Tax advice : Offered sweat equity in US startup.

[WordIsBond]

My experience with US start-ups is that they typically go for RSAs rather than RSUs because of the ability to do an 83(b). Listed US companies are different.

Am not familiar with 83(b) but the language he used sounded like RSU.

I struggle to understand what "clean" means. Let's say things go well (£1 is now £1m) and you buy them from your company at the much higher vested value on vesting (£1m).

My A), B), and C) were OR, not AND, options. He could leave the shares in the company (which has the ramifications you mention) OR buy them from the company as soon as the company receives them (that's what I referred to as "clean") OR issue them as scrip dividends.

The only advantage to leaving them in the company is avoiding personal taxation on something that might fail. It would be a risk/reward assessment.

Employer's NIC depends on a lot of things. There's not enough info to say whether any would be due if the start-up was the employer (if the shares are RCAs on vesting there can be in many circumstances - e.g. the employer has a branch in the UK, under host employer rules, etc). The key is to make sure that the NIC liability is not transferred to the employee (or if it is your PSC, it doesn't have to pay it on the value at vesting).

True, but for a US startup there isn't likely a UK branch, and they likely aren't going to be RCAs. In fact, many US startups are subchapter S, which can open another very large can of worms. OP should definitely find out about that and get some professional advice on that aspect from someone who knows what they are about, if this is subchapter S. Though I think the latest tax laws made C corps more attractive than they were. Admittedly not that up on recent developments....

Is EMI a possibility for a non-UK company?

Yes.

OK, am sure you know better than I do on that. Wouldn't it require him to work 2/3 of his time on this, or something like that? Maybe he's flush with cash but most contractors would struggle to work that much for shares in a startup. Would it force the employer to interact with HMRC? My experience with American companies with no UK presence is they don't want to have any interaction with HMRC at all. Their trust level for foreign tax authorities is about nil.

[Iliketax]

True, but for a US startup there isn't likely a UK branch

It'll be a question of fact whether it has a UK permanent establishment. If we are assuming that there is just one employee working in the UK then perhaps, perhaps not.

and they likely aren't going to be RCAs.

If there is a PSC involved, they will be RCAs on day 1. If not, it will depend on the facts when the tax point is (e.g. sale and accelerated or normal vesting, IPO, not the right kind of share, etc).

In fact, many US startups are subchapter S, which can open another very large can of worms. OP should definitely find out about that and get some professional advice on that aspect from someone who knows what they are about, if this is subchapter S. Though I think the latest tax laws made C corps more attractive than they were. Admittedly not that up on recent developments....

That'll make things interesting from a double taxation perspective (if the start-up is profitable) but won't change the treatment of shares.

Wouldn't it require him to work 2/3 of his time on this, or something like that? Maybe he's flush with cash but most contractors would struggle to work that much for shares in a startup.

It can be a bit more onerous than that but yes, if he or she wants EMI options it would. I see people work for start-ups for equity and very little cash pay (very little is just to cover NMW).

Would it force the employer to interact with HMRC?

Yes, it would.

[WordIsBond]

Thanks for the answers. Parts of this are very relevant to me currently on two different situations, and one historically.

It'll be a question of fact whether it has a UK permanent establishment. If we are assuming that there is just one employee working in the UK then perhaps, perhaps not.

From what OP says, it seems unlikely that there will be a UK permanent establishment in his case. In a prior employment I was one of three UK employees of a US firm. We all worked from home. It was not deemed to be a UK permanent establishment. Seems like OP would have to be, at a minimum, interacting with customers or trying to start an office and hire people for the company, to constitute an establishment.

If there is a PSC involved, they will be RCAs on day 1. If not, it will depend on the facts when the tax point is (e.g. sale and accelerated or normal vesting, IPO, not the right kind of share, etc).

I'd like to understand this. If the shares in the US startup aren't publicly traded, and the US company makes no offer or guarantee to buy them back, how does the involvement of a PSC make them Readily Convertible Assets on day 1? I think I must be missing something, and something I probably need to know, seeing as I am currently negotiating something with a privately-held US client.

That'll make things interesting from a double taxation perspective (if the start-up is profitable) but won't change the treatment of shares.

Right, that's what I mean. It may complicate his taxes for as long as he holds the shares.

It can be a bit more onerous than that but yes, if he or she wants EMI options it would. I see people work for start-ups for equity and very little cash pay (very little is just to cover NMW).

So if I want to set up an EMI option for one of my employees, he needs to work nearly full-time. That's something else I've been considering.

[Iliketax]

If the shares in the US startup aren't publicly traded, and the US company makes no offer or guarantee to buy them back, how does the involvement of a PSC make them Readily Convertible Assets on day 1? I think I must be missing something, and something I probably need to know, seeing as I am currently negotiating something with a privately-held US client.

