Sole trader being paid in shares - how is it treated for tax

Ginger1

If a sole trader is paid in shares by the company they are doing work for in lieu of income, is the value of the shares treated as income? If not, how does it need to be dealt with on the tax return?
TIA

douglasstroud

It does not matter what they get paid in, it is the value of the invoice that they issued that goes on the tax return and is taxable

Ginger1

That is the conclusion I had arrived at, thank you very much

Jay36598

Not Financial Advice

@Ginger1 — considering things are simple, you value income at the rate of market value of the shares received, considering it is not publicly traded company (yet), you can’t value the shares at their balance sheet value (a tedious exercise in and of itself) but rather you value them at the rate of the equivalent services you quote in the market to everyone.

Then there is a difference as well in terms of recognising ‘receipt’. A promise of shares received is different to shareholding actually recorded (at Companies House) which is when it becomes received/ taxable.

There are other concerns as well like you can deduct the cost of shares paid in the CGT calculations when you come to sell them eventually. Many people forget to make this deduction.

Quite a lot to consider but keeping things simple and well recorded, it should not be daunting.

Here is an excellent read from FT about someone asking the same question some 15 years ago: https://amp.ft.com/content/e8db772a-e4ac-11d9-95f3-00000e2511c8

douglasstroud

considering things are simple, you value income at the rate of market value of the shares received, considering it is not publicly traded company (yet), you can’t value the shares at their balance sheet value (a tedious exercise in and of itself) but rather you value them at the rate of the equivalent services you quote in the market to everyone.

I disagree, the consideration the sole trader has received is the value of the Invoice, not the market value of the shares.
For example if they Invoice for £500.00 and agree to receive shares then this is the amount the shares are worth and becomes the base cost of what the sole trader paid for them, £500.00 then becomes taxable income, the MV of the shares may be £0.00 but the sole trader has still made a sale of £500.00, you would think though that they would only accept shares to the value of their Invoice, and that the client would not give away shares worth more than the Invoice.
(I take it the sole trader is not connected to the client?)

Jay36598

> @douglasstroud said:
> considering things are simple, you value income at the rate of market value of the shares received, considering it is not publicly traded company (yet), you can’t value the shares at their balance sheet value (a tedious exercise in and of itself) but rather you value them at the rate of the equivalent services you quote in the market to everyone.
>
> I disagree, the consideration the sole trader has received is the value of the Invoice, not the market value of the shares.
> For example if they Invoice for £500.00 and agree to receive shares then this is the amount the shares are worth and becomes the base cost of what the sole trader paid for them, £500.00 then becomes taxable income, the MV of the shares may be £0.00 but the sole trader has still made a sale of £500.00, you would think though that they would only accept shares to the value of their Invoice, and that the client would not give away shares worth more than the Invoice.
> (I take it the sole trader is not connected to the client?)
Yep, that’s what I said: Value at the fair price of equivalent work done for anyone else (no special discounts or surcharges) for shares of non-publicly traded company.

But for a company traded in public, it has to be market value of shares at that point in time, irrespective of invoice price, the difference being a discount given if negative or if positive, a tip/ gratuity (which is taxable).

TaxAdvisorWB

It will be necessary to carefully review the written agreement to understand the arrangement in place. Particularly when they become entitled to receive the shares.
As you say the shares are a payment from the company it will be important to know what value they have assigned to these in their accounts as the personal tax liability will naturally follow this. If the shares are new you would expect the value to have been reported to Companies House when the new shares are issued so getting this information should be straightforward.
I would be cautious in assuming the shares are valued at the invoiced amount and would not be confident in arguing that the invoice overrides the facts. If this approach worked I think you would find people attempting to exploit the situation. Also following the logic of a sole trader in receipt of tips being required to report these (which would be in addition to the invoiced amount) the true value of the shares should be ascertained and reported as income.
A really helpful and interesting article appeared in Taxation Magazine recently on just this topic (issue 4812) not sure if they sell individual back issues or if you can access if as part of the free trial but well worth considering to help in justifying the position you take.