Section 68 Finance Act 2006

Section 68 of the Finance Act 2006 in the United Kingdom addresses the taxation of employment income earned through employment-related securities (ERS). It’s a crucial piece of legislation aimed at curbing tax avoidance strategies related to share schemes and other forms of equity-based remuneration.

Before the introduction of Section 68, complex planning mechanisms were being used to convert what should have been taxed as income (through salaries or bonuses) into capital gains, which generally attract lower tax rates. These mechanisms often involved manipulating the rules surrounding the acquisition, disposal, and vesting of shares offered to employees. The government recognized the potential for significant revenue loss and introduced Section 68 to counter these strategies.

The core principle of Section 68 is to ensure that any benefit derived from employment-related securities is taxed as employment income if specific conditions are met. This means that if an employee receives shares or other securities as part of their compensation package, and the value of those securities increases due to their employment, that increase is likely to be subject to Income Tax and National Insurance Contributions (NICs) rather than Capital Gains Tax.

Specifically, Section 68 applies when: * Securities are acquired by reason of employment. This encompasses situations where the securities are granted as part of a salary sacrifice arrangement, bonus, or any other form of employee remuneration. * There is an “advantage” in respect of those securities. This advantage is defined broadly and includes any increase in value of the securities, a payment made in respect of the securities, or any other benefit derived from them. * The advantage is not already taxed as income under other provisions. This prevents double taxation.

The legislation grants HM Revenue & Customs (HMRC) broad powers to determine when an advantage has arisen and its value. This determination is based on a “just and reasonable” basis, allowing HMRC to challenge arrangements that appear designed to circumvent the intended tax consequences. The “just and reasonable” standard gives HMRC significant discretion in assessing the tax liability arising from ERS.

Section 68 also includes provisions that address situations involving “convertible securities” and “securities options.” For convertible securities, the act ensures that any increase in value arising from the option to convert is taxed as income. Similarly, for securities options, any gain realized upon exercising the option is subject to income tax and NICs.

The introduction of Section 68 significantly impacted the design and operation of employee share schemes. Employers are now required to carefully consider the potential tax implications of granting securities to employees. Compliance requires diligent reporting to HMRC, using the appropriate forms and adhering to strict deadlines. Failure to comply can result in penalties and interest charges.

In summary, Section 68 of the Finance Act 2006 is a vital piece of legislation in the UK tax system, designed to prevent tax avoidance through employment-related securities. It ensures that benefits derived from these securities are taxed as employment income, aligning the tax treatment with the economic reality of the remuneration received by employees.