Shares or share options in lieu of payment for services.

54and56

I've looked on Revenue.ie for info on this but haven't been able to find anything which I think is relevant.

If a Ltd company is in trouble and needs a service I offer but can't afford to pay me could I accept payment in the form of an option to buy shares equal to the value of the service I provide with the valuation being date of the commencement of the service which for simplicity (and likely a reflection of the circumstances) would be Balance Sheet / Asset Value as the business has been loss making up to that point but if I implement the service I provide it may (hopefully) put the business on a path to long term profitability.

If the company had a Balance Sheet value of €100,000 and 100 ord shares owned by Mr X the MD and I provided €10,000 worth of services in return for which the company issued me with 11 ord shares what would the tax treatment be? Would I have to issue an invoice to the company for €10,000?

Instead of receiving 11 shares which have no real value until there is a distribution of profits or a sale of the company would I be better off getting an option to buy 11 shares for €1 at any time in the future which I could exercise just before a sale of the business in X years time.

Anyone got any insight into this area or can point me in the right direction of some info? If I decide to go ahead and provide services in exchange for shares or share options I'll get some proper tax advice but I'd like to do some general / hypothetical research first.

I appreciate anyone taking the time to share some insight with me on this.

Calahonda52

options are covered here
https://www.revenue.ie/en/additional-incomes/employment-related-shares/unapproved-share-options.aspx
getting shares is a bit trickier because the Revenue may take a different view of their value on the date of acquisition.
In any event only CGT will be at issue here, on disposal.
Asd to the idea of taking shares in a private co in trouble.....

54and56

Calahonda52 wrote: »

options are covered here
https://www.revenue.ie/en/additional-incomes/employment-related-shares/unapproved-share-options.aspx

Super, thanks Calahonda52, much appreciated.

Calahonda52 wrote: »

getting shares is a bit trickier because the Revenue may take a different view of their value on the date of acquisition.

Understood.

Calahonda52 wrote: »

In any event only CGT will be at issue here, on disposal.

That's good to know.

Calahonda52 wrote: »

Asd to the idea of taking shares in a private co in trouble.....

I know but it's a risk I'm able to assess so I'm comfortable with the potential risk/reward.

Peregrinus

Calahonda's link is to information about revenue treatment of employee share option schemes. I don't think it's relevant to the question raised in the OP, which is about share options (or shares) given not to an employee, but to a supplier in return for goods or services rendered.

I think this is just payment in kind for goods or services rendered, and it would be subject to income tax based on the value of the shares/share options received (which poses a valuation problem, obviously, but not a wholly novel one).

If you end up holding shares as a result of this transaction and later dispose of them, there may be a CGT liability there, but that's a separate matter.

Calahonda52

Peregrinus wrote: »

Calahonda's link is to information about revenue treatment of employee share option schemes. I don't think it's relevant to the question raised in the OP, which is about share options (or shares) given not to an employee, but to a supplier in return for goods or services rendered.

I think this is just payment in kind for goods or services rendered, and it would be subject to income tax based on the value of the shares/share options received (which poses a valuation problem, obviously, but not a wholly novel one).

If you end up holding shares as a result of this transaction and later dispose of them, there may be a CGT liability there, but that's a separate matter.

Agreed re the employee bit: an option is an option so the Revenue piece shows the treatment if the option is exercised, which is why I posted it.
Keep safe in the storm

Peregrinus

Calahonda52 wrote: »

Agreed re the employee bit: an option is an option so the Revenue piece shows the treatment if the option is exercised, which is why I posted it.

I don't think that's quite right. The whole short option/long option thing arises under Taxes Consolidation Act 1997 s. 128, and that only covers options granted to directors and employees.

I think the option needs to be valued as at the date of grant, and the value treated as income in the hands of the service provider. But, after that, any value that accrues either as a result of the exercise of the option or the disposal of the shares is going to fall under the CGT regime.

