A decade-long tax dispute about employee share schemes, Gray’s Timber Products Ltd. v HMRC, has had its final legal judgement.
The issue at the core of this case was that if shares are acquired from employees for more than their market value then the excess amount is subject to income tax and national insurance contributions (NICs) rather than capital gains tax.
In Gray’s Timber Products Ltd. v HMRC, an employee acquired shares in the company and signed a shareholders’ agreement which gave him a right to receive a disproportionately large amount of any sale proceeds if certain targets were met and he remained employed.
A sale did occur in 2003 and the employee received a large amount of proceeds.
The HMRC subsequently challenged the tax treatment of his gain.
During the case the employee argued that his rights in the shareholders’ agreement should be treated as if they were †attached to the shares and were included in the articles, and so contributed to the shares’ market value.
However, the Supreme Court upheld the rulings of the lower courts in the proceedings in agreeing that market value meant the value of the shares and rights which passed to a prospective buyer.
Therefore income tax and NIC is now payable on £1 million, which will be paid by the new owner of the company.
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