Where shares are sold to cover PAYE over one or two days, HMRC guidance allows the taxable value to be based on the average sale prices achieved – and so shares can be sold without worrying about triggering capital gains tax (CGT) liabilities – right? Not always! Unfortunately, a recent development in HMRC practice has created a real tax risk in relation to sales-for-tax. Where a sale-for-tax is achieved on the same day as vesting, the shares that are sold are matched with the shares which the employee received on vesting – and because the (income) taxable value is treated as being the same as the sale prices received, no capital gain arises. However, HMRC is now taking the point that this does not apply where a sale-for-tax occurs across two days. Instead, in this case, the shares that are sold are treated (for CGT purposes) as being sold from each employee's "section 104" pool. This means that in spreading a sale-for-tax across two days the company can unintentionally trigger a CGT liability for employees who already hold shares – which will normally include all of the senior executive team – and we have seen HMRC proactively raising enquiries into the CGT position of executives after a sale-for-tax on this basis. There are, however, steps that companies can take to mitigate – or even completely avoid - the issue, but this requires the sale-for-tax process to be carefully documented in advance. In any event, it is important for companies to ensure they are giving employees complete information in relation to the sale-for-tax, so that employees are aware of the consequences and are able to properly comply with their personal tax reporting obligations. ACTION: all companies that operate sale-for-tax processes should carefully consider the implications of this development and consider putting in place standing documentation governing the sales-for-tax to mitigate the risks. Holding (or retention) periods Post-vesting holding periods are now a common feature of share plans, and are welcomed by institutional investors. There are a number of possible structures, but commonly the rules will provide that shares are delivered on vesting (either to the individual or a nominee account) with the after-tax shares being subject to a "no-sale" restriction. This approach raises a particular tax consideration because shares subject to a no-sale restriction are "restricted securities" for tax purposes. This means that the tax legislation can (potentially) apply the tax charge at vesting based on a reduced value (ie of less than the open market share price at that time), but then with a potential second income tax charge arising when the holding period ends. The way to achieve certainty that this second tax charge does not arise is for participants to enter a "section 431 election" at or prior to vesting (which could be at the time of grant). These elections can be entered into electronically, and can be incorporated into grant or vesting documentation, which can ease the administrative burden. ACTION: review the structure of holding periods and, if operated as "no-sale restrictions" on vested shares, ensure that participants enter into section 431 elections. Share plan rules can be amended to make the election a condition of the share plan and the elections can be incorporated into grant or vesting documents to ease the administrative burden. Clawback HMRC has now issued guidance on the taxation of clawbacks, which clearly acknowledges that the clawback of a cash bonus can allow the employee to claim income tax relief – albeit that the ability to claim and use this relief is subject to a number of limitations. The guidance leaves a number of questions unanswered, however. Primarily, while there are good arguments that the same relief should apply to share-based awards (where the clawback is implemented through a cash repayment), this is not expressly addressed. It also remains the case that the employee and employer NICs cannot be recovered. Another important implication which companies should consider is that where a "net" clawback is applied (e.g. clawingback 53 out of an original gross award of 100), the employee can still claim the income tax relief on the net amount repaid (e.g. the employee claims relief at 45% on the repayment of 53, and so keeps 23.85). This can therefore leave the employee keeping a substantial proportion of the value of the award, notwithstanding the clawback. This may not be the outcome which the company – or shareholders – will have expected, which could leave the company in a difficult position if it is unable to prevent this outcome. ACTION: give careful consideration to how clawbacks are operated, rather than simply continuing to use "net" clawback. Review clawback provisions in plan rules, to address the risk of an employee being able to keep part of the value of the award even after a clawback has been operated. Please contact the Remuneration and Incentives team to discuss these developments and how they affect your share plan arrangements.