54and56

Thanks all, that's really helpful, in particular the differentiated treatment of employees/directors and suppliers/3rd parties.

I guess as part of my negotiation of payment in shares for the ongoing service I'll supply I could secure agreement that I will also become a director of the company which would then enable me to take advantage of the employee/director tax treatment.

Peregrinus

Provided, of course, you are willing to accept the responsibilities and liabilities associated with the office of director, and to discharge the duties.

In other words, in the unlikely event that they are willing to make you a director, don't do this. Just ask for more share options.

54and56

Peregrinus wrote: »

Provided, of course, you are willing to accept the responsibilities and liabilities associated with the office of director, and to discharge the duties.

If I'm going to be a 10% owner of the business I wouldn't see being a director as a burden, I'd see it as a responsibility I'd want.

Peregrinus wrote: »

In other words, in the unlikely event that they are willing to make you a director, don't do this. Just ask for more share options.

It's not unlikely at all actually, they want to tie me into helping them run the business long term so not sure why you conclude with such certainty that it's unlikely they'd want me as a director and also not sure why you advise not to do it when the service I provide is what's needed to turn it around from being loss making to being profitable.

Even if the business did fail there are very few liabilities to being a director provided there was no fraudulent/criminal or overtrading type activity going on.

This business is solvent and well capitalised (despite losses in its immediate past) but businesses fail every day due to market circumstances and poor execution without any recourse or downside for the directors or shareholders.

Aren't limited liability companies specifically designed to protect the shareholders from personal liability and aren't directors shielded from personal liability unless they were engaged in fraud or similar illegal activity?

Peregrinus

Je_suis_Jean wrote: »

Aren't limited liability companies specifically designed to protect the shareholders from personal liability?

The shareholders, yes. Which is why becoming a director is very, very different from accepting shares in the company.

Look, because we're in the tax forum here, and the conversation opened with a query about the tax treatment, I may have started out by focussing on what is a pretty minor aspect of this transaction, and probably not what should drive it. There's a huge difference between supplying services to a client in return for payment, on the one hand, and taking an equity stake in an enteprise, but paying for by rendering services rather than paying cash, on the other.

I think the real question you should be asking yourself here is not "how do I want to be paid for the services I render (and what would be most tax-efficient)?" It's "do I want to make an investment in this enterprise, and take an active role in running it?'. Only if the answer to the latter question is "yes" should you consider taking shares, and becoming a director. The answer to that question is not going to be tax-driven.

If you get to the point where you're satisfied that the answer to that question is indeed "yes" then, great, the opportunity to invest in the company by providing services rather than paying cash may be an attractive one. But note that you'll be looking for a shareholders' agreement to clarify and protect your position - you'll presumably be a minority shareholder in the enterprise - and there are much, much bigger issues than tax to be addressed.

54and56

Peregrinus wrote: »

I think the real question you should be asking yourself here is not "how do I want to be paid for the services I render (and what would be most tax-efficient)?" It's "do I want to make an investment in this enterprise, and take an active role in running it?'. Only if the answer to the latter question is "yes" should you consider taking shares, and becoming a director. The answer to that question is not going to be tax-driven.

If you get to the point where you're satisfied that the answer to that question is indeed "yes" then, great, the opportunity to invest in the company by providing services rather than paying cash may be an attractive one. But note that you'll be looking for a shareholders' agreement to clarify and protect your position - you'll presumably be a minority shareholder in the enterprise - and there are much, much bigger issues than tax to be addressed.

That's 100% correct Peregrinus and fully understood. I believe the company can have a successful future and that I can play an important role both as an initial service provider and post that project as a shareholder and director albeit not an employee. I'm not so worried about the liabilities associated with being a director but I do need to give consideration to the constraints of being a minority shareholder and the lack of liquidity.

