Latest News about Employee Share Plans

In this issue:

  • Recent developments on employee ownership trusts
  • Government shelves recommendations from Office of Tax Simplification (OTS)
  • HMRC online registration and notification for employee share plans

Employee ownership trusts

We have previously reported on the Government’s efforts to promote increased employee ownership, and in this newsletter, we are providing a further update.

Since the tax reliefs contained in Finance Act 2014 were first announced, we have advised a number of companies on a transition to employee ownership using the relief, so that the sale of a controlling interest to an employee ownership trust (“EOT”) is entirely free from capital gains tax (CGT).  A second tax relief is that bonuses paid to employees of companies controlled by an EOT benefit from an income tax (but not National Insurance) exemption.

We have now successfully completed employee ownership trust transactions for four clients, and continue to work with other clients on working towards, becoming employee owned.

A Case Study

By way of an example, one company which we have guided in its transition to becoming employee owned is based in the UK but also operates in other parts of the world. It provides consultancy and systems design for transportation management and has 100 employees, with healthy and growing profits.  Prior to its sale to an EOT, it was 70% owned by its two founders, the remaining 30% being held by a number of its more senior employees.

In wishing to retire from the business, the company’s founders considered a sale to a third party, but they concluded that, although this was feasible, it was not the most appealing succession route.  They took the view that the company could very easily become a less rewarding and enjoyable place in which to work, and they felt that this was not in the interests either of its employees or its longer term performance (because its success is dependent on the performance of the employees).

After a lot of thought and having taken professional advice, the founders concluded that employee ownership was the most attractive solution both for the company and its employees.  The subsequent announcement of CGT relief on selling to an employee ownership trust, which became law under the Finance Act 2014, made this choice even more attractive.

The company established an EOT and obtained advance clearance from HM Revenue and Customs that any tax payable by UK taxpayers on the proceeds of selling their shares to it would be subject to CGT (rather than to dividend income tax), following which full relief against CGT can be claimed.

After professional advice had been taken on the company’s current value, the company’s shareholders entered into a contract with the EOT under which the EOT agreed to purchase the entire company.

The EOT is funded by the company out of its profits.  The EOT made an initial payment to the selling shareholders financed by the company’s retained profits, with the intention that the balance of the purchase price will be paid within the next five years out of future profits.

It is clear that there is increasing interest in employee ownership trusts among companies in a similar position as the availability of these tax reliefs becomes more well-known.

We would be happy to discuss any aspect of employee ownership trusts or other forms of succession through employee ownership.

Autumn Statement and OTS recommendations

In his Autumn Statement on 3 December 2014, the Chancellor of the Exchequer announced that the Government did not intend to pursue two recommendations made by OTS in the area of employee share schemes or employee share plans. The first recommendation concerned the tax treatment of shares acquired by employees and the second related to the introduction of a possible employee shareholding vehicle as an alternative to an employee benefit trust (EBT), which appears to be regarded in some quarters as difficult to understand.

In practice, an EBT can be a very flexible vehicle and can in many cases be operated in a fairly straightforward way. As well as having a possible use as a warehouse for shares which are used in an employee share plan, in a range of different employee share plans it can act as a market maker for share transactions by and between employees.

If you would like more information about how EBTs can usefully be introduced, we would be pleased to assist.

HMRC online registration and notification

HMRC is currently introducing an online registration and notification system for employee share schemes. By way of reminder, the key points are as follows.

  • These requirements apply to all kinds of share scheme, including all forms of share options (EMI options, CSOP options, unapproved share options, SAYE options), share incentive plans (SIPs), and all other forms of employee share scheme.
  • All annual returns for tax years ending 5 April 2015 onwards for employee share schemes (whether tax-advantaged or not) must be filed online by 6 July following the end of the relevant tax year.
  • All tax-advantaged employee share schemes must be registered online with HMRC by 6 July 2015 if their tax advantages are to be preserved.
  • Grants of EMI options after 5 April 2014 must be notified online to HMRC within 92 days following grant if the related tax advantages are to be preserved.

A number of clients have reported to us that they have experienced problems in using the HMRC system for registering their share schemes and notifying grants of share options and other awards, which has caused delays and some deadlines have not been met. It is advisable, therefore, for share scheme operators to deal with all registrations and notifications at the earliest opportunity in case any difficulties in using the system might otherwise cause deadlines to be missed.