Richard, thank you for your patience. Here are my views:
Thank you. The warrants have a 5 year life; if I do not exercise them during that time, they will expire. I entirely follow your logic. My issue now is, what is the monetary amount on which the VAT is due? The warrants will be over 305 shares, being 2% of the share capital, and the exercise price per share is the par value (£1 per share). One possibility, I assume, is therefore 305 x £1 = £305. Clearly, if this were the case, we would be nowhere near the VAT threshold. However, I doubt HMRC would accept as it takes no account of either the time value or the intrinsic value of the warrants.
My view -
There is a commercial value of time and effort applied on this project. You must have agreed some terms and conditions and project price at the outset. If you decide to waive that price that is your commercial decision as this would reflect on your overall income and profit. The company has given you the right to acquire equity warrants in lieu of cash. It could be because the company has cash flow issues.
The question is … If you were to turn down the right to acquire equity warrants, would the company pay you for your services or would you have to take a hit in some loss of income?
If you decide to invoice the company £305 for services rendered, there is little HMRC can do about it as it is a commercial decision and you accept the warrants as payment. This invoice value would be your turnover for VAT threshold purposes also.
The exercise of these warrants would make it capital investment in the company and potential capital gain on sale of those shares in due course. You are sacrificing real income for potential capital gain.
Alternative 2: use some kind of deemed market value. Tricky because the client company is an unlisted, private company whose sole purpose is to hold IP: it does not trade commercially, so there are no traditional metrics to use for valuation. The only recent meaningful fundraising is a rights issue to the existing shareholders, just completing now, underwritten and subscribed at £150/share (1,000 new shares being issued). On this basis, the value of the shares into which the warrants would exercise is 305 x £150 = £45,750, which gets us closer to the threshold.
My view -
I would not consider this option … how long is the piece of string!!!!!
If you raise an invoice on some kind of deemed market value and the value fails to materialise when it matters, you have egg on your face and a massive capital loss where as you would have paid income tax on your profits. I am being pragmatic.
Just to be clear, although I said in my previous message that the company is to be sold, as things stand today there is no offer and consequently no bid price that could be used. Very interested to hear your view on this!
My view –
My question to you is - are you risk averse?
A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks.
I would rather have income for work done and pay my taxes than invest something like £45k in equity warrants where certainty is in question.
I hope this is helpful and answers your question.
If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.