I appreciate your input, it has helped to clarify the issues I need to focus on.

nompere

Je_suis_Jean wrote: »

That's 100% correct Peregrinus and fully understood. I believe the company can have a successful future and that I can play an important role both as an initial service provider and post that project as a shareholder and director albeit not an employee. I'm not so worried about the liabilities associated with being a director but I do need to give consideration to the constraints of being a minority shareholder and the lack of liquidity.

I appreciate your input, it has helped to clarify the issues I need to focus on.

A director is an employee.

Peregrinus

nompere wrote: »

A director is an employee.

Not necessarily. A director is an officer, and may be an employee, but need not be.

54and56

nompere wrote: »

A director is an employee.

I'm a non exec director of two other companies and I'm most definitely NOT an employee of either.

I invoice a flat monthly fee to fulfil my non exec duties which include monthly board meetings but I don't have an employment contract and the company does not make any kind of annual tax return on my behalf.

nompere

Je_suis_Jean wrote: »

I'm a non exec director of two other companies and I'm most definitely NOT an employee of either.

I invoice a flat monthly fee to fulfil my non exec duties which include monthly board meetings but I don't have an employment contract and the company does not make any kind of annual tax return on my behalf.

Revenue disagree with you about the taxation treatment of directors' fees.

https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-42/42-04-61.pdf

54and56

nompere wrote: »

Revenue disagree with you about the taxation treatment of directors' fees.

https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-42/42-04-61.pdf

Oops

Better get them to fix that.

They are unrelated companies so I wonder why they both treat non execs the same way i.e. they ask us to provide invoices to them.

Was that traditionally how it was handled?

Also, if you don't mind can you link to where Revenue defines the term "public office" as it relates to directors of Irish incorporated companies? I searched on Revenue.ie but couldn't find it.

barneystinson

Je_suis_Jean wrote: »

Oops

Better get them to fix that.

They are unrelated companies so I wonder why they both treat non execs the same way i.e. they ask us to provide invoices to them.

Was that traditionally how it was handled?

Also, if you don't mind can you link to where Revenue defines the term "public office" as it relates to directors of Irish incorporated companies? I searched on Revenue.ie but couldn't find it.

https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-42/42-04-61.pdf

54and56

nompere wrote: »

Revenue disagree with you about the taxation treatment of directors' fees.

https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-42/42-04-61.pdf

Hypotethical question:

Company A invoices Companies B & C €50,000 a year for the provision of non exec director services fulfilled by Mr Je_suis_Jean.

Mr Je_suis Jean's sole income from all activities is from Company A who pay him a salary of €30,000 a year.

Does Mr Je_suis_Jean pay PAYE, USC etc on €50,000 or €30,000?

Peregrinus

Je_suis_Jean wrote: »

I'm a non exec director of two other companies and I'm most definitely NOT an employee of either.

I invoice a flat monthly fee to fulfil my non exec duties which include monthly board meetings but I don't have an employment contract and the company does not make any kind of annual tax return on my behalf.

nompere wrote: »

Revenue disagree with you about the taxation treatment of directors' fees.

Whether or not they are employees, directors are officers, and a single set of rules governs the tax treatment of income from offices, employments and pensions. Thus even where a director is not an employee, this does not generally result in tax treatment very different from the treatment he would get if he were an employee.

Peregrinus

Je_suis_Jean wrote: »

Hypotethical question:

Company A invoices Companies B & C €50,000 a year for the provision of non exec director services fulfilled by Mr Je_suis_Jean.

Mr Je_suis Jean's sole income from all activities is from Company A who pay him a salary of €30,000 a year.

Does Mr Je_suis_Jean pay PAYE, USC etc on €50,000 or €30,000?

I'm not sure that companies B and C should be paying the invoice. Company A is not a director of companies B and C, and I don't think it can provide "non-executive director services", since the only person who can provide director services is a director.

