Phantom Share Plans

We are aware of concerns that the recent draft legislation in Clause [j1021] published on 22 March 2006, specifically sub-section (2) which amends S420(1)(f) to refer to “options”, and sub-section (3) which amends S420(5) so it excludes only securities options not used for avoidance from the definition of security, means that participants in what are commonly termed “phantom share plan” may have acquired employment-related securities within the meaning of S420(1) Part 7 ITEPA 2006.

A typical phantom share plan will mirror a real share plan - for example using terms used in real plans - such as “grant of option”, “exercise of option” etc., but does not give the participants any right to acquire shares. Instead, the phantom scheme promises participants a cash sum calculated so as to equate to the increase in the value of notional tracker-shares between a starting date (to mirror the date when a real option would have been granted) and a date or period of time when they can claim the cash bonus (to mirror when a real option would have been exercised). The promise, like a real share award or option, is usually subject to performance conditions that have to be met. The employee obtains a cash employment reward by reference to the increase in the value of the business in the same way as if a real option had been exercised and real shares acquired.

HMRC’s view, supported by legal advice received, is that participation in a typical “phantom share plan” will not mean that the employee has been granted an option either under existing legislation or the proposed amendments. This is, of course, subject to the usual caveat of the need to consider variants of the typical scheme on their own facts. We appreciate that this view is at odds with some of our published guidance, although there are no different taxation consequences, and we will be amending the guidance as part of our current programme of work on the new Employment-Related Securities Manual, and we will ensure that material in other guidance manuals is amended where relevant.