Employee Ownership - What's Going On?
The last couple of years have seen a huge flurry of interest in employee share ownership. Nick Clegg, George Osborne, the House of Lords and a whole host of government advisers have been making announcements, proposals and recommendations, all apparently in the spirit of making employee ownership easier.
With so much white noise, it’s difficult to work out what’s in and what’s out. Here’s a quick timeline of when/if certain changes are happening, followed by a summary of what it all means:
Company Share Buybacks
The Nuttall Review (published in 2012) recommended (among other things) that it should be easier for private companies with employee owners to buy shares back from employees, for example on cessation of employment, without the need to put in place an Employee Benefit Trust.
As a consequence, changes have been made to company law so that private companies can now pay for any share buyback in instalments and can hold shares in treasury. There is also a relaxation of the requirement for a 75% special resolution for a buyback to a 51% ordinary resolution. See our more detailed commentary here.
Where are we now? The changes are in effect now.
RM2 comment: This is great from a practical perspective but not from a tax perspective, because the tax law has not been changed alongside the company law changes. Unless an employee has held shares for at least 5 years, gains from most shareholdings will be taxed as dividends, not capital. So for the time being, it’s likely that an EBT is still the best method (tax-wise) for a company wishing to buy shares back from employees.
Entrepreneurs’ Relief (ER) and Enterprise Management Incentives (EMIs)
If an EMI option was granted at least 12 months before the shares are sold, and the option holder was an employee or officer of the issuing company for at least the year ending on the date of sale of the shares, the period the share option was held will count towards the one year holding period requirement for Entrepreneurs’ Relief (ER). There is now no need for the individual to hold any specified percentage (i.e. shareholdings of less than 5% will be eligible if the shares were acquired under EMI).
Where are we now? The new rules will apply to EMI options exercised and shares sold after 5th April 2013. There are also helpful provisions applicable to options exercised after 5th April 2012 and shares sold after 5th April 2013.
RM2 comment: These changes are extremely welcome and make EMI a “no-brainer” for qualifying companies and employees, with the possibility of paying no income tax or National Insurance Contributions, and capital gains tax charged at a mere 10%. Do be careful to check, however, the position of the sale of EMI shares alongside shares acquired other than under EMI options or where EMI options were exercised prior to 2012, as different ER rules apply to such other shares.
Model Documentation for Employee Owned Companies
Again in response to the Nuttall Review, some documentation has now been published by Business Innovation & Skills (BIS). The documentation includes articles of association for an employee owned company, a model trust deed and articles for a trustee company, and additional notes and guidance.
Where are we now? Documentation available now. More beneficial tax treatment for employee ownership currently under consultation.
RM2 comment: This is a welcome attempt by government to provide what could be DIY documentation for companies wishing to establish themselves as employee owned, without advice from (necessarily) niche advisers (ourselves included!). Anything that makes it easier and cheaper for smaller companies to provide wider ownership by employees is a very positive move, however, experience dictates that there is no ‘one size fits all’ approach and therefore specialist advice should still be sought to ensure refinements are made to meet each company’s circumstances. We look forward to future announcements from government on taxation. Proposals have been announced, including the possibility of capital gains tax relief on the sale of a business to employees, but these are subject to consultation and are unlikely to be a reality much before 2014.
Simplification for Tax Advantaged Schemes
- Single definition of retirement age for all schemes
- Tax free early exercise on cash takeovers
- Alignment of material interest tests for CSOP and EMI to 30%
- Removal of material interest test for SIP and SAYE
- Removal of dividend cap under SIP
- Changes to how the number of partnership shares to be awarded under SIP will be determined in the Partnership Share Agreement
- Allow certain restrictions in SIP, SAYE and CSOP (provided that employees are notified of the existence of those restrictions
- Enhancement of bad leaver treatment for SAYE and CSOP schemes
- Removal of 7 year SAYE savings period
- Extension of exercise period for EMI options after disqualifying event from 40 days to 90 days
Where are we now? The changes will apply, broadly, once the Finance Bill receives Royal Assent, probably in July 2013.