If the individual is employed by their PSC (rather than someone in the start-ups group) then see s702(5A) ITEPA 2003 - Income Tax (Earnings and Pensions) Act 2003

So if I want to set up an EMI option for one of my employees, he needs to work nearly full-time. That's something else I've been considering.

That's right - ETASSUM53020 - Employee Tax Advantaged Share Scheme User Manual - HMRC internal manual - GOV.UK

[curious11]

Some further info to answer some of the hypotheticals being discussed.

It's not RSU, but common stock.

I'm only likely to commit 8hrs a week on average, so it's not full time and I continue my existing contractor work with multiple clients.

I work through a solely owned Ltd company(PSC), but this venture with the startup will be done outside this, eg on a self-employed contractor basis.

There is no contract of employment with the startup, it's explicitly described as "independent contractor", with "no cash compensation".

The startup "contemplates a grant of stock in connection with the engagement". "Entitlement to any grant will be contingent on approval of the grant by #### board of directors".

It's worth noting the cliff is at 4 months to I consider the risk and commitment to be relatively small in the grand scheme of things.

I'm not sure if you've missed my previous post as my posts were pending, but it's also worth noting the comments I received from HMRC.

Thanks again for the interesting discussion.

[Iliketax]

Some further info to answer some of the hypotheticals being discussed.

It's not RSU, but common stock.

I'm only likely to commit 8hrs a week on average, so it's not full time and I continue my existing contractor work with multiple clients.

I work through a solely owned Ltd company(PSC), but this venture with the startup will be done outside this, eg on a self-employed contractor basis.

There is no contract of employment with the startup, it's explicitly described as "independent contractor", with "no cash compensation".

The startup "contemplates a grant of stock in connection with the engagement". "Entitlement to any grant will be contingent on approval of the grant by #### board of directors".

It's worth noting the cliff is at 4 months to I consider the risk and commitment to be relatively small in the grand scheme of things.

I'm not sure if you've missed my previous post as my posts were pending, but it's also worth noting the comments I received from HMRC.

Thanks again for the interesting discussion.

So register with HMRC as self-employed, include the value of the shares in the turnover of your accounts and pay normal trading income tax on your profits. No PAYE issue, no s431 election. CGT on eventual sale with the value you included as turnover being your CGT base cost. Simples.

one of their technical advisers who basically said he couldn't think of any reason they would be able to tax me other than on liquidation of the shares.

That's not right. The shares will have some value (even if it is only £1) and so you have to include that value in your turnover and so in your taxable profits.

[WordIsBond]

Sounds like you only have three issues left:
1. Figure out the value of the shares at the time you receive them.
2. Avoid getting through HMRC's idiot AI system so that you don't get barmy advice from their idiot advisors.
3. Make this company successful and get rich.

#2 might be the most important of the three.

[curious11]

Sounds like you only have three issues left:
1. Figure out the value of the shares at the time you receive them.
2. Avoid getting through HMRC's idiot AI system so that you don't get barmy advice from their idiot advisors.
3. Make this company successful and get rich.

#2 might be the most important of the three.

Oh my, #2 is so true. It's a disgrace that this system has been released in to production.
Whoever thought that telling users "Please state your query, possible answers are x, y, z", then when I try various permutations of my question, it just repeats the question. Why not just give me a list of f@#!ing options instead of requiring me to be some kind of clairavoient mind reader that knows in advance what the acceptable replies might be. IT IS INSANE.

One can only assume the aim is to encourage people to just give up.

[krytonsheep]

I'm only likely to commit 8hrs a week on average. It's a pre-revenue startup.

Sounds dodgy. The going rate for contract developers on US startups is about $100 an hour.
If they can't afford to pay you, it means

a) they have no experience of running successful startups / have no money.
b) If they do have money, they think what they're doing is so risky they're not willing to take any risks with their own cash.
c) No one trusts them or the idea enough to invest in it at this stage ( not uncommon for pre-revenue startups).

Pre-revenue startups should be working all the hours to get something to market to get to revenue in, so I'm not sure what they expect you to do in 8 hours a week.

[Lance]

I've been offered sweat equity in a US startup.
The company is in early pre-funding stage, no revenue, no value.
I will be granted around 4% common stock which will be vested on schedule based on services provided as a private contractor over 3 years.
I've looked everywhere can I can't find anything that clears up whether I can treat my equity as having nominal value at the time of granting (not vesting) thus avoiding/reducing income tax and NIC liabilities.
I appreciate that this is a long shot and likely to result in nothing, but if it does work out I don't want to be hit with tax bills that I can't pay without selling the equity.
Happy to pay the capital gains of course!

I've seen reference to a "Section 431 election" which allows declaring the value of the shares at the time of granting but I'm not sure if it might apply to US companies and nor do I know how to assign a valuation that HMRC wouldn't quibble over.

Any advice on how this should work?
Thanks in advance for any insight.
c.

Jam tomorrow - Wikipedia