Written by Timothy Jarvis.

Before the financial crisis it was relatively common for UK private companies to use partly paid shares to incentivise key members of staff.

Under these arrangements shares were issued to recipients for market value by the company but the subscription price was left outstanding on the terms that it could be called up on the occurrence of certain trigger events. The shares are treated as fully paid up for company law purposes. And this analysis flows through into the tax with the consequence that there should be no market value tax charge on the share issue because the shares are treated as paid up for income tax purposes.

The use of partly paid share schemes has been less common since the financial crisis because of a greater awareness that share prices can go down as well as up with the consequential risk that an award holder could be left with an asset which is worth less than he owes to the company.

Where a close company (broadly a company under the control of 5 or fewer shareholders) makes a “loan to a participator” then the company incurs a tax charge equal to 25% of the face value of the loan. In the RKW Ltd case, the tax tribunal had to consider whether the outstanding subscription price was a loan which would have triggered a 25% loan charge. It took the view that the legal definition of a loan is a flexible one and it can have different meanings in different contexts. This led the tribunal to conclude that the outstanding subscription price was not a loan when set against these facts.

The judgment therefore avoids a disastrous outcome for partly paid share schemes by confirming that the outstanding subscription price does not crystallise a 25% loan to participators charge.