Employment-related securities, or interests in employment-related securities, are restricted if restrictions have been imposed directly or indirectly by any:
and
Generally, any restriction that reduces the value of a security will be covered by Chapter 2, but the legislation splits the restrictions into three broad categories of restricted securities and restricted interest in securities:
Under ITEPA03/S422 Chapter 2 applies both to securities that are
subject to restrictions (referred to as restricted securities) and
unrestricted securities where the employee’s interest in
those securities is restricted (referred to as a restricted
interest in securities).
ITEPA03/S423 provides a wide definition of the term
“restricted”. The first consideration is whether or not
the restriction has any effect on the market value of securities.
If the value is not reduced, then even if there is a restriction,
the securities are not within Chapter 2.
The effect of a restriction on the market value of a security
will depend on the facts of the case. For example a share may be
acquired on 1 January 2006 with a restriction that the employee
will not be entitled to any dividends for three months. If the
company always declares a large dividend on 1 March each year the
restriction will have an effect on the value of the share. However,
if the company always declares its dividend in June – or
perhaps has never declared a dividend – the restriction may
well have no effect on the share value at all.
Restrictions can be imposed in a variety of ways and
ITEPA03/S423 (1) covers these by referring to “any contract,
agreement, arrangement or condition”. The restriction can be
in a side agreement; in the contract of employment; or as a
condition of the share acquisition.
It is, however, sometimes difficult to distinguish between a
share which has restrictions on its rights and a separate class of
share which does not have those rights.
For example, a company may have one class of shares, and all
shares give the holder a right to vote. If the employee has a side
agreement under which it is agreed that he or she cannot vote then
there will be a restriction on the shares.
Another company may have two classes of share. Ordinary
shares (which give the right to vote) and non-voting A shares. If
an employee is given a non-voting A share it is debatable whether
or not the employee has a share with a restriction (the absence of
a voting right) or an unrestricted non-voting share. Provided the
non-voting feature is included in the Articles of Association and
there is no special mechanism for its removal, such shares may
constitute a different class of shares.
Where a class of share has a lower priority in a winding-up
than another class of share in a liquidation it is not restricted
but just a different class of share.
In practice the question will make little difference. If the
employee is subsequently given a right to vote there will either be
the lifting of a restriction (giving a charge under Chapter 2) or
the conversion of the share from one class to another (giving a
similar charge under Chapter 3).
Where it is not clear which of Chapter 2 and Chapter 3 should
apply we would normally expect the Chapter 2 scheme of taxation on
restricted securities to be preferred by the employee, because of
the greater flexibility provided by elections (see
ERSM30370 and
ERSM30450).
We are content with this provided there is a consistent
approach and there is no avoidance of tax or NICs by the
manipulation of arrangements or values.
