The First-Tier Tribunal has ruled that restrictions should be taken into account when shares issued to employees are valued for tax purposes.
In the case of Sjumarken v HM Revenue and Customs [HMRC], Lars Sjumarken was employed by BNP Paribas as an investment banker, in charge of BNP’s EU investment banking division, until his contract was terminated on 18 October 2005.
On 17 January 2006, a compromise agreement was signed between Sjumarken and BNP Paribas, which included a termination payment of £117,450, the release of shares under BNP’s share incentive plan (Sip), and cash under the bank’s Cash Incentive Plan (CIP).
Sjumarken also received three months’ pay in lieu of notice.
In addition, as an employee of BNP Paribas, he was eligible for 3,000 long-dated share options, which were granted to him in March 2003 and expired in 10 years from that date.
Sjumarken’s self-assessment tax return for 2005-2006 did not include tax on the shares received under the Sip. Although he referred to these, he stated that these were free of tax because it was an approved scheme.
The payment received under the CIP was listed as taxable income in his self-assessment return but in the course of subsequent discussions with HMRC, Sjumarken stated that this should be treated as a tax-exempt redundancy payment.
Subsequently, HMRC issued a closure notice on 6 January 2010 stating that Sjumarken owed a further £57,836.36 of tax because both the shares granted under the Sip and the cash received thorugh the CIP were taxable income.
The tribunal’s ruling results from the re-hearing of a decision given by the First-Tier Tribunal on 7 January 2011, which was set aside by a decision dated 15 January 2013 on the basis that there had been a procedural irregularity issues.
Both parties have now agreed that neither the Sip nor the CIP were approved for UK tax purposes.
Sjumarken’s appeal was accepted in respect of the valuation of the Sip shares, on the basis that these are restricted and the parties should agree a valuation on that basis. However, it was rejected in respect of any additional deduction.
The case also found that an option holder does not give consideration to his or her employer when an option lapses on termination of employment, and that Sjumarken had an interest in more than one of the employer’s share incentive plans.
After Sjumarken was made redundant, certain shares deriving from the share plan were allocated to the benefit of the taxpayer. At the time, these shares appear to have been valued for tax purposes by the employer without reference to any restrictions, although Sjumarken was informed by his employer that restrictions continued to apply to at least some of the shares.
There was some confusion over the extent to which the restrictions continued to apply, and how this would affect the valuation process.
The tribunal concluded that the relevant provisions in the share plan were unclear, and that the shares were subject to restrictions and should therefore be valued on that basis.
The case also depicted that it is crucial that share scheme documents should be clear and unambiguous, and that individual arrangements for particular employees should be communicated fully and clearly to participants to avoid lengthy and time-consuming arguments further down the line.
It also ruled that records should be kept by the employer regarding the individual arrangements for particular employees, and the basis on which valuations are made.
Stephen Chater, share plans director at Postlethwaite Solicitors, said: “The First-Tier Tribunal had to consider which of the various valuation methods should apply for tax purposes where private company shares are acquired by, or disposed of by, employees.
”This case involved shares which had originally been subject to restrictions (reducing their value for tax purposes) which fell away in certain circumstances. The tribunal had to therefore decide whether the restrictions still applied at the point at which tax became payable.”