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Taxation > Business and Share Valuations >

Valuations for Implementing Share and Share Option Schemes

There are a number of approved schemes such as the Enterprise Management Incentive Scheme and the Company Share Option Plan. Unapproved schemes are also common.

If shares are acquired through one of these schemes and the option price is set below market value then the employee will be taxed as employment income on the discount between the option price and the market value at the date the option is granted.

If an unapproved scheme is put in place the employee will also be taxed on the full amount of any discount but by reference to the value at the date the shares are acquired.

Many of our clients are small or medium sized companies. They have no “market” they can refer to for a valuation of their shares. They are not quoted, so how much are the shares worth? The answer is not simple and can only be determined by carrying out a detailed valuation exercise. 

What is the potential risk of not valuing the shares beforehand?

The problem arises where the scheme is implemented without seeking HM Revenue’s agreement to the valuation in advance:

  1. The tax and NI the employee suffers will probably not have been planned for;
  2. If the wording of the scheme is not carefully drafted then the company can also suffer a hefty tax charge due to the “grossing up” provisions.

Either way the anticipated benefits of having the scheme can be significantly eroded by these unexpected tax charges.

Ask HM Revenue and Customs to agree the valuation in advance

  1. There are in fact two valuations needed; Actual Market Value and Unrestricted Market Value;
  2. Market Value for employee shares is different to market value for other purposes! Why? Fiscal valuations such as these differ from “normal” market valuations for other purposes because of the raft of case law on the subject. It is this case law which dictates the protocol for reaching agreement with HMRC

We can negotiate with HMRC in advance and obtain their agreement to the valuation so that the option price can be correctly set. Their agreement is valid for 60 days, which gives ample time to finalise the documentation and implement the scheme.

Why use Hart Shaw?

We know what HMRC expect to see in a valuation report. We can pre-empt their queries and reduce the time it takes to reach agreement; thereby saving costs.

We understand your objectives and get the best result possible for you.

If you are rewarding employees with shares, think twice before “saving money” and not looking at the valuation. If the share, or option price, is set incorrectly it can be very expensive. Now more than ever, no one wants unnecessary and unplanned costs.

Contact Steve Vickers on 0114 251 8850 or email him steve.vickers@hartshaw.co.uk to discuss our Valuation Services.

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