9th April 2013
This newsletter looks at proposals in March’s Budget Statement and in the Finance Bill 2013 which have an impact on employee share schemes and employee ownership.
Enterprise Management Incentive (EMI)
As announced in the 2012 Budget, capital gains tax entrepreneurs’ relief will be available on disposals of shares acquired on exercise of EMI options from 6 April 2013, whether or not the option holder holds 5% of the shares in the company (which is the normal requirement for the relief). The period between the grant of an EMI option and the disposal of the shares must be at least twelve months if shares are to qualify for entrepreneurs’ relief.
The Government has published further details about the tax treatment of the proposed new “employee shareholder” employment status:
- Following considerable lobbying, income tax and National Insurance contributions (NICs) legislation will be amended so that, for tax and NICs purposes, an employee shareholder will be treated as having paid £2,000 for employee shareholder shares. This will have the effect of making the first £2,000 worth of such shares free from income tax and NICs.
- The draft legislation to provide a capital gains tax exemption for disposals of employee shareholder shares now excludes the possibility of an income tax charge on a buyback of employee shareholder shares.
- The “material interest” restriction has also been tightened in an attempt to reduce the risk of the initiative being used for tax avoidance purposes.
However, shortly afterwards, the core “employee shareholder” provisions were removed from the Growth and Infrastructure Bill when the Government was defeated in a vote in the House of Lords, so that the Government will now have to decide whether, and, if so, in what form, to reintroduce the necessary clauses. This might mean that, even if the Government decides to proceed, the introduction of the new employment status scheduled for September 2013 could be delayed.
Tax-advantaged share schemes
As announced in December 2012, the Finance Bill includes provisions to simplify tax-advantaged share schemes, following review by the Office of Tax Simplification. The key changes are as follows:
- Retirement provisions in the tax-advantaged schemes will be harmonised, and the requirement for certain schemes to include a specified retirement age will be removed.
- The circumstances in which employees who leave employment will be able to benefit from tax-favoured treatment for Company Share Option Plan (CSOP) or Save As You Earn (SAYE) options, or Share Incentive Plan (SIP) awards, will be harmonised, and the circumstances in which tax-free exercise of SAYE and CSOP options will be available on the cash takeover of a company will be widened.
- The rules in SIPs, SAYEs and CSOPs that prevent the use of shares subject to restrictions will be abolished. This change has the potential to make these schemes more popular and easier to establish.
- The material interest rules for SIPs and SAYE schemes will be abolished, and relaxed for CSOP.
- The period following a disqualifying event during which an EMI option can be exercised in a tax-favoured manner will be extended from 40 days to 90 days.
- These changes will take effect from the date on which Finance Bill 2013 receives Royal Assent. In some cases, however, scheme rules will need to be amended, in order to take advantage of the changes. We would be happy to advise on what steps (if any) need to be taken.
The Government has confirmed that it will proceed with a proposal to replace the current system of HMRC approvals for CSOPs, SAYE option schemes and SIPs with a self-certification regime. It will publish further details in due course. Legislation to implement the self-certification regime will be included in Finance Bill 2014.
Government funding for employee ownership
The Government proposes to provide £40 – 50 million annually from tax year 2014-15 to encourage the take-up of employee ownership structures for businesses. This will fund:
- Responses to recommendations made by the Nuttall review of employee ownership and to proposals from other parties with an interest in employee ownership.
- A new capital gains tax relief on the sale of a controlling interest in a business to an employee ownership structure. This relief is connected to the proposed “off the shelf” employee-owned company model being worked on by the Department for Business, Innovation and Skills and the Implementation Group on Employee Ownership. It is proposed that the legislation for the relief should be introduced in Finance Bill 2014.
The Government also proposes to consider further related incentives, including measures targeted at indirect employee ownership models.