TaxPersonal TaxOptions muddle prompts bonanza

Options muddle prompts bonanza

A recent appeal court case has exposed a capital gains tax loophole that will allow companies to reclaim hundreds of thousands of pounds of tax paid on unapproved share option schemes.

Owner-managed companies and high earners who have completed their 2002 tax returns can amend them until January 2003 to claw back capital gains tax. Mid-tier accountancy firm Armstrong Watson believes owner-managed companies could be ‘looking at potential six and seven-figure tax rebates’.

Nick Scull, tax partner at the firm, said he had already identified a potential refund of #100,000 in a single case and he still has piles of last-minute amendments to work through.

The Inland Revenue last month lost an appeal in the Mansworth v Jelley case over the cost of unapproved shares. Following its loss the Revenue issued a technical note on 8 January about the new tax treatment of unapproved shares. From now on, acquisition costs can be recognised as part of the purchase value, which reduces the capital gain.

Scull believes the tax note provides a significant scope for tax avoidance.

He explained that by applying the new ‘muddled’ rules, a tax return on unapproved shares would always show a loss, and therefore calculates no tax.

‘The Revenue has stubbornly been saying it knows what it is doing. But this tax note gives people the scope to come up with a scheme to avoid tax,’ he said.

Armstrong Watson has designed a scheme based on the tax note, which would effectively enable employers to pay tax-free bonuses by presenting them as unapproved share options. Scull said this could work for any type of one-off payment to employees.

‘It is almost too good to be true. The Revenue said it would not appeal (the judge’s decision), but when it realises the full scope (of its tax note) it might try to get legislation through to limit the scope,’ he said. The tax change does not affect people who bought shares through an approved option plan.

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