Using a scheme (Non DOTAS) in the last 1-2 years - Help needed to rectify

[webberg]

We're the rights trading in open market?
I am not an expert here and listen to webberg more but what I trying to get you to is that one of the things for your scheme to work will be RISK to exist in real. And for that share rights have to traded in an open market and valued by open market. ( or valued in a proper way)

This is the absolutely correct approach.

Is there real risk. If yes, the scheme is hard to crack. If no (and that can come in many forms) then it's a soft target.

[webberg]

I actually would feel more comfortable in paying the full tax on the loans received to put an end to this mess now rather than have this worry for the next 6 years (or however long HMRC can pursue it). I just need to find a way to do this. It seems crazy that there is no way to do the "right" thing and pay the money back?!

Don't do that.

You have a potential problem in that you received a loan (possibly taxable as salary) which perhaps should have been subject to PAYE (your liability or employer?), had a benefit of a loan (possible P11D required), used it to acquire an option (possible income tax and CGT event), used the option to repay the loan (CGT event). Possible NIC on at least 3 of those.

It's unfortunately not as simple as treating the loan as untaxed income. You need to unpick the whole legal document suite, establish the facts, prepare the analysis you want HMRC to believe and convince them of it.

I suspect this is getting boring for the rest (except Strength in Numbers).

Happy to help if you PM me.

[eek]

Hk

[ASB]

It seems that since you describe it as rights that what was acquired was some sort of call option.

I assume that what you were getting were right to ordinary shares in "payroll co plc".?

Were these shares pre existing and held in treasury?

Is payroll co quoted on a highly regulated recognised exchange?

Is it a large enterprise with loads of external investors or are the shareholders only the employees?

Is the disposal into the open market or back to the company?
Was this optional or did everybody do it?

Was the loan on normal commercial terms?

jsop are a relatively uncommon thing. But some have passed. This one does has an aroma of being somewhat on the agressive and artificial position.

[contractor46]

It seems that since you describe it as rights that what was acquired was some sort of call option.

I assume that what you were getting were right to ordinary shares in "payroll co plc".?

Were these shares pre existing and held in treasury?

Is payroll co quoted on a highly regulated recognised exchange?

Is it a large enterprise with loads of external investors or are the shareholders only the employees?

Is the disposal into the open market or back to the company?
Was this optional or did everybody do it?

Was the loan on normal commercial terms?

jsop are a relatively uncommon thing. But some have passed. This one does has an aroma of being somewhat on the agressive and artificial position.

I wish i could say that I had the answer to your individual questions but i don't. I can certainly try to obtain it from the payroll provider. Whether I can get this info is another questions though.

As far as I know the shares are pre-existing.

I'm not sure if they are on an exchange. I dont think the shares are listed anywhere.

I believe the shareholders are made up only of employees.

Disposal of the shares is back to the company.

It is presented as being optional but I don't recall being given an alternative option with them.

Sorry i am unsure of what "normal commercial terms" means? Apologies, my knowledge of shares and loans is very basic.

Here is a quote from the scheme handbook that may be of interest:

"It is important, to avoid any income tax liabilities on the acquisition of your rights, that you pay a sum equal to the market value of your

rights. If HM Revenue and Customs should decide that the price which you paid for your rights is less than their market value we shall

require you to pay the difference to the Trust. As a result of entering into the letter of direction mentioned above, you also direct that any

additional amounts payable are dealt with by a loan to you for such additional amounts which are then paid over to PAYROLL COMPANY"

[webberg]

I wish i could say that I had the answer to your individual questions but i don't. I can certainly try to obtain it from the payroll provider. Whether I can get this info is another questions though.

As far as I know the shares are pre-existing.

I'm not sure if they are on an exchange. I dont think the shares are listed anywhere.

I believe the shareholders are made up only of employees.

Disposal of the shares is back to the company.

It is presented as being optional but I don't recall being given an alternative option with them.

Sorry i am unsure of what "normal commercial terms" means? Apologies, my knowledge of shares and loans is very basic.

Here is a quote from the scheme handbook that may be of interest:

"It is important, to avoid any income tax liabilities on the acquisition of your rights, that you pay a sum equal to the market value of your

rights. If HM Revenue and Customs should decide that the price which you paid for your rights is less than their market value we shall

require you to pay the difference to the Trust. As a result of entering into the letter of direction mentioned above, you also direct that any

additional amounts payable are dealt with by a loan to you for such additional amounts which are then paid over to PAYROLL COMPANY"

Sounds like the PA Holdings scheme in part.

