Employee share options - can you claim a refund of UK tax previously paid?

On 8 January 2003 the Inland Revenue issued a statement, which offers certain employees the potential to claim back capital gains tax paid on options already exercised and sold. Previous gains may be reduced or converted into allowable losses.

Why the change in treatment? The statement arose as a direct result of a recent Revenue defeat before the Court of Appeal. The Inland Revenue state they will not be appealing against the decision.

Who is affected? Those affected are employees who sold shares that were acquired by exercising unapproved options, Enterprise Management Incentive options or approved options exercised in an unapproved manner.

What is the effect? The change will generally increase the capital gains acquisition cost of the asset sold, and thus reduce the capital gain or turn a gain into a loss. This is because acquisition is treated as market value (MV) of the shares at date of exercise, and to this is added the amount charged to tax at exercise.

For example: 100 unapproved options are granted to an employee. Exercise price is £5 per share. The option is exercised when market value is £10 per share. The shares are sold for £12 each.

What are the deadlines for making changes to Tax Returns? For Tax Returns already submitted for years to 5 April 2001 and earlier it is now normally too late to amend a Return to utilise a loss. However, if a Return is still open then changes can be made. For Returns to 5 April 2002 the deadline for amendments is 31 January 2004. If amending a Return creates a loss that cannot be set against gains (and thus not create a tax refund), then the loss carries forward indefinitely to set against gains in subsequent years.

Although the normal time limit for amending Tax Returns is one year following the Tax Return filing deadline the time limit for loss claims is much longer. It may be possible, for example, to claim losses arising in 1997/98 up to January 31, 2004. If these loss claims are accepted then they can be carried forward to utilise against gains in later years.

N.B. The Inland Revenue will not automatically change any Returns already submitted. A formal amended Return has to be submitted to claim a refund of capital gains tax already paid. A letter may suffice to recognise a loss to be carried forward.

More information? E-mail us at info@coppergateassociates.com. And also visit our website at www.coppergateinternational.com