK suppliers of electronic services registering to account for VAT on these supplies to EU private individuals under HMRC’s designated portal.


Your decision to sign up to MOSS will be based on a number of factors and considerations:


• You must be VAT registered in the UK


• How many EU countries you make supplies of electronic services to


• Which EU countries you make B2C e-service supplies in


• A switch in VAT costs: From January 1, 2015, the change in the rate of VAT charged due to the


THE BUSINESS MAGAZINE – THAMES VALLEY –NOVEMBER 2014


unlikely,” I said, pointing out that if he acquired the shares after September 1, 2013 and had given up some employment rights as consideration for the shares, he should have a good chance of a tax-free outcome.


A crestfallen Joe revealed that the relevant documents dated back six or seven years, which meant he did not meet the criteria of an employee shareholder.


My next question was whether Joe owned an actual shareholding or share options. “Not sure,” he said, “I just know I will be getting 4% of whatever the company is sold for.”


A few computer keystrokes later and I had TechCo’s Companies House file at my disposal and quickly discovered that Joe was not a shareholder, suggesting that what he held was a share option.


“With a bit of luck it, you may have to pay 10% tax rather than 54.6%,” I offered in the knowledge that everything hinged on the paperwork. “Has anyone mentioned EMI to you?” I asked.


I was not referring to the Beatles’ record label, of course, but the acronym would prove music to


switch will be borne by the consumer of the digital services, irrespective of whether you choose to VAT register in the EU member state or whether you opt to use the VAT MOSS service


• Three year correction periods (unless the local time limits allow longer)


• Records: to be kept for up to 10 years after the calendar year in which the BTE sales were made


• Penalties: will these be more abundant under MOSS or via the separate EU member state VAT registration?


• Refund errors/rebates: these will be partly delayed under a MOSS registration until the end of 2018.


Depending on the volume and number of countries in which you make supplies to private individuals, you will have to decide which route is best for you.


Details: Jason Mitchell 0118-9503895 www.macintyrehudson.co.uk


Joe’s ears nonetheless. For EMI is a special tax arrangement for small to medium-sized enterprises, limiting the tax liability on employee share option profits to a 10% capital gains tax (CGT) charge.


If Joe had an EMI, it would be in writing and registered at HM Revenue & Customs. If not, a share option profit could be taxed at 54.6% in some cases. “You better dig out your paperwork – there’s £178,360 of tax at stake,” I advised.


Joe called me that evening. He had the papers, complete with references to Enterprise Management Incentives – EMI for short. The result? Only 10% CGT on Joe’s £400,000.


The clear lesson, therefore, is to take expert advice from the start when structuring employee equity incentives to avoid reducing their value by more than half.


I would be delighted to help.


Details: Alan Ross 07775-737199 alan.ross@wilson-partners.co.uk www.wilson-partners.co.uk


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