[Iliketax]

I wish i could say that I had the answer to your individual questions but i don't. I can certainly try to obtain it from the payroll provider. Whether I can get this info is another questions though.

As far as I know the shares are pre-existing.

I'm not sure if they are on an exchange. I dont think the shares are listed anywhere.

I believe the shareholders are made up only of employees.

Disposal of the shares is back to the company.

It is presented as being optional but I don't recall being given an alternative option with them.

Sorry i am unsure of what "normal commercial terms" means? Apologies, my knowledge of shares and loans is very basic.

Here is a quote from the scheme handbook that may be of interest:

"It is important, to avoid any income tax liabilities on the acquisition of your rights, that you pay a sum equal to the market value of your

rights. If HM Revenue and Customs should decide that the price which you paid for your rights is less than their market value we shall

require you to pay the difference to the Trust. As a result of entering into the letter of direction mentioned above, you also direct that any

additional amounts payable are dealt with by a loan to you for such additional amounts which are then paid over to PAYROLL COMPANY"

This is very much 'grown up' tax planning and by that I mean that there is a lot of risk with this sort of thing.

One of these risks is implementation risk (i.e. is it all happening as people say it is). The bits and pieces that you describe make me worry that it is quite contrived. And as there does not seem to be a market for the shares then the valuation side on sale worries me too.

From a tax perspective, you've not given enough detail as to how it works. But you did use the term 'joint share ownership scheme'. These were used a lot seven or eight years ago but are less common nowadays. They normally involved the employee and an EBT buying the shares together and having different rights to the value from those shares. For example, if £100 of shares then the employee might pay (say) £10 to get the whole of the growth in value above £100 whereas the EBT would pay £90 for the first £100 of value. The shares go up in value to £1,000 and so the employee gets £900 of value and uses the £10 to repay the loan making a profit of £890. Normally this is subject to capital gains tax. The plan lasted three-to-five years (or until IPO/exit for unlisted companies). The key thing is that these shares are genuinely going up in value because the company has been a success. So, for example, they were used by a company that was expecting an IPO or a sale, or a new listed company with high potential. If the share price was not expected to increase much the economics made it much less attractive.

One of the risks was the upfront value. Some people said that the upside was worth £10, or £5 or 1p. The lower the value the more tax potentially due. The valuations got more tricky for people in August 2013 when HMRC changed their approach to valuing this type of arrangement. JSOPs got less attractive though because you can't get entrepreneurs' relief (so 28% tax rather than 10% on sale).

The key risk on acquisition is that HMRC can say that the value the shares up front is higher than the price you paid for them. If so, you will have to pay income tax on this extra value. Having to pay a higher purchase price if HMRC challenge the value may get rid of that tax charge (I've seen HMRC accept this type of market value adjuster clause before) but in the case of tax avoidance I doubt if HMRC would accept that it changes the tax charge up front (but if HMRC did accept it they would say that you had a loan from the EBT for the shortfall and so PAYE/NIC would have been due under the disguised remuneration rules).

I am very confident that they way I've described the JSOP is that it is not DOTAS-able.

Your scheme sounds different in that you mention dividends and the company buying back the shares. So that suggests the shares are in a UK company and they are aiming for the excess over the initial subscription price to be taxed as a dividend. That worries me more than doing this with shares that are sold in the market (i.e. where there is a real price). My concern is that buying back the shares for a made up value is significantly more aggressive. This is especially the case if the shares are bought back annually and you happen to get the right amount (e.g. the fees invoices less a margin).

I'm not going to comment on whether this would be DOTASable as I don't have sufficient details.

Now the following is a guess based on what you have said and my guess in the last paragraph. But I think your key risk is the tax and NIC due on sale. You've paid (or will pay) tax under self-assessment at dividend rates but a tax tribunal might well say that the certainty that you will end up with what you expected to receive means that it should be subject to income tax and NIC as if you had been paid a bonus. Now the question then is whether you will personally be liable for that tax or whether HMRC would ask the employer to pay it (and if so, let's hope you've not agreed to reimburse them). My expectation would be that HMRC would not chase you for this (they would chase the employer) but without seeing the documents and understanding the facts, who knows?

In terms of going forward, HMRC has commissioned a market research firm to do some research on the prevalence of 'growth shares', how they are marketed and why they are used, etc. My guess if the results will be made available to a new government and (based on a conversation with an unusually senior individual at HMRC) I would expect HMRC to want to make changes to legislation. There will be a lot of vested interests in this but I would expect a formal consultation on it in the summer (as was promised in the last Labour government's last Budget).

