The following is provided for informational purposes only, and it does not constitute tax advice. UK tax legislation does not specifically elaborate on the concept of (reward) virtual shares, and all the facts and circumstances of specific scenario should be considered to determine the tax consequences. The below examples describe scenarios where both the issuer and recipients are residents of the UK.
UK incorporated companies are generally treated as UK tax resident. A company is UK tax resident if it is incorporated in the UK or is centrally managed and controlled in the UK (subject to exceptions). Resident companies are taxable in the United Kingdom on their worldwide profits. If your program includes virtual shares or payments to employees in the UK, it would also be important to determine your PAYE presence in the UK.
Depending on the design of the program, all tax results are possible - the issuer is taxed, the recipient is not taxed, or they are both subject to a tax or neither of them is taxed. For example, the following taxes may be relevant to consider (the list is not exhaustive):
- income tax and social security contributions (NIC) to be withheld and paid by the issuer under the Pay As You Earn (PAYE) system in case the person is receiving a virtual share as a remuneration as an employee
- income tax and social security contributions to be paid by a self-employed individual who are granted virtual shares for their services and who do not qualify as employees. They will need to report their trading profits through the Self Assessment tax return
- income tax payable by the recipient for receiving a virtual share or proceeds under the virtual share, as miscellaneous income
- capital gains tax on the proceeds from the disposal of the virtual share to be paid by the recipient, whereas the receipt of a virtual share could be seen as a miscellaneous income.
Persons subject to tax obligations are also obliged to report their tax obligations with the local tax authority. In the UK, it is the HM Revenue & Customs ( https://www.gov.uk/government/organisations/hm-revenue-customs ). Reporting forms and filing deadlines are different per different taxes and types of persons. In some cases, the reporting requirement apply even if the tax withholding or payment obligation is not due or if there is no taxable amount.
An employee is taxed on all remuneration and benefits from employment received during a tax year. An employee is someone who works under an employment contract. You should carefully work out the status of the person – an employee or a self-employed individual – as your payroll tax obligations and formalities will depend on this. You can find more information about the employee status and the employment contracts on https://www.gov.uk/employment-status/employee and https://www.gov.uk/employment-contracts-and-conditions . An employee is taxable not only on basic salary but also on benefits in kind. In case of benefits in kind, it should be further assessed if the benefit will be subject to PAYE or not.
Employers must withhold income tax and social security considerations from the remuneration of employees under the PAYE system. Where the virtual shares are issued to an employee by their employer there is a presumption that the virtual share/rights under the virtual share will be regarded as employment income. Depending on the rights assigned under the virtual share a taxable point may be at the time of award of the virtual share or at the time of receiving the rights or benefits under the virtual share.
UK resident individuals are taxable on their worldwide income and gains. Thus, if virtual shares are issued to the individual as a gift under no formal relationship, e.g., an employment, and the person expects no reward for the activity you want to thank or reward them for, then such issue or receipt of virtual shares may qualify as not taxable. If a recipient receives a pay-out under the virtual share, this may qualify as a taxable income that they need to report and pay taxes on.
If the person would be able to sell virtual shares or they will sell the share received under the virtual share, a capital gains tax should be considered on the gain of such disposal of assets.