HMRC publishes guidance regarding impact of PISCES on share incentives

The Private Intermittent Securities and Capital Exchange System (PISCES) is a new type of stock market that will allow for secondary trading of private company shares. One of the key potential benefits of PISCES is that it will give private companies the ability to allow employees to monetise share awards prior to a full exit. HM Treasury intends to lay a statutory instrument before Parliament in May 2025 to introduce PISCES.

On 26 March, as part of the government's Spring Statement, HMRC published a technical note regarding the tax implications for companies and employees trading their shares on PISCES. Once PISCES is introduced, private companies should consider whether to allow employees who acquire shares pursuant to a share scheme to sell them via a PISCES platform. With this in mind, the key points from the technical note are as follows: 

1. Readily Convertible Assets (RCAs): Currently where an employee of a private company exercises an option, or otherwise acquires shares at a discount to their market value, the likelihood is that any income tax due will be payable via self-assessment and no employee/employer NICs will arise. However, HMRC have confirmed that if at the time that the employee acquires shares there are arrangements in place for those shares to be traded on a PISCES platform, the shares will be treated as "RCAs". Employer NICs arise on the acquisition of an RCA by an employee, at 15% of the value delivered to the employee (i.e. the market value of the shares received minus any exercise price/consideration paid for them). An apprenticeship levy liability may also arise for the employer at 0.5% of the value delivered. The employer will also be obliged to operate PAYE in respect of the employee's income tax/NIC liabilities, rather than these being dealt with via self-assessment. Employers should consider the additional employer costs carefully when considering whether to seek admission to a PISCES platform. Before any such admission the terms on which options/awards have been granted should be reviewed, to confirm whether they would be treated as RCAs.

2. Enterprise Management Incentive (EMI) options: EMI options can be granted on terms allowing exercise during a PISCES trading window, provided this is specified at the time of grant (i.e. in the option agreement). However, amending an existing option agreement, or using a general discretion clause within an option agreement, to permit exercise on a PISCES trading window will be regarded as a release and regrant of the EMI option, potentially causing the tax advantages to be lost. The government will continue to consider legislating to allow existing EMI options to be amended so that they can be exercised on launch of a PISCES trading window. The rules regarding discretions within EMI arrangements are complex, and any breach can jeopardise tax advantages; should the government allow changes to existing EMI options, such amendments will need to be carefully drafted to avoid causing such a breach.

3. Company Share Option Plan (CSOP) options: Similar to the guidance above for EMI options, provided that exercise of a CSOP option occurs at least three years from grant, employees can exercise their options on a PISCES trading window and receive CSOP tax relief, provided this is specified at the time of grant. Many CSOP option plans allow for exercise at any time following the three year period having been met (rather than requiring an exit to exercise), and so this new flexibility is less likely to be relevant for CSOP options. As above, currently existing CSOP plan rules which are exit-only cannot be amended, nor can general discretion clauses be used, to permit exercise in these circumstances. The government will continue to consider legislating to allow existing CSOP options to be amended so that they can be exercised on launch of a PISCES trading window.

4. Transaction valuation: When considering transactions that have occurred through a PISCES event, HMRC will not seek to disturb the price between buyer and seller, as it would likely be at arm's length and so the transaction would be deemed to have taken place at market value. However, transactions involving connected parties may be reviewed by HMRC through compliance checks, to consider whether the price reflects market value.

5. PISCES transactions as evidence of market value: Past PISCES transactions will be considered as evidence of value when assessing market value for other purposes. Crucially, if shares, and particularly small minority holdings, are transacted at a price on PISCES, this could mean that HMRC determine that applying a discount for lack of marketability and minority holdings may not be appropriate for other purposes such as grants of EMI/CSOP options. Such discounts can be substantial and are frequently applied by private companies when granting options; this could therefore have a material impact on the continued operation of a private company's incentive plans following a PISCES event. Specific circumstances may warrant a price adjustment, such as a difference in the company’s circumstances between the PISCES event and the valuation date, a lack of liquidity in the market or if the price is out of sync with normal share valuation principles, but this would need to be considered on a case-by-case basis.

6. Advance assurance mechanism: There will be no advance assurance mechanism to agree market values for PISCES events.

7. Stamp Duty and Stamp Duty Reserve Tax: PISCES transactions will be exempt from Stamp Duty and Stamp Duty Reserve Tax. A technical consultation on the draft statutory instrument setting out this exemption has been launched, ending on 23 April 2025.

In Employment Related Securities Bulletin 59, HMRC has confirmed that PISCES will not be a recognised stock exchange within the meaning of section 1005 of the Income Tax Act 2007. Any companies which utilise PISCES should ensure this is reflected in their Employment Related Securities end of year returns. Companies should also review any vesting / exercise triggers in their share plans, to ensure that these only refer to admission to a 'recognised stock exchange' (rather than a more generic IPO / listing trigger), so as to ensure that a PISCES admission does not inadvertently trigger vesting / exercise rights.