'Growth' shares are "still on HMRC's radar", expert says

The request suggests that HMRC may scrutinise arrangements closely, potentially leading to changes in their tax treatment in future, said Suzannah Crookes, a share plans and incentives expert at Pinsent Masons, the law firm behind Out-law.com.

Growth shares, which are sometimes called 'hurdle' or 'flowering' shares, are shares of a special class and are designed to allow employees to invest a small amount upfront in a company and realise capital gains if the company performs well. The shares generally have limited rights when the employee subscribes, so that the employee can avoid an upfront tax charge by acquiring the shares at their then market value. However, the share rights increase in the future if specified conditions are fulfilled.

HM Revenue and Customs (HMRC) has published a “call for evidence” in relation to remuneration practices. This asks questions about the methods of remuneration of employees, directors, and other types of worker. One question asks about remuneration involving shares and alludes to growth shares.

HMRC has asked general questions about why plans involving employment related securities are used in remuneration packages and how effective they are in incentivising employee performance.

"It would be helpful if you could provide evidence on how commonly employment related securities awards involve shares or other securities that are not available to non-employee investors and which enable an employee to benefit from growth or rights in excess to those available to non-employee investors when answering this question," says the consultation. "What award characteristics in particular enable this and why do employers choose to award these securities rather than shares or other securities of a type held by non-employee investors?"

In the March 2010 budget it was announced by the Labour government that there would be a consultation in summer 2010 on taxing "returns from geared growth, following the increased use of tax-motivated arrangements involving employment-related securities". It said that this would be "to ensure that income from employment is taxed correctly".

The current government said initially that it would issue a consultation, but it was later announced that the consultation would be deferred. HMRC also consulted informally in 2011 on a 'hallmark' under the disclosure of tax avoidance schemes (DOTAS) rules for growth shares.

Crookes said "There is no clear indication at this stage that HMRC is looking to change its practice, or make any legislative change, in relation to growth shares. However, HMRC has previously indicated a potential consultation on geared growth arrangements and on a tax disclosure 'hallmark' for growth shares - although these proposals have not been taken forward at this stage, it is clear that growth shares are 'on the radar' for HMRC who will potentially scrutinise this type of arrangement carefully".

She said that any company implementing growth share or similar arrangements, and any individual holding such shares should focus on the commercial rationale for the relevant share rights, and take into account the risk of a change in law or practice affecting the tax treatment.

The call for evidence was published in response to recommendations set out in the Office of Tax Simplifications second report. This review of benefits and expenses highlighted that working practices have changed and the way benefits are offered has also evolved, "with a growing appetite and market for voluntary or flexible benefit packages which are often combined with salary sacrifice arrangements".

HMRC said of the call for evidence "The process is intended to seek views to inform future tax development but is not expected to lead directly to any immediate or specific policy outcome".

The deadline for responses to the call to evidence is 9 September.