A new employee shareholding vehicle
On 17 July 2014, HM Treasury published an open consultation on the Office of Tax Simplification’s (OTS) recommendation to introduce a new employee shareholding vehicle. The consultation is part of a wider government trend to encourage, promote and simplify employee share ownership.
The benefits of employee share ownership are well-known. Fundamentally they align the interests of employees with those of shareholders, which in turn leads to a more motivated and productive workforce. There are also some lesser-known benefits. In 2010 the Cass Business School conducted a study of companies that encouraged employee ownership and found:
- That there were higher levels of profitability (correlated to giving employees ownership and more autonomy in decision making).
- Evidence of greater business resilience over market cycles.
- That there were higher growth rates during the financial crisis.
Despite these benefits a large number of companies have been discouraged from employee ownership because of the cost and complexity associated with setting up an Employee Benefit Trust (EBT). EBTs routinely operate in conjunction with employee share plans and are a fantastic vehicle for warehousing and recycling shares, providing much needed liquidity for shares in a private company.
EBTs and Liquidity
EBTs can be used to either acquire shares from employees or to facilitate the purchase of shares from one employee to another. A common mechanic is for the EBT to operate in accordance with set trading windows several times a year whereby employees can buy the shares at a price that is agreed with HMRC in advance.
However, aggressive remuneration tax planning involving EBTs has tarnished their reputation and together with new anti-tax avoidance legislation there is an mistaken perception that EBTs are toxic and not worth bothering with.
There is therefore a tension between the invaluable role that an EBT plays in providing liquidity for private companies (thereby encouraging employee share ownership), versus the perception that EBTs are too complex to set up and administer with too many tax issues to be navigated.
The Government is proposing to introduce a simplified statutory EBT called a “qualifying employee shareholding vehicle”. This new vehicle would operate along similar lines to existing EBTs except that it would benefit from certain favourable tax exemptions to encourage companies to use them for the purposes of encouraging employee share ownership.
Two important tax issues addressed by the proposal are:
- The potential capital gains tax charge on an EBTs disposal of qualifying assets to employees. This gives rise to a double tax charge when employees are later subject to income tax on the market value of the shares at the time of receipt. The OTS propose simpler access to the relief under s239ZA of the Taxation of Chargeable Gains Act 1992, by relaxing the conditions that give rise to the capital gains tax charge. It is suggested that this could lead to the majority of offshore EBTs (which are not liable to UK capital gains tax on disposals) moving onshore, making them easier and cheaper for companies to administer as well as allowing for stronger UK regulation.
- The inheritance tax charge on every tenth anniversary of the setting up of a trust and also when property leaves the trust. It is proposed that all the exemptions currently available under s86 of the Inheritance Tax Act 1984, titled ‘trusts for the benefits of employees’, be automatically applied to vehicles which are suitably designed to ensure the transfer of assets into a trust for employee benefit only.
The OTS recognised that any changes must be accompanied by appropriate safeguards to protect against the vehicle being used for tax avoidance purposes. As a result the vehicle would be qualified by a number of requirements, such as the requirement that it should exist for the purpose of enabling employees to hold or acquire shares in their employing company. The OTS also suggest establishing a time limit for shares held by employees who leave the company, after which charges will be incurred if the shares are not disposed of or sold. Views are requested on all safeguards proposed.
It is clear that the Government seeks to encourage the creation of more UK based EBTs and this should be welcomed. Despite the consultation being rather detailed, there remain a number of outstanding issues. First, the type of entity through which the proposal is to be implemented. The OTS suggested employing a statutory EBT but recognised that this may prejudice reactions to the recommendation. A second uncertainty is the likely demand for such a vehicle, especially when so many companies have set up offshore alternatives. However, if the vehicle is as simple and cost effective to set up and operate as proposed, it will no doubt be attractive to many companies who wish to facilitate employee share ownership but have been discouraged from doing so thus far.