So my recommendation is to get together what documents you have / can get and take them to a tax adviser and discuss your choices. Some things to ask about are Chapter 3D Part 7 ITEPA and the principles in the PA Consulting case.

[contractor46]

This is very much 'grown up' tax planning and by that I mean that there is a lot of risk with this sort of thing.

One of these risks is implementation risk (i.e. is it all happening as people say it is). The bits and pieces that you describe make me worry that it is quite contrived. And as there does not seem to be a market for the shares then the valuation side on sale worries me too.

From a tax perspective, you've not given enough detail as to how it works. But you did use the term 'joint share ownership scheme'. These were used a lot seven or eight years ago but are less common nowadays. They normally involved the employee and an EBT buying the shares together and having different rights to the value from those shares. For example, if £100 of shares then the employee might pay (say) £10 to get the whole of the growth in value above £100 whereas the EBT would pay £90 for the first £100 of value. The shares go up in value to £1,000 and so the employee gets £900 of value and uses the £10 to repay the loan making a profit of £890. Normally this is subject to capital gains tax. The plan lasted three-to-five years (or until IPO/exit for unlisted companies). The key thing is that these shares are genuinely going up in value because the company has been a success. So, for example, they were used by a company that was expecting an IPO or a sale, or a new listed company with high potential. If the share price was not expected to increase much the economics made it much less attractive.

One of the risks was the upfront value. Some people said that the upside was worth £10, or £5 or 1p. The lower the value the more tax potentially due. The valuations got more tricky for people in August 2013 when HMRC changed their approach to valuing this type of arrangement. JSOPs got less attractive though because you can't get entrepreneurs' relief (so 28% tax rather than 10% on sale).

The key risk on acquisition is that HMRC can say that the value the shares up front is higher than the price you paid for them. If so, you will have to pay income tax on this extra value. Having to pay a higher purchase price if HMRC challenge the value may get rid of that tax charge (I've seen HMRC accept this type of market value adjuster clause before) but in the case of tax avoidance I doubt if HMRC would accept that it changes the tax charge up front (but if HMRC did accept it they would say that you had a loan from the EBT for the shortfall and so PAYE/NIC would have been due under the disguised remuneration rules).

I am very confident that they way I've described the JSOP is that it is not DOTAS-able.

Your scheme sounds different in that you mention dividends and the company buying back the shares. So that suggests the shares are in a UK company and they are aiming for the excess over the initial subscription price to be taxed as a dividend. That worries me more than doing this with shares that are sold in the market (i.e. where there is a real price). My concern is that buying back the shares for a made up value is significantly more aggressive. This is especially the case if the shares are bought back annually and you happen to get the right amount (e.g. the fees invoices less a margin).

I'm not going to comment on whether this would be DOTASable as I don't have sufficient details.

Now the following is a guess based on what you have said and my guess in the last paragraph. But I think your key risk is the tax and NIC due on sale. You've paid (or will pay) tax under self-assessment at dividend rates but a tax tribunal might well say that the certainty that you will end up with what you expected to receive means that it should be subject to income tax and NIC as if you had been paid a bonus. Now the question then is whether you will personally be liable for that tax or whether HMRC would ask the employer to pay it (and if so, let's hope you've not agreed to reimburse them). My expectation would be that HMRC would not chase you for this (they would chase the employer) but without seeing the documents and understanding the facts, who knows?

In terms of going forward, HMRC has commissioned a market research firm to do some research on the prevalence of 'growth shares', how they are marketed and why they are used, etc. My guess if the results will be made available to a new government and (based on a conversation with an unusually senior individual at HMRC) I would expect HMRC to want to make changes to legislation. There will be a lot of vested interests in this but I would expect a formal consultation on it in the summer (as was promised in the last Labour government's last Budget).

So my recommendation is to get together what documents you have / can get and take them to a tax adviser and discuss your choices. Some things to ask about are Chapter 3D Part 7 ITEPA and the principles in the PA Consulting case.

Thanks very much for this information. I will do as you say and gather my documents and try and consult an adviser to see what they say.
I would be happy to work out my total earnings for the periods that I have used this company and then apply the tax bands for these periods (20% and 40%) to the amounts and pay it back to HMRC for peace of mind.
I know that I could potentially be handing over thousands to HMRC for nothing if my scheme is not deemed to be tax avoidance but with the stress this has caused so far I would prefer to take the immediate financial hit.

[ASB]

You do need to be cautious and explore all the avenues. The transactions you have entered into exist. They dont change simply because you want them to.

The cumulative effect of them combined has to be considered.

[Dylan]

If you want to rest more easily then you could always buy a CTD