Tax implications of sweat equity

Key points

• Little guidance exists on how to treat equity allocated to contractors who have no employer/employee relationship with the company.
• The company has to put a value on the service it has received and register it with Companies House.
• The consultants should plan for potential liabilities and discuss with the company the need for a split of cash and equity consideration.

Sweat equity is normally defined as ‘unpaid labour’ that an employee entrepreneur or investor puts into a business in order to build it up while cash resources are limited in the hope that they will be rewarded by a long-term increase in the value of equity in the business.

However the warm glow of success when that unpaid labour contributes to the building of a valuable business can also lead to a level of anxious perspiration if the tax issues that arise from sweat equity have...