SE11855 – PAYE avoidance: shares subject to forfeiture

Section 140A and 203FB ICTA 1988

The Share Schemes Manual (SSM 4.1) explains the tax consequences of various share awards. It is important to distinguish between
share incentive plans (SSM 4.9)
restricted share schemes – shares subject to forfeiture (SSM 4.10).

In a share incentive scheme an employee may be promised, or even allocated, shares but does not acquire the shares until particular conditions are met – most long term incentive plans come into this category.
The Schedule E charge arises when the conditions are satisfied and the employee acquires the shares. If the shares are readily convertible assets, PAYE must be operated when the conditions are satisfied on or after 6 April 1998 – see example SE11863.

In a restricted share scheme an employee is provided shares on terms that they may be forfeit at a future date.
From 17 March 1998 the Schedule E charge arises when the risk of forfeiture is lifted and on or after 6 April 1998 when the shares are readily convertible assets the employer is obliged to operate PAYE by virtue of Section 203FB ICTA1988. For awards before 17 March 1998 there was no Schedule E charge on that event.
An employer is not obliged to operate PAYE in respect of shares, or options over shares, awarded in Inland Revenue approved share schemes (see SSM 2.1). These rules were not changed by Finance Act 1998.