DCSIMG

Plan to get workers to give up rights in exchange for shares proves all that glisters is not gold

  • by Jeff Salway
 

A SCHEME encouraging employees to relinquish certain rights in exchange for shares in their company gets underway in April. But the controversial plan comes with a tax promise that is far less attractive than the government has claimed.

Under the scheme, set out late last year, workers giving up their employment rights can claim shares worth between £2,000 and £50,000.

In order to make the scheme more attractive to potential participants, the Chancellor announced that shares acquired under this scheme will be exempt from capital gains tax (CGT). However, this is not as good as it looks on first reading.

Aside from the very questionable matter of whether or not an employee would be well advised to give up his or her employment rights in this manner, the scheme does not appear well thought out from a tax perspective.

Although the CGT exemption appears attractive, CGT on exit is not usually a major concern when planning employee share award schemes. The real problem is that income tax must be paid by the employee on the market value of the shares at the point that they are given (free of charge) and they must therefore find the cash to pay that tax.

Since the amount charged to income tax is added to the base cost of the shares, and the employee has their (and their spouses or civil partners) annual exemption – currently £10,600 each – available to reduce the gain further, then in the vast majority of cases there would be no CGT to pay anyway.

Seen in that light, and taking into account the valuable employment rights being surrendered, the proposed CGT exemption does not appear especially generous and nor therefore is the scheme attractive to employees in its current form.

This appears to have been recognised to some extent by the Treasury, which now proposes that only the value over £2,000 of the shares awarded to employees under the scheme will be subject to income tax. Whilst this is welcome, the figure of £2,000 is still very low and is likely to further restrict the take up of the scheme.

There are other problems too, most especially the issue of liquidity. The scheme is supposed to be aimed at small or medium sized businesses but shares in small companies are highly illiquid assets, in that they could be difficult to sell. On top of that, dividends may not be regular or even paid at all, and there may be no opportunity to sell the shares for many years, if ever.

The Treasury has stated that workers who leave the company while holding shares acquired in this manner can ask the company to repurchase them. Aside from the question of how the repurchase price would be arrived at, the repurchase would, under current legislation, be taxed as a dividend rather than a capital gain. That point, which seems to have been overlooked by the Chancellor, means the proposed CGT exemption would be useless.

In pure tax terms, the proposals are little better than other share schemes currently available and, unless the government thinks things through more carefully and makes the scheme more attractive to both employers and employees, it is unlikely that many will take up the offer, especially when viewed in the context of the valuable employment rights which would be given up as a consequence of entering the scheme.

• Ronnie Ludwig is a partner at Saffery Champness chartered accountants in Edinburgh

 

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