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Tax-Efficient Remuneration and Reward Systems training course


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Will employee-shareholder contracts be subject to the normal income tax and corporation tax rules?

Free Fact Sheet - Employee Share SchemesThe Growth and Infrastructure Bill is currently progressing through Parliament and subject to this proposed legislation receiving Royal Assent employers will be able to offer employees a new type of contract. It is proposed that under the employee-shareholder contract, employees will be given shares which the proposals say should be issued free of charge to the employees and treated as fully paid up. To try to make the scheme attractive it is intended that any gain on the subsequent sale of the shares by the employee would not be subject to Capital Gains Tax.

The draft Finance Bill for 2013 has considered the capital gains tax concession but does not appear to have considered whether the normal arrangements will apply when an employee is gifted shares.  The normal arrangements mean that the employee has personal tax liabilities arising from the benefit of the gift while the employer is able to treat the value of the shares as a taxable charge against its profits for corporation tax purposes.

I asked the HMRC for guidance on this and they have explained:

“As the Chancellor announced at the Autumn Statement on 5th December 2012, the Government is considering options to reduce income tax and national insurance liabilities that arise when employee shareholders receive the shares, including an option to deem that employee shareholders have paid £2,000 for shares they receive. This option would mean that the first £2,000 of share value would be free from income tax and national insurance. It is otherwise anticipated that shares issued under the new status will be employment related securities as defined in the Income Tax (Earnings and Pensions) Act 2003, and subject to income tax and national insurance accordingly. The Corporation Tax position is also being considered as part of this process.”

If it is only the first £2,000 worth of shares that will be free of tax then this will have a significant impact upon the attractiveness of the scheme which is already proving contentious because for a scheme to qualify the employee will have to give up certain employment rights.  An employee could be very attracted by a scheme that is giving them up to £50,000 worth of shares free of charge but if they are subject to income tax and national insurance then the employee could feel rather let down to learn that as a consequence they have a significant tax liability which maybe in excess of £20,000 for those people who already pay higher rates of income tax.

It will be interesting to see the eventual outcome of the Government’s deliberations on this initiative.  Many people who are labelling the arrangements as the ‘share-for-rights scheme’ consider it doomed from the offset because it is proposed that employees who agree to this type of employment contract will give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training.  Coupled with the possible tax implications it will be a hard one for employers to sell to their employees who might not be natural investors.

Clearly expert guidance will be required to implement such a scheme and for many organisations a significant cultural shift will have to happen.

An employee share scheme is just one example of what might be a tax-efficient way of rewarding your staff. To consider all the possible ways of remunerating people we invite you to attend a comprehensive one-day seminar, which we are presenting in London and Manchester during March. For more details about the seminar, Tax-Efficient Remuneration and Reward Systems, please go to this page.

To download a fact sheet that explains the current position regarding employee share schemes then please visit this page.

Stephen Smith
Managing Director
UK Training (Worldwide) Limited