ACCA Advanced Taxation (ATX) Practice Exam

How do 'free shares' operate within a Share Incentive Plan (SIP)?

1. Employees can receive shares without any value limit

2. Employees may be awarded shares worth a maximum of £3,600 each year

3. Employees must purchase all shares at market value

4. Employees get shares based only on performance metrics

The correct answer is: Employees may be awarded shares worth a maximum of £3,600 each year

In the context of a Share Incentive Plan (SIP), 'free shares' operate by allowing employees to receive shares that are provided by their employer as a benefit. Each employee can be awarded free shares up to a maximum value of £3,600 per tax year. This threshold is important because it defines the maximum amount of shares that any single employee can receive tax-free within the SIP framework. This system encourages employee participation and engagement, while also providing them with a tangible stake in the company's success without requiring any financial investment on their part for the shares. The tax advantages associated with free shares, alongside the cap on value, ensure that employees are rewarded in a controlled manner that promotes long-term loyalty and alignment with the company's interests. Other options do not align with the regulations governing SIPs; for instance, there's a specified limit to the value of shares that an employee can receive annually, which excludes any option suggesting unlimited share allocation or mandatory purchase at market value. Performance metrics are also not a requirement for awarding free shares, as they can be given irrespective of individual performance, as long as the value cap is adhered to.