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GAAR advisory panel opinion on arrangements involving employee shareholder shares

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The GAAR advisory panel has published its opinion on arrangements enabling the directors and shareholders of a company to extract value through employee shareholder shares. The panel’s conclusion was that the entering into and carrying out of the arrangements was not a reasonable course of action in relation to the relevant tax provisions.

The taxpayers were directors and employees of a company, who between them owned 100% of the shares in that company. Separate references were made in relation to the individual taxpayers and the panel issued opinion notices in respect of each, with a common schedule covering all taxpayers. Each taxpayer was also a member of one or more partnerships associated with the company’s business.

In 2014, the taxpayers embarked on a restructuring of the business involving the extraction of value via employee shareholder ‘C’ shares (which entitled the holders to the substantive economic value of the company). The arrangements ran as follows:

  • the taxpayers gave up their interest in the partnerships and the company’s adviser agreed with HMRC a valuation of the proposed ‘C’ shares based on a net asset value performance hurdle;
  • the company passed resolutions sub-dividing the existing £1 ordinary shares into 100 ordinary shares of 1p, which were subsequently re-designated to give the taxpayers two new class ‘A’ and class ‘B’ shares, with the rights passing into the class ‘C’ shares once the agreed net asset value hurdle was reached;
  • each of the taxpayers then signed an employee shareholder agreement recording the value of the employee shareholder shares at less than £25,000 for each taxpayer; and
  • within 90 days of receiving HMRC’s valuation, the performance hurdle was met, the taxpayers resigned as directors and the company repurchased the ‘C’ shares.

The overall result of the arrangements was that each of the taxpayers received their share of the company’s accumulated and undistributed profits, which were largely generated prior to HMRC issuing its valuation of the ‘C’ shares.

The panel refers to the material interest test in the employee shareholder legislation, which for the purposes of CGT and income tax relief on a share repurchase required there to be no relevant material interest within the 12 months preceding the acquisition of the employee shareholder shares. In effect, the taxpayers had sought to backdate the issue of the employee shareholder shares to a time before the employee shareholder agreement had been signed and the material interest condition could not be satisfied, while sidestepping the £50,000 limit on value contained in the legislation.

The opinion observes that: ‘Each shareholder/employee is in the same economic position (save for tax) whether or not the employee shareholder shares are issued. Each shareholder under the arrangements is simply moving their entitlement to their share of the company’s underlying profits from a left hand (taxable) pocket to a right hand (tax exempt) pocket.’

The panel concludes that the entering into of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions, and the carrying out of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions. See

Issue: 1460
Categories: News