The changing tax valuations landscape

Background

HMRC have recently announced that they will no longer provide post transaction valuation checks ("PTVCs") for employee share transactions after 31 March 2016.

The PTVC concession was a key aspect of the UK tax landscape for employee share transactions. PTVC's provided certainty around the levels of employment tax charges by providing an agreement of the valuation of employee share transactions shortly after issuance.

As with other government bodies, HMRC's Share and Assets Valuation (SAV) division are under resource and budget pressure, and the removal of this concession is to enable them to focus their resources, in particular on higher value items. Certainly, there has been a sense that the increasing complexity of many share schemes coupled with the sheer volume of 20,000+ requests each year, meant that the status quo was not sustainable with existing resources.

For ESS and approved share option schemes (such as EMI, CSOP and SIP), pre-approval for the valuation can be sought from HMRC. For now this will continue to be the case, although HMRC have also announced that they are reviewing their procedures for these valuations.

Why is this important?

Following the removal of the concession, uncertainty around the valuation and hence up-front tax treatment will persist.

As a quick refresher, where members of management receive or subscribe for securities in portfolio companies, an employment tax charge will arise if the price paid is less than market value. This applies to the initial issue of equity at the time of a transaction and any future issues or equity/debt reorganisations during the deal life cycle. These employment tax charges can give rise to PAYE and NIC obligations for the companies involved.

Any subsequent revision to the tax valuation on review by HMRC can lead to incremental tax (including grossing up) and penalties, which can be material. We expect HMRC to become more sophisticated and consistent in how they target their reviews following the digitisation of tax returns and corporate reporting of share transactions.

In the context of due diligence, such uncertainty can often result in large potential exposures which are difficult to resolve and may lead to price reductions or escrow amounts being required (in particular where aggressive/inadequate or poorly documented valuations were prepared).

How will this impact me going forward?

The need for robust contemporaneous valuations becomes more important to future proof current positions against subsequent reviews by HMRC and as part of due diligence processes. We would also expect to see more detailed disclosure from both company and personal tax perspectives both at acquisition and possibly disposal. In the short term, there is a small window of opportunity to submit PTVCs under the current regime - the deadline is 31 March 2016.

Click here to view a short discussion on this topic by our specialist tax valuation and management team advisors.

How can PwC assist you through these changes?

PwC has one of the largest specialist tax valuation teams in the UK with a long track record of successfully agreeing and negotiating valuations with HMRC and other tax authorities.

We have considerable experience in developing robust valuations, especially around large and complex schemes, including for European and US tax purposes. No such concession has existed in these territories historically and therefore we are used to preparing robust valuation reports to future proof employee share valuations against tax audits and buy-side due diligence.

Do you have concerns about how change this may affect you? Share your thoughts below or schedule a meeting to discuss your situation in confidence.

 

Greg Wakenshaw |  Director, Valuations
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Tom Klouda |  Senior Manager, Private Equity and M&A Tax
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Rodger Heeley |  Senior Manager, Management Team Advisory Group
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Sharon Harrison |  Senior Manager, Management Team Advisory Group
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