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HMRC share valuation snakes and ladders

There have been two important changes to HMRC valuation practices affecting awards of shares which are likely to have a significant impact on the design of management equity plans in private equity backed companies. They have not yet received much attention and many other advisers have yet to focus on them. One change will be helpful; the other, much less so.

Pre-grant valuation agreements

The helpful change has arisen from the introduction of the new Employee Shareholder Status (Shares for Rights) scheme promoted by George Osborne. In return for the employee surrendering certain statutory employment rights the scheme offers the ability, for the first £2,000 worth of shares, including growth shares, to be awarded tax free with the capital gain on the sale of these shares, up to an initial value of up to £50,000, being free of capital gains tax. Depending on the structure adopted, this may result in some shares delivering value, in line with the design of the legislation, with no resulting tax or NIC charges.

To make this new scheme work HMRC Shares Valuation recognised that a new pre-grant share valuation agreement procedure would be necessary, and so it is now possible to seek agreement with HMRC for the value of shares awarded under this scheme before the awards are actually made. As the new scheme also does not require the shares to be in an independent company and there is considerable flexibility in the rights the shares can have, this new Employee Shareholder Status (Shares for Rights) scheme should become an integral feature of sweet equity awards to management.

HMRC takes tougher stance on “growth shares”

The less welcome development concerns a change in HMRC’s view of the “information standard” that applies for share valuations. In the past it has sometimes been possible to agree with HMRC nominal value for the value of “growth shares” mainly because it was argued that, since the individual awards were over relatively small minority holdings, information about future prospects could not be taken into account in the valuation because, as confidential information, it would normally not be available to such a potential small shareholder.

HMRC made it clear at a recent meeting with share valuation specialists that they now consider that valuations agreed in the past by HMRC on this basis were agreed in error. They have revised their analysis of the “information standard” published in their technical manual so that information on future prospects will be required when valuing “growth shares”. Of course others may take a different view of the scope of the “information standard” but given HMRC’s new public stance, in future it will be difficult to reach agreement with HMRC on the value of “growth shares” without taking account of future prospects. As a result of this change conventional “growth shares” are likely to become significantly less attractive and companies will need to consider alternatives such as joint ownership (JSOPs) as originally developed by our Firm.