Reply to: UK tax advice on founding and contracting for a US C-corp

[cojak]

You are resurrecting a five year old post, I would advice getting proper tax advice from a specialist.

[bobsaccamano]

To the OP, what was the outcome here?

I am in a slightly different situation: I am a UK-based engineer who's been offered a part time contract to work for a US startup (no UK presence) for a combination of cash and equity. The startup has raised a small round of investment from private investors and is valued in the low single digit millions (private market valuation, so can be argued to be worthless). Are there any legal mechanisms to receive said equity to avoid paying dry tax in the UK?

[BlasterBates]

I admit to being unfamiliar with this matter (and that's the reason for my original post), but based on what I read on investopedia, it seems clear to me that, by default, income tax is due in the scenario that I described. If one pays their income tax in the US, then they can file the 83(b) election and avoid having to pay income tax on the value of the shares when they vest. Nonetheless, I do not know what the situation is when one pays their income tax is paid in the UK.

P.S. Merry Christmas!

An 83b election doesn't exempt from income tax on vested shares, it simply means you pay income tax up front when the rights are granted. It then protects you from paying income tax on any subsequent gains in these shares.

From your source:

The 83(b) election gives the co-founder the option to pay taxes on the equity upfront before the vesting period starts. This tax strategy will only require that tax be paid on the book value of $1,000.

I don't think this possibility exists in the UK.

https://www.cbw.co.uk/2021/02/taxati...ock-units-rsu/

An RSU is a type of share that may be restricted for some reason – for example, it may not have any voting rights when granted or be contingent on certain targets being met before the shares actually vest.

The first time that they are exposed to tax is upon vesting, at which time both income tax and NIC are due. Employers will usually deal with this under PAYE and so, if you are the recipient of some RSUs, initially there is nothing you need to do to make that happen.

Income tax becomes due when the shares are vested. The s431 election protects you from income tax on further gains in the value of the shares when you sell them, because you've opted to pay income tax on the shares at their actual market value. If you receive shares as a shareholder I think they will be taxed as dividends in which case they should be valuated at market value and the s431 election is irrelevant. Bear in mind as a director or employee you will be paying NICs, as a shareholder I think you probably pay the dividend tax rate.

If you are a contractor then probably you can simply declare stock dividends when the shares are vested. However HMRC might view this as an employment contract and want to charge NICs.

I would get some professional advice.

[alpe19]

Yes but the point is everything is designed so that you own the shares at all times (provided you meet the vesting criteria )rather than the shard being issued to you as you meet the criteria.

it’s explicitly designed to minimize tax risk and avoid it being classed as income in the US (which is ascstrict as the UK for such tricks).

it’s rare that I have to say this but blasterbates is wrong here because of the way the shares are issued.

I admit to being unfamiliar with this matter (and that's the reason for my original post), but based on what I read on investopedia, it seems clear to me that, by default, income tax is due in the scenario that I described. If one pays their income tax in the US, then they can file the 83(b) election and avoid having to pay income tax on the value of the shares when they vest. Nonetheless, I do not know what the situation is when one pays their income tax is paid in the UK.

P.S. Merry Christmas!

[eek]

I see, I am probably confused because the Restricted Stock Purchase Agreement submitted to me states that the Company would be entitled to repurchase the stock at par value in case of termination of Continuous Service Status for any reason, so I assumed that this meant that I would be receiving the stock as compensation for my service to the company (i.e. my work as a contractor). Moreover, in the contractor agreement that I have been sent it is stated that "Contractor shall be paid solely in equity securities of the Company, subject to vesting and the other terms and conditions set forth in the Common Stock Purchase Agreement between Contractor and the Company", which again seems to associate the shares I would receive to my activity as a contractor.

Yes but the point is everything is designed so that you own the shares at all times (provided you meet the vesting criteria )rather than the shard being issued to you as you meet the criteria.

it’s explicitly designed to minimize tax risk and avoid it being classed as income in the US (which is ascstrict as the UK for such tricks).

it’s rare that I have to say this but blasterbates is wrong here because of the way the shares are issued.

[alpe19]

You will need an accountant to correctly value your shares and sell enough of them to cover any outstanding tax liabilities.

My concern is that, after 12 months from incorporation (which is when the first shares would vest), the shares will not be publicly-traded, so I may not be able to sell them to anyone, having to pay taxes on their value out of my own pocket.

You could end up holding worthless shares and a huge tax bill.

Thanks, this is exactly what I fear.

