The Government hopes to double the number of companies offering share
incentives to staff with its new All-Employee Share Scheme – another step on
the road to the enterprise culture. Lynda Finan explains what’s in it for
employers
Chancellor of the Exchequer Gordon Brown announced the New All Employee
Share Scheme in his pre-Budget statement last November. New Labour believes
that employee share ownership has an important part to play in raising
productivity by giving employees a direct interest in the success of their
employing company. "I want to encourage the new enterprise cultureÉ in
which everyone contributes and everyone benefits from success," Brown
said.
Britain’s share ownership is half that of the US. The UK has never been a
nation of worker-shareholders, despite the fact that share ownership plans are
not an innovation and that governments since the late 1970s have offered tax
incentives to encourage employees to buy shares in their employing companies.
In 1978, approved profit-sharing schemes arrived, allowing employers to
distribute free shares across the company. This was followed by the
save-as-you-earn (Saye) Option Scheme in 1980 and the Company Share Option Plan
(CSOP), for senior executives, in 1984. Despite the tax advantages they carry,
employers have not consistently, or on a wide scale, offered share schemes to
their staff.
The Government hopes the new scheme will be more successful and will double
the number of companies offering such incentives to all, rather than a select
few, employees.
In last month’s Budget, Brown announced enhancements to the scheme,
including a reduction in Capital Gains Tax, to encourage take-up (see box). He
also announced existing schemes including SAYE would remain unaltered.
The new scheme will allow employers to permit their employees to buy up to
£1,500 worth of shares in their own company from pre-tax income, which can be
matched by the employer with up to £3,000 of shares. It will also allow the
employer to give a further £3,000 worth of shares, with the option of linking
this award to performance. So long as the shares are retained in the plan for
at least five years, no income tax or National Insurance contributions will be
levied on them.
As employees will be required to pay for "partnership shares" (see
below) from the outset, the new scheme offers a different form of employee
share ownership to the traditional option schemes. The Government has tried to
build barriers against the risk to employees in committing their own funds by
introducing tax breaks, discounting opportunities on equity purchases and
setting a relatively low limit on the number of shares that can be purchased.
With these sweeteners it hopes employees will be keen to be a part of such a
scheme. It will be possible for an employee, with a purchase of shares at an
effective cost of £1,000, to receive shares up to a maximum of £7,500. But
there is no guarantee all companies will be this generous.
The Government has provided tax incentives for employers to set up the
scheme. This may prove useful to companies which have not yet set up share
schemes for their employees, although the real incentive to companies is to be
able to offer a scheme which encourages enterprise and promotes the identity of
employees’ interests with those of the company and its shareholders.
The legislation will allow the employer to set up a share ownership plan
comprising one or more of three elements.
Partnership shares
Employers may include a plan which allows employees to allocate part of
their pre-tax salary to buy shares in their company. These shares are referred
to as "partnership shares" and staff can buy to a maximum value of
£1,500 a year. As an example, a basic-rate tax payer will be able to purchase
£1,500 worth of shares at an effective cost of about £1,000, since the shares
will be exempt from both income tax at a rate of 23 per cent and NI
contributions.
Although partnership shares may be removed from the plan at any time, as an
incentive to retention the Government proposes that if the shares are withdrawn
from the plan within five years, other than in certain limited circumstances –
including the cessation of employment by reason of death, disability or
redundancy and on reaching retirement age – there will be a charge to income
tax and NI contributions.
As the partnership shares have been bought by employees, however, they can
never be forfeited although they may be subject to pre-emption provisions
requiring them to be offered for sale if the employee ceased to be in relevant
employment.
Matching shares
Employers can offer up to £3,000 worth of "matching shares" to
employees who buy the full allowance of partnership shares. Employers will
therefore be able to award up to two free matching shares for every one the
employee buys. The only restriction proposed is that the same ratio of matching
shares must be awarded to all employees who have purchased partnership shares.
As the matching shares will be offered to encourage the purchase of
partnership shares, companies will be permitted to include provisions for
matching shares to be forfeited, at no cost, if the corresponding partnership
shares are withdrawn from the plan within three years. Furthermore, matching
shares may also be lost if the employee leaves within three years, other than
for certain "good" reasons such as death, illness or redundancy.
Free shares
The employer can give up to £3,000 worth of shares – "free shares"
– whether or not it operates a partnership shares plan. The award of free
shares is a form of performance-related pay since the award can be linked to
individual, team, divisional or corporate performance as long as the
performance conditions are based on objective measures. The Government says the
scheme will be closely monitored so employers do not abuse it by, for example,
concentrating rewards on directors and higher-paid employees.
