Owner managed businesses operating employee share schemes need to ensure they meet all the necessary requirements to avoid unwanted HMRC attention.
HMRC was recently successful in a case at the First Tier Tax Tribunal in relation to the denial of a claim for Business Asset Disposal Relief (BADR) (formerly Entrepreneurs’ Relief), where the shareholder had ownership of 4.999% of the voting rights and share capital – falling just below the 5% threshold, commonly known as the “personal company” test.
The case highlights the strict attention businesses which are employee-owned or operate employee share schemes need to pay in regards to all criteria for BADR being met. Other key considerations include:
- Putting a paper trail in place to document agreements between parties. For instance, the above tribunal case might have reached a different outcome if a trust existed over the shortfall in the shareholding, particularly if there was documentary evidence in place between the shareholders that the remaining shares were held on trust for the appellant.
- Taking care in planning your share capital structure to avoid any uncertainty with regard to the entitlement of shareholders to voting rights and entitlements to distributable profits and sale proceeds.
- Seeking out HMRC-approved share option schemes. The Enterprise Management Incentives (EMI) scheme will be available to many businesses and the personal company test does not apply to holders of EMI-qualifying shares or share options.
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With the right professional advice, share incentives plans can be a fantastic tool for ambitious businesses. To learn more about them in the context of your own businesses, contact one of our Tax team below.
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