A ruling by the first tier tax Tribunal has found in favour of HM Revenue and Customs (HMRC) on the tax treatment of a UBS AG employee bonus scheme involving forfeitable shares.
UBS AG awarded shares in a special purpose vehicle (SPV), which could be sold for cash, resulting in an annual bonus with more favourable tax treatment than a cash payment.
The case looked at whether the shares were ‘forfeitable’ and not subject to an income tax charge when awarded by the employer.
In this scheme, the forfeiture provision required that employees must sell their shares if the FTSE 100 index rose above a certain level at any time during a three-week period after the award was granted, but would only receive 90% of the market value of the shares.
The Tribunal held that on its own this feature would have made the shares forfeitable and so avoided an up-front income tax charge on the employees being awarded the shares.
The Tribunal noted the legislation does not require the restriction to be employment-related – so it was acceptable for the restriction to relate to the movement in the FTSE 100 index – and that the short period of time over which the restriction applied did not itself prevent it being treated as a restriction.
However, the scheme was structured so the SPV hedged the difference with commercial options so that, if the forfeiture provisions were triggered, the employee could be compensated for the remaining 10% of value that they had not received for their shares.
The Tribunal found this was a central part of the scheme and that even though employees could receive less than market value for their shares if the forfeiture provision was triggered, this was not the only amount they could receive.
In practice they would always receive an amount equal to the market value of their shares albeit from an alternative arrangement.
As a result, the shares were not forfeitable within the meaning of the legislation and an income tax charge arose when the shares were awarded to employees.
A comment from law firm CMS Cameron McKenna stated: “In practice, schemes like this one were mostly blocked by anti-avoidance legislation announced in 2004 as part of a tougher tax environment, although there are still a large number of bonus schemes like this whose tax treatment is outstanding, where HMRC's resolve will no doubt be fortified by this judgment.”
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