ACCA Advanced Taxation (ATX) Practice Exam

What tax charges could apply if shares are readily convertible into cash when exercising a non-tax advantaged share scheme?

1. Only Capital Gains Tax

2. Only Income Tax

3. Both Income Tax and NIC

4. No tax charges will apply

The correct answer is: Both Income Tax and NIC

When shares are readily convertible into cash in the context of a non-tax advantaged share scheme, the relevant tax implications typically include both Income Tax and National Insurance Contributions (NIC). This outcome is primarily due to the nature of the shares being treated as a type of cash equivalent benefit received by the employee. Income Tax applies because the value of the shares is considered a benefit arising from the employment, and is thus subject to income taxation upon acquisition or exercise. The value received is assessed as earnings or income, leading to an obligation to pay Income Tax based on the market value of the shares at the time they are exercised. Additionally, National Insurance Contributions (NIC) will also apply because the benefit derived from the shares is connected to employment. Employers must account for NIC on the amount of the benefit, treating it similarly to cash bonuses or other cash-equivalent benefits provided to employees. The scenario suggests that the shares' liquidity and the fact they are part of a non-tax-advantaged scheme trigger these dual tax obligations. This comprehensive approach highlights the complexity of share schemes and the resultant tax considerations, noting that non-tax-advantaged schemes lack the favorable tax treatment of other schemes, such as Enterprise Management Incentives (EMI) or Share Incentive Plans (