[BlasterBates]

Hello everyone,[*]I would expect to pay income tax to HMRC for any monetary compensation, as a sole trader (I do not have nor plan to start a Ltd company);[*]I would expect not to pay income tax to HMRC for any share that vests, provided that I file correctly my s431 election. Nonetheless, it is not clear to me if the s431 election would apply to a contractor or if it's exclusively for employees of the Company. If s431 does not

You should expect to pay income tax on shares that vest. The s431 election exempts you from further income tax liabilities when you sell them.

https://frazerjames.co.uk/rsus-a-tech-employees-guide/

There is no tax to pay when RSUs are granted. You only pay tax on RSUs when they vest. The UK tax treatment for RSUs is similar to how your salary is taxed.

You will pay income tax and national insurance on the value of RSUs vested. You will also pay employers national insurance. This will be based on the value of the RSUs once they vest (not the value when they are granted).

You will need an accountant to correctly value your shares and sell enough of them to cover any outstanding tax liabilities. You could end up holding worthless shares and a huge tax bill.

Most companies fail so bear that in mind.

https://www.investopedia.com/article...il-and-why.asp

[alpe19]

I see, I am probably confused because the Restricted Stock Purchase Agreement submitted to me states that the Company would be entitled to repurchase the stock at par value in case of termination of Continuous Service Status for any reason, so I assumed that this meant that I would be receiving the stock as compensation for my service to the company (i.e. my work as a contractor). Moreover, in the contractor agreement that I have been sent it is stated that "Contractor shall be paid solely in equity securities of the Company, subject to vesting and the other terms and conditions set forth in the Common Stock Purchase Agreement between Contractor and the Company", which again seems to associate the shares I would receive to my activity as a contractor.

[eek]

Based on the thread I linked before, I understood that section 431 election may not apply to a contractor and, therefore, I would have to pay also income tax to HMRC on the value of the shares when they vest. Is that not the case? Thank you very much

But you miss the fundamental difference.

he was working for the shares.

you are buying them up front and vesting is being done in a different way so as you are not working for the shares, your issue is different.

in your case you are buying the shares when you begin but the company has a legal right to buy (all or some of them) them back at par if you fail to meet the vesting criteria.

founders shares work differently to employee shares and that other poster’s issue was that he was neither a founder nor an employee.

so go and get advice if you want but make 100% sure of the questions you are asking because the devil here is in the detail and you’ve got yourself confused.

[alpe19]

Based on the thread I linked before, I understood that section 431 election may not apply to a contractor and, therefore, I would have to pay also income tax to HMRC on the value of the shares when they vest. Is that not the case? Thank you very much

[eek]

Thank you very much for the info. Because of my ignorance on this matter, I was thinking this would be much simpler. I really appreciate your feedback. I think my only option is to get proper advice from a UK/US tax advisor and figure out with them if an arrangement exists that does not put me personally at risk.

Thanks again, have a nice day!

At risk of what? This is the uk, you end up with a set of shares assuming it all works out and they vest correctly and tax will be due on the capital gain when you sell them.

personally you are worrying too much about something that in all likelihood won’t ever come off. I would be way more concerned if I was joining a firm 6-12 months in than I would be starting a business as a joint shareholder.

[alpe19]

Thank you very much for the info. Because of my ignorance on this matter, I was thinking this would be much simpler. I really appreciate your feedback. I think my only option is to get proper advice from a UK/US tax advisor and figure out with them if an arrangement exists that does not put me personally at risk.

Thanks again, have a nice day!

[eek]

Yes, we would be using Clerky for that. From an initial look, Clerky and Stripe Atlas seem very similar. The only problem is that these platforms standardise and provide support for the incorporation process in the US, but have very little, if anything, for non-US founders or contractors.

If they are incorporating in the states and not planning to do anything else there is little point doing much about it as I don’t believe there is any solution that will help you here beyond (if it works out) heading to Portugal or somewhere where international income is subject to minimal or zero tax rates.

[alpe19]

Thanks, everyone, for the feedback. It really looks like I should get advice before signing anything. I find particularly concerning that some of you were put off in similar circumstances by the complexity of this matter: while I am willing to invest my time in this venture, knowing that it may not succeed, I could not accept to risk what I have personally earned with sacrifices until now (house, investments, etc.).

[alpe19]

This is exactly the type of thing Stripe Atlas: Start a business with our startup toolkit was designed to do.

Yes, we would be using Clerky for that. From an initial look, Clerky and Stripe Atlas seem very similar. The only problem is that these platforms standardise and provide support for the incorporation process in the US, but have very little, if anything, for non-US founders or contractors.