RM2 comment: The simplifications will help clients in particular where they run two or more schemes and struggle to manage the treatment of employees under two different sets of rules. Some modifications may be needed to existing plans and RM2 can assist with that.
Employee Shareholder Status
George Osborne’s big idea was first floated last year. The plan was to create a new employment status under which employees gave up certain key employment rights in return for shares in their company.
Unfortunately the big idea immediately ran into a lot of difficulties. Critics identified numerous flaws, and certain clauses were initially voted down in the House of Lords, before they were finally accepted with some significant amendments when the Growth and Infrastructure Act received Royal Assent on 25th April 2013.
“Employee shareholders” will be able to receive shares valued between £2,000 and £50,000 in their company. The first £2,000 of shares will not incur any charge to income tax (the excess will!). When the shares are sold, any gains will be exempt from capital gains tax (in relation to shares originally acquired within the limit of £50,000).
In return for the shares, employees must enter into an “employee shareholder contract”. This will provide fewer rights than an ordinary employment contract so, for example, the employee shareholder will have no right not to be unfairly dismissed (except in certain circumstances), no right to statutory redundancy payments, no right to ask for time off for study/training, and no right to make flexible working requests (unless returning from parental leave, when the right will subsist but be restricted). Employee shareholders must also give 16 weeks’ notice if they want to come back early from statutory maternity, adoption or additional paternity leave.
Where are we now? Employee shareholder status is set to commence on 1st September 2013.
RM2 comment: There is still some doubt as to how this idea will work in practice. Companies wanting to encourage employee share ownership are often the same companies which wish to guarantee employment rights, rather than remove them. There will be costs associated with valuing private company shares, and also in providing the guidance for employees that is required by the legislation (thanks to the House of Lords’ intervention). There are also some tax issues relating to how shares will be bought back on leaving (see above and our earlier article, here).
Self-certification of Approved Schemes
As part of its report on approved schemes, OTS reported that the self-certification approach for EMI should be adopted for the other approved schemes, to reduce the time and costs associated with seeking prior HMRC approval to plan rules.
Where are we now? Under review and anticipated in 2014.
RM2 comment: This will clearly require careful planning, as SAYE, SIP and CSOP have more restrictive rules than EMI, which means there is greater scope for mistakes to be made. Nonetheless, we consider that the risks of mistakes will be outweighed by the considerable time savings likely for clients wishing to put plans in place to a certain timetable, without being subject to lengthy turnaround times from the (hardworking but overstretched) HMRC share schemes unit.
Online Filing for Form 42
Form 42 was identified by the OTS as ripe for simplification, which recommended the form is taken online, removing the need for (in some cases) literally hundreds of paper pages.
Where are we now? HMRC is developing the online form and this is expected to go live in 2014.
RM2 comment: Online filing for all forms is clearly the way forward and it is to be hoped that HMRC will also make changes in connection with other share plan returns. However it will be interesting to see how share schemes reporting ties in with the implementation of Real Time Information reporting (RTI).
Simplification to Unapproved Share Schemes
In its January 2013 report on the simplification of unapproved share schemes, OTS made a number of recommendations. These included:
- Introduction of the “marketable security” so that no tax would be due on employment related securities until the securities could be sold for cash (thus avoiding the so-called “dry tax charge”)
- Introduction of an employee shareholding vehicle, enabling companies to operate a trust-type arrangement that operates outside the many complex tax traps currently in existence
- Simplify the tax treatment of share based arrangements for internationally mobile employees
- Simplification of certain rollover provisions and corporation tax relief in takeover situations
Where are we now? All these recommendations are being consulted upon and legislation is unlikely to be adopted before 2014 at the earliest.
RM2 comment: Again, OTS’ recommendations are welcome and should reduce the complexities associated with share schemes – and, particularly, employee benefit trusts – which often prevent smaller private companies from implementing employee share ownership schemes. However, the recommendations will necessarily require detailed consideration. Don’t hold your breath on these.