Separately, I think the Revenue would also feel that €50,000 (or even €30,000) is pretty rich for a non-executive director, and they'd wonder whether Mr Je_suis_Jean might not in actuality be doing a teeny bit more than discharging the office of a non-executive director.

mrslancaster

If the OP invoiced the company he would charge VAT @ 23%.
If he is 'paid' in shares how is the VAT issue handled?

barneystinson

mrslancaster wrote: »

If the OP invoiced the company he would charge VAT @ 23%.
If he is 'paid' in shares how is the VAT issue handled?

There is no VAT issue. As you say, the OP raises an invoice charging VAT and he is accountable for the VAT on his invoice.

If he accepts payment in kind rather than in currency, that's his business, as long as the value of that consideration doesn't materially exceed the amount stated on the invoice.

54and56

Peregrinus wrote: »

I'm not sure that companies B and C should be paying the invoice. Company A is not a director of companies B and C, and I don't think it can provide "non-executive director services", since the only person who can provide director services is a director.

I get your point but if that is the case how can a hospital structured as a Ltd Co invoice for "medical procedures" since the only person who can provide medical procedures is a qualified doctor?

Peregrinus wrote: »

Separately, I think the Revenue would also feel that €50,000 (or even €30,000) is pretty rich for a non-executive director, and they'd wonder whether Mr Je_suis_Jean might not in actuality be doing a teeny bit more than discharging the office of a non-executive director.

There's a few things here:-

1. It's TWO separate non exec dir roles so €25,000 each per annum which from speaking to others with similar skills and experience to myself who perform NED roles for other companies is pretty much market rate as far as I can tell.

If you're a superstar Exec in high demand e.g. (for illustration purposes) Michael O'Leary you are going to be paid over €100,000 for the same role as you bring additional gravitas and high profile to the role and there will be huge demand for your services.

Taken from www.iodireland.ie

"How much should a non-executive director be paid?
Fees for non-executive directors vary greatly and depend on a range of factors including the time commitment expected, the level of involvement with board committees, the size and turnover of the company and the sector in which the company operates."

2. The role of a Non Exec isn't universally defined. The time commitment and degree of involvement which Company B require from a non exec in order to discharge his/her responsibility may differ significantly to Company C. I have a set amount of duties and meeting requirements to fulfil with each company I am a non exec of and I don't exceed that. If I did (as happened on one occasion) my company would invoice separately for XYZ consulting project.

Peregrinus

Je_suis_Jean wrote: »

I get your point but if that is the case how can a hospital structured as a Ltd Co invoice for "medical procedures" since the only person who can provide medical procedures is a qualified doctor?

Because the legal and regulatory regimes differ. Hospitals can provide and charge for medical care, but they must employ properly qualified practitioners to deliver the care. However somebody acting as a company director isn’t just providing a service under a contract for services; he’s filling an office, and it’s an office which can only be filled by a natural person. Unlike with doctors and nurses, no particular professional qualifications are required to fill a company director's office, but you do have to be a human being.

Je_suis_Jean wrote: »

There's a few things here . . .

I take your point. Obviously you know the situation better than I do; I just observe that 100k would be an extraordinarily high fee for acting as a non-executive director of two (linked?) private companies. That's not to say it couldn't be justified by particular circumstances, but (if there were any tax advantages to characterising the payment as directors' fees) you should should expect to have to justify it.

But, of course, there may not be a tax advantage. As already noted, the emoluments of an office are generally subject to the same tax regime as the emoluments of an employment, so characterising the payment as a director's fee is not likely to result in any tax saving. The Revenue may be unbothered.

In fact, it may be better to characterise the payment or part of the payment, as a fee for services rendered under a contract for services (e.g. for business consultancy, or whatever) since then you can provide the services through a company, and take whatever advantages that offers.

But, legally, it puts you in a potentially awkward position, should the company go pear-shaped and creditors or regulators start looking for people to blame. There's an obvious conflict of interest in being both a director of the company and a person who profits from contracts with the company; one of the roles of a non-executive director in particular is to object to such contracts, if they are not on best terms or seem otherwise undesirable. So you may prefer not to find yourself in that position. But we're going well beyond tax considerations here.