Some situations could arise where the deemed election would produce an unwanted result where the shares acquired have a value apart from the IP. New ITEPA03/S454 (2) allows the employee and his employer to jointly agree to disapply the deeming provision referred to. The effect of this is that only the restricted value of the shares is taxable at acquisition (again excluding the value attributable to IP). Where the shares are forfeitable for up to 5 years there will be no charge up front. There will be a further Income Tax and NICs charge when the restrictions are lifted or the shares are sold.
An agreement under ITEPA03/S454 (2) can only be made with the consent
of both employee and employer because the agreement may affect the tax and
NICs liabilities of both parties. The agreement must be made in a form approved
by HM Revenue & Customs (HMRC) and must be made before, or within 14 days
after, the acquisition of shares by the employee.
The employer will normally be the Research Institution unless
the researcher is only employed by the spin-out company, when it
will be the latter.
Once an agreement has been signed by both parties it is
irrevocable. Each party should retain a copy and produce it to HMRC
if requested.
Ulysses is invited to join the same spin-out, Odyssey Ltd, as
Homer (see
ERSM100540) after 150 days, when
funding has also been received and further research been done
within the spin-out. The shares are restricted with a forfeiture
condition if Ulysses leaves.
Outcome
Ulysses will be aware that relief under Chapter 4A extends
only to the value derived from the IP transfer agreement and has
the choice to allow the deemed election to stand, and be chargeable
on the unrestricted market value of the shares at acquisition,
disregarding value attributable to the transferred IP but including
any value attributable to the funding and further business
development.
If Ulysses does this he will not be subject to any later
charges to tax under Chapter 2. Alternatively Ulysses can opt out
of the deemed election by making an agreement with his employer
under ITEPA03/S454 (2) so that he is only charged to tax on
the restricted value of the shares at acquisition. If he does this,
he will be charged to tax under Chapter 2 at a later date when the
restrictions on the shares are lifted, or another chargeable event
within ITEPA03/S427 occurs.
