In more detail

Readily convertible assets

• The readily convertible asset test is important for private companies because it determines whether the employer has to withhold income tax and employee NICs and pay employer NICs. Whether shares are readily convertible depends on a range of factors such as ownership structure, liquidity rights and upcoming corporate transactions.
• If shares are not already convertible assets, HMRC's latest guidance states that by allowing shares to be traded on PISCES, the share will become readily convertible assets for any taxable events under an employee share plan. This applies even if a trading window is not open at the time of the taxable event.
• In addition, shares acquired in anticipation of the company being admitted to PISCES will also be viewed as readily convertible assets.
• This will have two impacts on employee share plans. Firstly, it means that employer costs will increase because they have to pay 15% employer NICs. Secondly, employers need to find a practical way to withhold income tax and employee NICs when the shares may still be illiquid.
• If a company's shares are not already readily convertible assets, this may be a factor they consider before allowing shares to be traded on PISCES. This will not impact companies whose shares are already readily convertible assets, e.g., most PE-owned businesses.

Equated Monthly Installments (EMI) and Company Share Option Plan (CSOP) options

• For EMI and CSOP options, HMRC have said that PISCES trading windows can be a specified event to allow employees to exercise.
• However, this must be expressly stated as a term of the option from grant. If companies exercise discretion to allow exercise during a PISCES trading window, this would cause the options to lose their tax advantaged treatment. Likewise any amendment to the terms of the option would also count as a regrant of the option.
• This means that this is only likely to apply to future grants because most companies would not have expressly included a PISCES trading window as an exercise event for options granted to date.

Valuations

• HMRC have said that it will likely respect PISCES transactions as being market value, but that it might review these on a compliance check if they occur between connected parties.
• HMRC also indicate that PISCES transactions would be considered as evidence of value but that market value may depend on the time that has elapsed between the transaction and the company's performance in that time.
• If small shareholdings are being transacted on PISCES, HMRC indicate that a discount may not be appropriate. However some circmstances may warrant using a different value to the transactions on PISCES. For example, a difference in company's circumstances between the PISCES event and the valuation date, a lack of liquidity in the market and if the price is considerably out of sync with normal share valuation principles.
• Therefore, companies will need to be aware of the transaction prices on PISCES when determining market value, but these are not always determinative.

Annual reporting

• In a separate update, HMRC have confirmed that PISCES will be a regulated stock market, but will not be a Recognised Stock Exchange.
• This is relevant for companies completing their annual share plan return where there is a question that asks whether shares are listed on a recognised stock exchange. If the shares can be traded on PISCES and nowhere else, companies would answer 'no'.