Do I need to pay tax on shares earned?


1

I am working on a project in my spare time with a friend. The project has the potential to make money in the future.

We want to run the project democratically and non-hierarchically. We have decided to achieve this we will value our time, and anyone else that works on the project, equally at 1 share per day worked. We don't have money to pay anyone and doing this will directly tie time invested in the project to the share of any profits when we exit.

I have two questions:

In UK law:

  1. When does a side project have to legally be registered as a company?
  2. If we are essentially paying ourselves in shares, do we need to pay tax on the shares we are earning?
I'd be interested to here how this also might work legally in other countries.

Thanks

Equity UK Tax

asked Jan 28 '13 at 20:59
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Erik Straughn
6 points
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2 Answers


1

This sounds way too complicated and not an appropriate way to allocate shares in a UK Ltd company.

You have to set up the Ltd company (trivial, see here ) and when you do, you specify how many shares are available, where the registered address is, who the directors are, etc.

You are meant to keep paperwork to show allocation of additional shares and this is likely to be cumbersome with the scheme you've suggested, although I suppose this could be done in batches, say quarterly. Also. once you start, you are expected to perform certain tasks, such as Annual Returns, Corporation Tax Returns, etc.

If you want to avoid all these complications, at least in the short term, you could invent a notional "share" which you "earn", then once you get to a stage where you need to form a Ltd company, you convert the notional shares into actual shares.

answered Jan 29 '13 at 05:42
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Steve Jones
3,239 points
  • Thanks for your answer. That is the plan, to keep a record of days worked, and therefore shares earned. When we are at a stage to form the company create only the shares that we have earned at that point. Then every three months allocate any new shares earned. That doesn't sound complicated to me, the opposite in fact. My question was about what tax would be payable on the shares, and also at what point law requires the company to be formed. – Erik Straughn 8 years ago
  • You can create the company when it suits you, although it makes sense to have it in place before you start trading, as the "Limited" part of Limited Company has several useful advantages. As for the tax treatment of allocated shares, that is where it gets complex and you should seek advice from HMRC or an accountant for that, both for acquisition and the eventual disposal of the shares. – Steve Jones 8 years ago

0

I'd be interested to here how this also might work legally in other
countries.

US here.

In the US this would be considered taxable ordinary income, taxed as salary (i.e.: including payroll/SE taxes) at FMV (fair market value) of the shares at the moment they vest (i.e.: allocated, since you didn't mention any vesting schedule). The gain you recognize if (when) you sell these shares will be the difference between that FMV and the market price when you sell, and taxed as capital gain.

I would be surprised if it is significantly different in the UK.

Note that for the shares to be allocated, there has to be a company in existence (registered with the authorities, etc). Your accountant will help you with the valuation to calculate the FMV, but daily allocations may complicate things since you'll have to calculate each allocation FMV separately.

answered Jan 29 '13 at 05:14
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Littleadv
5,090 points
  • Thanks for the answer. That's interesting to know, it's just the answer I'm looking for but for the UK. As far as I can see the gov.uk site https://www.gov.uk/tax-buying-selling-shares/buying-shares says that you don't have to pay tax if you are given shares for free, or if you are buying new shares - so potentially in the UK only capital gains is charged when they are sold. – Erik Straughn 8 years ago
  • @Erik Giving shares "for free" means gifts, and you don't need to pay tax for that in the US as well. Similarly, if you **buy** shares - you exchange one piece of paper (money) for another of the same value (shares), hence nothing taxable. But if you get shares for work - that is salary, and salary is usually taxable. Not taxing that would lead to barter trade and tax avoidance, so I highly doubt that the situation in the UK differs from what I've described significantly. Talk to a local tax accountant. – Littleadv 8 years ago
  • @Erik - quote from the site you linked to: "It’s not just paying for shares in cash that’s taxable. **If you give something in exchange for the shares, you pay tax on the value of what you gave for the shares**.". That is exactly what I described. You're taxed as if the shares were salary, because you gave the value of salary (your work) in return for the shares. – Littleadv 8 years ago
  • You may well be right. There are two interesting quotes on that page though - "what you pay for the shares - this might be different from their current market value." and "It’s not just paying for shares in cash that’s taxable. If you give something in exchange for the shares, you pay tax on the value of what you gave for the shares". – Erik Straughn 8 years ago
  • So what is the difference between buying new shares in a company, which in untaxable, and exchanging labour for new shares in a company, which you're saying is taxable? – Erik Straughn 8 years ago
  • @Erik the difference is that you're skipping the conversion of labour into money, which is taxable. – Littleadv 8 years ago
  • So if my day rate was £250, and I did a days work in exchange for 1 share in a company that had no value (i.e. early stage start-up), I would be charged income tax on £250, even though what I have earned is valued at 0? – Erik Straughn 8 years ago
  • @Erik that you have to clear with a licensed tax accountant. I'm not familiar with the UK laws on how to calculate and tax wages. It would be reasonable to consider that you'd be taxed on *minimum* wage, not your personal going rate, or the FMV of the services rendered (which is again, not your personal going rate but rather the market average for the services provided). These are details you have to discuss with a licensed professional. Also, in any case, shares allocated hold value, and the tax may be calculated based on that value. It is not 0, as the company has something contributed to it – Littleadv 8 years ago

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