Tax treatment
Employees who keep their shares in the scheme for five years will pay no
income tax or NI contributions on those shares. Participants taking their
shares out after three years will pay tax and NI contributions on no more than
the initial value of those shares – any increase in the value of their shares
in the plan will be free from tax and NI contributions. Employees removing
shares within three years will be liable to pay income tax on the market value
of shares when taken out of the plan.
On the sale of shares there is a capital gains tax liability only on any
increase in the value of shares after coming out of the plan. Dividends may be
paid on the shares to employees and they are to be taxed in the normal way.
However, the Government is encouraging further reinvestment by offering
dividends free from income tax if they are ploughed back into purchasing
additional shares.
Creating a trust
A UK trust will act as the vehicle for acquiring and handling shares for the
benefit of employees. The Government believes that since many companies are
familiar with trusts and operate such arrangements at present, this will not
cause any practical problems for those wishing to establish the new scheme.
The trust required will be more flexible than the types of trusts currently
used in conjunction with approved profit-sharing schemes. For example, the
money acquired to purchase the shares will come not only from the company but
also from the employees. Second, the trustees will be empowered to recycle free
and matching shares as a result of employees leaving their jobs. Third, cash to
meet Paye liabilities can be raised by the trustees by selling any of a
participant shares.
There will be a strict time limit for the use of deductions from salary to
acquire shares. The current proposal is for 30 days, unless the plan provides
for an "accumulation period" of not more than 12 months.
Tax relief
As well as offering employees tax incentives to participate in the scheme,
the new scheme offers tax advantages to the employer. The following can all be
deducted in computing the company’s liability for corporation tax – the costs
of setting up and administering the plan, gross salary allocated by employees
to buy partnership shares and the market value of free and matching shares when
acquired by the trustees.
Administration and implementation
For most companies, the scheme must be approved by shareholders. For public
companies with an annual general meeting to be held before July, consideration
should therefore be given to obtaining shareholder approval on the basis of the
draft legislation.
Companies should review their administration procedures and systems to see
if they can cope with the mass of paperwork the new scheme will inevitably
generate. Alternatively, they should consider outsourcing the administrative
burden.
HR strategies
Employers should be looking to review their HR strategies as soon as
possible, considering how they will monitor performance relative to the award
of shares. Existing schemes should be reviewed and employment packages may need
to be reconsidered to take account of the existence of the new scheme.
Lynda Finan is a share schemes specialist and a tax partner in the Leeds
office of national firm Dibb Lupton Alsop
www.inlandrevenue.gov.uk/shareschemes
Action
The final details of the proposals are to be contained in the Finance Bill,
which is due to be published in April. The Finance Act 2000 is expected to
receive Royal Assent in July. The Chancellor has announced that the Inland
Revenue will be geared up to review draft schemes submitted by companies in
late April.
The Inland Revenue is expected to preview schemes under a new Fast Track
Approval Procedure. It is also promising a helpline for initial queries, and is
proposing to increase the number of officials working on share schemes in order
to deal with the likely increase in demand as a result of the implementation of
the new scheme. It will also publish specimen documents, including the plan
rules and a trust deed.
At a glance guide
Improvements in the Budget
– Companies will get corporation tax relief for the costs they incur in
providing shares for employees to buy, to the extent that such costs exceed the
employees’ contributions
– Shares held in a qualifying employee share ownership trust (Quest) on
Budget Day can be transferred to a new plan trust without losing the
corporation tax relief already given on the contribution made to the Quest
– Companies can award free shares in respect of performance periods that
begin before the 2000 Finance Bill becomes law
– As a transitional measure, companies can run an APS scheme alongside a new
plan that provides partnership shares
– A simplification for trustees D employers can operate PAYE and account for
National Insurance
– The dividend re-investment limits are simplified – up to £1,500 of dividends
may be re-invested in shares tax free each year
– The time limit for providing information to the Inland Revenue is extended
from 30 days to three months
– The 30-day time limit for taking shares out of the trust when employees
leave is replaced by a new rule which gives employees and trustees freedom to
make their own arrangements about transferring the shares
– Improvements specifically to help smaller companies
– A new capital gains roll-over relief for existing shareholders who want to
– Sell their shares to a new plan trust to be used for the benefit of
employees
– The existence of arrangements to enable employees to sell shares held in a
new plan trust will not of itself make those shares readily convertible into
cash and require employers to operate PAYE and account for National Insurance
Where to go from here?
– Review your HR strategy
– Review employment packages
– Review existing share schemes
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– Review administration systems
– Consider seeking shareholder approval now
