Employee owner status – a step in the right direction, but still flawed

Michael Deeks, Tax Partner, Olswang

Despite the fact that the overwhelming response to its initial consultation on this issue was either negative or mixed, the Government today confirmed its commitment to implementing the employee owner status (which it has now decided to call the “employer shareholder” status).

Under these provisions, employees will relinquish certain statutory employment rights in return for between £2,000 and £50,000 worth of shares in their employer company (or its parent), on the basis that any gains on those shares will be exempt from capital gains tax.

Normally, when shares are awarded by an employer to an employee for nil cost, a charge to income tax and potentially National Insurance contributions arises on the market value of the shares.

Accordingly, one of the key concerns about the employee shareholder status was that the employee shareholders would incur National Insurance contributions and income tax liabilities on acquisition of their employee shareholder shares.  The Government has acknowledged these concerns and noted in the Chancellor’s Autumn Statement that it is considering introducing measures to reduce these tax liabilities; including potentially exempting the first £2,000 worth of shares from income tax and National Insurance contributions.

In its response to the initial consultation on the employee shareholder status published yesterday, (which focused primarily on employment law issues), the Government noted that it has taken many criticisms from the consultation responses into account.

Key changes to the initial proposals include:

  • changing the £50,000 upper threshold from a cap on the value of shares which could be awarded to employee shareholders to a cap on the amount of gains that would be exempt from capital gains tax;
  • allowing non UK companies to benefit from the status; and
  • allowing shares to be issued by both the employing company and its parent company (although not a subsidiary of the employer) to provide additional flexibility.

Whilst we welcome the Government’s constructive approach to the employee shareholder proposals, we still believe that there are several areas of concern relating to the proposal; including how small and medium sized private companies will, firstly, be able to value their shares and, secondly in some cases be comfortable that those shares are worth a minimum of £2,000.   The Government acknowledged these valuation issues in its response to the consultation, but as yet, has not suggested any solutions.

The Government will be issuing draft legislation for consultation on 11 December specifically focusing on the capital gains tax aspects of employee shareholder status and we look forward to seeing whether this will address these issues.

Other employee incentives matters

Entrepreneurs’ Relief

Despite industry speculation, the Chancellor did not announce any changes to the availability of Entrepreneurs’ Relief (“ER”).  Having extended ER to those gains made on the disposal of shares acquired under Enterprise Management Incentive (“EMI”) options in the 2012 Budget, he did not concede to the calls to allow the 12 month holding period for such shares to run from the date of grant of such EMI options rather than the date of exercise (as was the way in which taper relief operated previously).  This is a missed opportunity for the Government to encourage wider employee share ownership by virtue of a simple amendment to existing provisions.

It was also thought that the Chancellor might have abolished the usual requirement under ER for an individual to hold at least 5% of the ordinary share capital of the company and be able to exercise at least 5% of the voting rights (and hold at least 5% of the company’s nominal share capital) in the case of an employee who acquires shares in his employing company by whichever means.  Again, this opportunity to extend the scope of ER was not taken, which could have been viewed as a means of encouraging entrepreneurial spirit amongst employees.

Tax simplification

Following the consultation the Government undertook after the 2012 Budget relating to the simplification of tax advantaged employee share ownership, it was announced today that a package of measures to this end is to be implemented during 2013.

Again, simplification in these matters is generally to be welcomed although it remains to be seen whether this will result in a greater administrative burden being borne by the implementing companies as HMRC takes a less “hands-on” approach to approved share ownership schemes.

Disguised remuneration

The Government considers that its efforts to deal with disguised remuneration as a method of avoiding tax and National Insurance have been effective to date.  Consequently, there are no proposals to make any changes to the current form of the legislation.



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