On 23 May 2001 an employer granted an employee an option over
1,000 shares in the company's unapproved share scheme at £1
per share. The employer is a private company, not listed on any
exchange. The option can be exercised between 1 January 2003 and 31
December 2007. There are no arrangements for the employer to buy
back shares.
In January 2003 the company considers a possible flotation on
the London Stock Exchange. A feasibility study highlights issues
that the company needs to address first, but is broadly supportive
of a flotation in June 2003. As work continues towards the
potential flotation the share price rises to £5 and on 24 May
2003 the employee exercises the option and acquires shares worth
£5,000.
Under Section 477 ITEPA 2003, the amount chargeable to tax as
employment income is £4,000 (representing the value of the
shares acquired when the option is exercised less the amount paid
to exercise the option). There was no income tax charge at time of
grant because the option could not be exercised more than 10 years
later (see Share Schemes Manual, SSM3.3).
The shares are in an unlisted company so none of the
definitions of readily convertible asset in Section 710(1)(a) or
(b) ITEPA 2003 apply (see
EIM11901 to EIM11907). But when the
employee acquires the shares on 24 November 2003 he knows that the
company is intending a flotation on the London Stock Exchange.
After that event the shares will be capable of sale on the exchange
and this represents a potential trading arrangement.
The shares are acquired before the intended flotation and it
is possible that the flotation may never take place. But the
feasibility report and continuing progress towards flotation make
it likely that flotation will occur.
Consequently the employee acquires the shares subject to an
understanding that trading arrangements are likely to come into
existence and, by virtue of Section 702(1)(c) (see
EIM11908), the shares are readily
convertible assets. Section 700 ITEPA 2003 applies and the employer
must operate PAYE on £4,000.
