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More details published of tax treatment of 'employee shareholder' shares

The Government provided further detail in the Budget on the income tax treatment when shares are acquired in connection with its proposed new "employee shareholder" status, a new form of equity-linked employment contract. 20 Mar 2013

The Budget announcement also confirmed a delay in the originally intended start date for the new status from 6 April 2013 to 1 September 2013.

“Employee shareholder “status was first announced at the Conservative Party conference in October 2012 and its implementation was confirmed by the Chancellor of the Exchequer, George Osborne MP, at the Autumn Statement (93-page / 2.70MB PDF), and in draft legislation.  

'Employee shareholder' status has been proposed as a third form of employment status, alongside 'employee' and 'worker', taking effect as a new form of equity-linked employment contract. In exchange for giving up certain employment rights, employees will become owners of a stake in the business they work for by being given shares in the employer company worth between £2,000 and £50,000. Any profit on those shares will be exempt from capital gains tax (CGT) when the shares are sold. Existing employees cannot be forced to take up employee shareholder status – however employers may choose to offer only the employee shareholder status to new joiners.

As already announced, the Government will exempt gains on up to £50,000 of shares acquired by employee shareholders from capital gains tax. The Government has now announced that the first £2,000 of share value that anyone receives under the new status will be free from income tax and national insurance contributions. This will be of particular benefit to anyone receiving the minimum amount of shares, as it will ensure that no tax is due when they receive their shares.

There will be tax relief too for employer companies offering the new employee shareholder status against the acquisition of shares by new employee shareholders.

Confirmation of the income tax treatment has been awaited since the proposal was first announced, as without clarity on the income tax position, it has not been possible for employers properly to evaluate whether employee shareholder status is of interest to them, because of the potentially high costs in tax terms of acquisition of shares. However, more employers may now look in more detail at the proposals and whether these offer opportunities to increase share ownership by employees.

The proposals have previously attracted criticism in relation to a number of features, and some key areas of concern remain, for example in relation to valuation and source of shares. Tax expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that the question of how the shares will be valued will be a particularly difficult issue for unlisted companies.

“The Budget announcement itself provides no further guidance on valuation beyond the definition of 'value' previously provided for the purposes of the £2,000 threshold and the £50,000 cap," he said. "The valuation difficulties associated with providing shares to employees remain, and this could limit take up of the new status by SMEs and unlisted companies.”

There are also potentially obstacles for listed companies, Findley said.

“The legislation currently prevents companies from using shares warehoused in employee benefit trusts which will severely constrain the ability of listed companies to use the arrangement.  It is unclear whether or not this was intentional or whether the position will be amended as the legislation progresses,” he said.

The Budget announcement made clear that there will be anti-abuse rules in relation to employee shareholder status, though the detail of these remains to be seen. Draft legislation previously published has already barred those who own 25% or more of a company from becoming employee shareholders.